World Cup excitement kicks off!

I’ve spent the week scouring the FIFA website, making spreadsheets of the group stages, watching old videos on YouTube, and following Socceroos on Twitter.  It’s a clear case of World Cup fever.

Ever since the 2002 edition, I’ve been hooked. I’m not a big follower of local or European soccer, but playing the game on a world stage changes it – not unlike how track and field suddenly becomes fascinating for two weeks every four years, during the Olympics.

I had a formative experience during the World Cup in 2002. I watched Brazil score 6 goals in a couple of early round matches, while other teams looked defensive and dour. That kind of attack was going to be hard to beat, I reckoned, so I popped $10 on them to win at 8-1.

A couple of weeks later I watched Brazil trump Germany in the final and took my winning ticket down to cash it in.

The next two World Cups were especially exciting because Australia was finally involved. I remember being awake and very excited in the early hours of 13 June 2006, when Australia scored three (three!) late goals to win their first world cup match in 20 years.

But expectations are a lot more modest for Australia in the 2014 Cup. Instead of having just one powerhouse of global football in our group, we have two. Spain and the Netherlands. The third group member, Chile, is actually ranked higher than the Netherlands on the FIFA tables. Australia is the lowest ranked team in the cup and Tim Cahill is no longer a sprightly unknown who is given space to score.

Still, World Cup 2014 sparkles with excitement, and that’s mainly because of the Calcutta.

I’d never heard of a Calcutta until last week, but now I am a believer.

It’s a bit like a sweep. You may have been involved in a sweep for a horse race – you put in $2 and get some beast that runs mid-pack the whole way, leaving you with a nagging sense of disappointment.

The Calcutta is designed to compensate for that. Teams are drawn from a hat and participants bid on them.  If the team is a dud, there are few bids and it goes cheaply, allowing the possibility of turning a tiny bet into a large fortune.

Our Calcutta was run last night, in the salubrious confines of the Reverence Hotel, in Footscray. (I’d like to insert here, parenthetically, an enthusiastic endorsement of the menu at this establishment and the beef burrito in particular. If gentrification means a walnut and sweet potato salad with your burrito, then I am all for gentrification.)

Before the emerging writers festival crowd took over the back bar with a poetry slam, we auctioned off eight teams and six bundles of teams.

The eight teams were: Brazil, Argentina, Spain, Netherlands, Germany, Portugal, Italy and England.

The six bundles were:

Asia Australia, Japan, Korea, Iran
Africa Ivory Coast, Nigeria, Ghana, Cameroon
Americas Mexico, Costa Rica, USA,  Honduras
South America colombia, chile, ecuador, uruguay
Europe Greece, France, Switzerland, Bosnia
Europe 2 Russia, Algeria, Belgium, Croatia

Bidding began in a conservative fashion, when the Asian group was hammered down after only two bids, contributing $2 to the total prize pool.

The prize pool (and whole event) were designed by a local gaming impresario who I shall call Marty, since that’s his real name. 65 per cent to the winner, then 20, 10 and 5 percent for the next three spots.

The interest and excitement of the Calcutta auction process lies in the fact that the value of any team depends not only on its chances of winning, but the size of the prize pool. That’s an unknown. Basically the prize pool depends on how much people are willing to spend. I tried to wheedle this information out of some of my fellow bidders before the game began, but they held their cards close to their chests.

Bidding continued with the Africa and Americas bundles going to me for $3, the only sizeable outlay came when a gentlemen born near Birmingham put his heart into a bidding war and paid $9 for England.

I’d run some analysis in advance that told me bundles were the best way to get value, so I soon set a bidding record for the South America bundle, paying $15.

calcutta

The feeling of winning an auction is not purely celebratory. What it tells you is nobody else shares your confidence. It can fill you with the fear that you may have just succumbed to the winner’s curse of paying too much.

The thrill of winning a bid was often followed, last night, with a small spell where the winner retreated into themself and stared in quiet contemplation at their ticket. After I bid my $15 (enough to buy 84 per cent of a really amazing burrito) I had my doubts.

But later, as bids rose, my $15 investment in Columbia (rank 5), Chile (rank 13), Ecuador (rank 28) and Uruguay (rank 6) came to seem pretty good. I smiled when Argentina (rank 7) sold for $36.

The auction was fun, involving at one point phone bidding that saw Portugal sold to an outside party. We joked about creating a derivatives market and on-selling our early buys at a profit to anyone who hadn’t been present.

But the big excitement of the evening was the auction of Brazil, host country and favourite. Nobody expected the way the bidding war would turn out for that.

Bidding rose swiftly above the highest price paid. Everyone could see Brazil still offered value, relative to previously auctioned teams and also to the total pot size. But with participants already having invested substantially, and budget constraints starting to loom (did anyone really want to go home and explain they spent $50 on a single bet?), syndicates quickly formed. Two syndicates – one of three persons and one of two –  took the bidding up above $50, until finally the Calcutta auction was over with a total prize pool round $200. Markets work, people!

A most satisfactory way to spend a Thursday evening – plus I now have a dozen non-Australian teams to support in the World Cup!

(Back to that derivatives market. If you’d like in on this Calcutta, it’s not too late to buy a team! Make me an offer…)

Marvellous! An economic history lesson from Flinders St Station

I am completely entranced by this old photo of Melbourne’s most iconic intersection.

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Source: Flickr

The shot tells a story of changes in technology and economics. For starters, there are four horse-drawn carts in the photo.

While a busy Friday night in 2014 might still see a horse and carriage at this intersection, in 2014 they’d be pulling regretful tourists, not valuable cargo. The decline of the horse and rise of the car coincides with the industrialisation of the fuel-making process. In 1927, oil company Mobil was just 16 years old.

Here’s a Google Maps image of the intersection today.

The tram stops also tell a story of change, not so much in technology as values. The tram stops of the jazz age – located in the middle of the street, amid a stream of traffic – amount to little more than a bit of paint on the ground. That has changed. Tram stops now are highly protected from traffic, probably because the value society places on human life has risen along with wealth and productivity.

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One familiar thing in the shot is traffic. We see cars stacked three across and two deep, getting ready to hook turn from Flinders St onto Princes Bridge in the foreground of the shot. (For non-Melbourne readers, the hook turn is a unique form of torture inflicted by this city on unwitting drivers, for the purposes of mirth.)

The street at the top of the photograph – Swanston Street – is now closed to car traffic. The externalities associated with car traffic are very clear in this intersection, as early as 1927. (I am referring not to pollution, but the way the presence of one car on the road slows down all the others.) The proliferation of cars in the last 90 years means these externalities would have developed to city-threatening proportions had the use of cars not been limited.

The crowds suggest patterns of work is much the same. But it doesn’t show the city at night, which would reveal far more differences in society, in dress codes, and the purchasing power of young people especially. Zooming in would also reveal big differences in ethnic composition, thanks to the ease of global travel.

There are no bicycles in the shot, which is a surprise to me. Standing at this intersection now, you’d struggle to frame a shot without a bike in it.

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Apparently cycling was extremely popular in the 1890s. That enthusiasm has seemingly waned by the time film was exposed for this shot. Will Melbourne’s current love affair with bikes also prove transitory, or is this shot just unrepresentative?

There have been a lot of technology changes since the 1920s. One of the most dramatic is in construction. Despite being a shot of the city, this photo, repeated today, would not show any sky scrapers. This area has heritage protection. Perhaps there were height controls even then – the shadows reveal bigger buildings lurk just outside the frame.

Most of the technology changes since the 1920s are at a smaller, human scale. The contents of the pockets of the people in the shot is probably where the most dramatic changes would be evident. The one clue we have in this shot to that sort of technological change is the fact it is shot in sepia. Image

There are a lot of lessons in this old shot, a lot of differences. But the biggest single point is probably the similarity.

The crowds swarming across Flinders St look exactly as they do today. That suggests the patterns of life – catch a train into the city, go to work, go home – have not changed too much. And three of those four corners – the railway station, the pub and the cathedral remain the same. Only the old Princes Bridge Railway Station in the bottom right is gone, replaced with Federation Square.

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Swanston Street 2014

The trams in the shot are cable trams – they are not powered by electric wires but pulled along by a cable that ran beneath the street. [edit: apparently cable trams were replaced by electric trams the year before this shot was taken.]

Despite the advent of electricity and computers, trams still follow these same routes.

This shows the way infrastructure and patterns of human life endure. Technology is often first used to do the same old tasks a bit differently. We don’t quickly end up in a Jetson’s future, but a sort of inverted Flintstones, where the objects are much the same and the technology behind them is different.

(Cable tram video you will find terrific if you like history, Melbourne or public transport.)

What else do you notice about this photo? Please leave a comment!

 

Should unemployed people be forced to take any job?

Tony Abbott is having a horrendous run. He’s now more unpopular than Bill Shorten, who holds an 11 point lead in approval ratings, a reversal that is truly spectacular.

His big problem is a tough budget that broke promises.

One of the Government’s signature policies is to push young people into taking work. Their policy is called “earn or learn.” It will deny the Newstart (dole) payment to anyone under the age of 25; and people aged 25-30 will not be eligible for the dole in their first six months of unemployment.

”There is no right to demand from your fellow Australians that just because you don’t want to do a bread delivery or a taxi run or a stint as a farmhand that you should therefore be able to rely on your fellow Australian to subsidise you,” said Employment Minister Eric Abetz.

The rationale is to stir up resentment at the welfare state.

“The bludger should not be our national icon.” – Rupert Murdoch, (American citizen)

It’s an entirely political, dog-whistle ploy to make underpaid workers of Australia target their resentment at the unemployed, not the managers that dine with their own remuneration committees. 

But doesn’t mean the policy intent is all bad. Here’s why the policy can do good for some people (caveats follow).

Long-run unemployment is one of the most damaging things that can happen to a person. It causes not just a fall in skills (human capital). It is associated with worse health outcomes, including mental health issues, falling life expectancy, higher chances of dropping out of the labour market, and their children’s school performance.

Long run unemployment is also bad for the economy. Hysteresis is now an accepted fact of macroeconomics. It describes the way long periods of high unemployment make the minimum achievable unemployment rate creep higher and higher. An economy that can match people into jobs swiftly increases the welfare of future workers.

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Sure unemployment is bad. But people know that and want to get themselves a job. No?

Well, a new paper from the National Bureau of Economic Research shows that unemployed workers set a reservation wage that affects their willingness to take a job.

“workers are 24 percentage points more likely to accept an offer that is equal to or exceeds their reservation wage than to accept a job with a wage below the threshold.”

This fits with some excellent new research by Australian economist Justin Wolfers. He found arbitrary thresholds are a source of important irrationalities in human behaviour, and illustrated it with marathon finishing times.

marathon finishing times
Source: NY Times

Wolfers’ article focuses on how arbitrary thresholds could cause irrational investment behaviour, especially the case of people being unwilling to sell their house for less than they bought it for. But the analysis could as easily apply to reservation wages, which can be set with reference to what you used to earn.

If you refuse a job because if pays $5000 a year less than your old job, but then spend months more unemployed, you may well be worse off.

These pieces of research are part of the new behavioural economics that finds predictable irrationalities in human behaviours.

It is not uncommon for social outcomes to be improved with a “nudge” toward the more rational course of behaviour. Traditionally, of course, conservatives oppose these kind of nudges, preferring to let humans remain “free”, while liberals tend to endorse them. In the case of “earn or learn,” it is more of a shove then a nudge, and conservatives are more likely to be fans of it.

I don’t want to stand up for the exact policies that the Coalition has brought in. I think they are too blunt to have a net good effect. But the concept that the labour market will reach equilibrium without intervention is also likely wrong – unemployed people should be encouraged to not just search for, but take a job.

CAVEATS: 

Economics of territory. Ukraine, the South China Sea and democracy.

What motivates governments?

Economics has long struggled with this question.

Public choice theory argues government leaders want to create big organisations they control. The more money and people controlled by the leaders, the more powerful they feel.

Other theories argue leaders are motivated by the preferences of voters / citizens.

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Crimea and its capital Simferopol

The question is extremely pertinent when a government decides it wants to expand its borders. What does a government gain by controlling more land? More sources of revenue, sure, but also more costs. How do voters weigh those?

In the case of Crimea, a little peninsula on the south side of Ukraine, Russia’s annexation has obtained it a sizeable store of energy deposits, making the adventure potentially valuable in cash terms. But the leading explanation of the decision to occupy does not revolve around Putin doing the math on oil.

Occupying more land  – empire building – is a time-honoured strategy for leaders. From Rome via the Mongols and on to the British Empire a measure of greatness is territorial control. Perhaps the sort of people who can be bothered climbing the greasy pole of political leadership are never tired of attempting to gain more power. So when they rule, they feel they must rule more.

Invasions in order to annexe are now uncommon. (Invasions for other reasons remained popular in America until recently, and will probably swing back into vogue in time.)

Partly this is because the international community has arranged itself to try to raise the cost of territorial expansion and diminish the benefits. Sanctions can follow.

But partly it is because dictatorship is in decline.

The best way to prevent land grabs and invasions is probably democracy. The characteristic common to Putin’s Russia and China (with Tibet in its back pocket, the south China Sea Islands almost in its grasp, and its eyes on Taiwan), is that the leaders need not fight to win votes. Once in power, their will to rule more can only be fed by expanding the territory they control.

In democracies, empire-building is defined by ruling for more than one term. Gerry-mandering, pandering to voters and rorting electoral funding rules in order to win the next election might not be ideal behaviour, but it is less damaging than rolling squadrons of tanks over the border.

From the perspective of the global economy, land grabs are destabilising. Any chance they will spark a war makes them a major risk to global output and standard of living. The sinking of a Vietnamese ship in the South China Sea, for example, is a risk to the balance of power in Asia, a balance in which the US and Australia are involved.

The motivations of powerful non-democracies remain a threat to our well-being.

FOMO. The acronym that explains why you’re on LinkedIn.

LinkedIn is rubbish, we all know it. But we can’t stop using it.

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Why?

We fear there are benefits of using LinkedIn that we’ll miss out on.  Prospect theory calls it loss aversion, but the kids call it FOMO – Fear Of Missing Out.

Humans are wired to hate losses more than they enjoy gains. This is not strictly rational, and it means we make some bad choices.

Haunting LinkedIn might be among them.

LinkedIn is
At some level, we know LinkedIn is not worth it

I mainly visit LinkedIn when I get a reminder from the website. Maybe someone has looked at my profile, or maybe someone wants to be a connection.

I hover there for a few minutes, wondering what it all means. Sometimes I do get a phone call from a person that LinkedIn said was looking at my account. But would they have called me anyway?

LinkedIn has to taunt you to get you to network.

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Congratulating people on work anniversaries is an alien concept, but the idea other people are doing it means we wonder if we should too.

LinkedIn plays on our fears that other people are getting ahead of us professionally.

It taps not into our desire to be better people, but our much more powerful fear that we will lose our rank and status.

We also imagine it will cushion our fall should we lose our jobs. In the newspaper industry, redundancy rounds were strongly correlated with LinkedIn connection requests.

It doesn’t hurt that making a LinkedIn account is quick and easy. People probably maintain their LinkedIn like an insurance policy. It’s not costly to have, but it helps manage the anxiety that might come with losing your job.

LinkedIn is the facebook of work. We know facebook doesn’t really help us make friends. So does LinkedIn work as a resumé?

I wrote, a few weeks ago, about how to get a job, and LinkedIn was not the top priority, and – this is important – it was not a substitute for actual networking..

Screen Shot 2014-05-26 at 11.44.23 amMaybe LinkedIn is not good for the average guy, but if you’re trying to build a brand, it is awesome. Maybe?

I doubt it. (n=1). For example, LinkedIn scores below even Google+ as a referrer of visitors to my blog.

Of course, there are experts out there shilling for the many powerful strategies you can deploy to make LinkedIn work for you. I don’t doubt that there are ways that work brilliantly for a small percentage of people and firms, but they rely on LinkedIn maintaining a base of slightly nervous users checking in to make sure they’re not missing out.

But this emperor’s new clothes situation is not going to resolve itself with LinkedIn shivering nude and all of us turning away. We’d be too worried that even a nude emperor might be worth our attention.

I may be a LinkedIn skeptic, but I still like to make a new connection as much as the next person. Connect with me here!

“Hatchbacks on stilts.” Why SUVs are an arms race we must stop

There’s a lot of talk about how Australians are buying smaller cars, and how Australian car makers are stupid for pushing on with big petrol-guzzling cars nobody wants.

But Australians do want big petrol guzzling cars. They just want them to be tall.

The SUV category is going crazy. In April 2004, 12,351 SUVs were sold. By April 2014 monthly sales had doubled to 25350.

Meanwhile, “passenger vehicles” – your classic sedan, sold fewer. April 2004 saw 44,000 sold, but by April 2014 sales shrank to 39,000.

In 2014, even as the car market is having its worst year for a decade, SUV sales are creeping up.

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When people buy an SUV, they’re purchasing the ability to go off road. Right?

Not if you look at the details. Companies are pushing out two wheel drive versions of their SUVs and they sell fast.

The AFR’s motoring writer nailed this in a review of the new $90,000 BMW, which is two-wheel drive.

Some surprisingly large SUVs – including the X6 fastback from BMW – feel like hatchbacks on stilts,” he wrote.

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Reflecting: a BMW SUV in its element.

And there’s the key.

People want to be high up. It’s game theory. If the car in front of me is small, I can see over it really well from an SUV. If the car in front of me is tall, I want to be in an SUV or I won’t see anything at all.

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Externality would be a sweet name for the new Ford SUV. I imagine its prestige to come from being that little bit bigger, heavier and harder to stop than the Explorer, the Excursion and the Expedition.

As someone who drives a car that comes up to armpit height, I can confirm sitting in traffic involves looking at a lot of SUV bumper bars and having no idea what is happening in the traffic up the road.

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2048. Thank me later.

An elevated position doesn’t just permit a better view of traffic, but of other people in the traffic. I can’t see what that Range Rover driver is texting from down here, but they can sure see what’s on my phone (at right).

The light commercial category also shows the change. You can’t easily sell a ute you have to step down into these days. The 1.74 metre tall Nissan Navarra tops the category, easily out-selling the 1.5 metre tall Holden ute.

Buying a tall car is what’s called a dominant strategy, if you want to be able to see. It’s also a dominant strategy if you want to crash into another SUV, according to research.

In head-on collisions between passenger cars and SUVs … Drivers of passenger cars were more than four times more likely to die even if the passenger car had a better crash rating than the SUV.”

This is the classic game theory scenario of an arms race.

The arms race analogy is a good one. Like the proliferation of weapons, taller cars are costly and risky. They are heavier, take up more road space, cause more wear and tear to roads and emit more carbon. They may be more likely to roll in a crash. They’re exactly the kind of purchase decision in which a government might try to intervene.

For a long time, SUVS had lower import tariffs than passenger cars. That changed in 2010 when tariffs on cars fell. But by then, the proportion of SUVs sold was already steadily marching upwards.

Changes to the way we tax cars are possible in the next few years. The Henry Review recommends getting rid of the luxury car tax and fuel taxes, replacing them with congestion taxes or user pay systems. It is clear that our current system does little to deter SUV purchase. Could a well-designed licensing and user-pays system be better, or is the only stable game theory equilibrium one where we all drive cars like the Dodge Ram, that can barely fit in a lane?

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One term? I wonder

Waleed Aly’s long piece in today’s Fairfax press about Tony Abbott is thoughtful, but the headline it carries: No Way Abbott Can Now Budget For Second Term is too strong.

Every reader fell greedily upon that story, I assure you, but the headline hints at far more certainty than the excellent Mr Aly projects.  Here’s three reasons why “one-term Tony” will win the 2016 election, and one reason he might not…

1. Parliamentary majority. 

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Source: ABC

In the lower house, the Coalition leads Labor 90 to 55. Labor needs to peg back 21 seats to win. If you look at the pendulum, that means they need to win every seat that the Coalition holds be a margin of 4.3 per cent or less, while not losing any of their own seats.  That’s a lot.

Winning a lot of seats will be hard for Labor, because it requires not just a swing but a lot of good candidates, a lot of organisation and a lot of money.

2. Sophomore surge

In theory, someone who was an unknown at their first election becomes familiar at the second (sophomore) election. They enjoy a surge in popularity. This effect, if it exists, will help the Coalition a lot – they introduced 19 new MPs.

As the name implies, the sophomore surge is a US concept. Is it real in Australia?

Some bloggers argue yes.

This book written about the 2010 election thinks so:

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That means that even if Labor gets 51 per cent of the vote in 2016, it can easily lose a lot of important seats and be stuck in opposition.

3. Budget trickery

Tough budgets now lay the foundation for easy budget later. I wrote about this last week. 

To most people, the grumbling of early 2014 [will be] as relevant to the political situation as the result of the 1974 VFL Grand final. Labor can’t get over the broken promises and keeps talking about the past, while Mr Abbott is focused on the future.

The evidence for the efficacy of this approach is mounting. Not only Victorian Premier Denis Napthine but also NZ PM John Key have unveiled more generous budgets on the eve of elections. (NZ is introducing free doctor’s visits just as we abolish them. Time to move to Wellington?)

4. But the polls are very bad.

55-45 is BAD.

I can see just one good example of a government coming back from that, in the early 90s. Keating took over a very unpopular government and won the next election.

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Source: News

 

Howard was losing by almost as much prior to the 2001 election. I also commend to you this graphic of the newspoll:

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If this polling continues, expect newspapers to push the idea Malcolm Turnbull should take over from Mr Abbott. Not only would it likely help the Liberals, the media have clearly learned that a good leadership challenge narrative attract eyeballs and, crucially, elevates their (our?) own importance.