Saturday, December 28, 2002

Yet another inquiry over summer

The House of Representatives Communications Committee is to inquire into worth of splitting Telstra into two.

It'll do so quickly.

Telecommunications analyst Paul Budde writes:

"The Structural Separation Inquiry is arguably the most important telco inquiry ever conducted by this government will take place in only five days in February - none of them in regional Australia - and the report is to be tabled on March 24.

"Given this ridiculous timeframe, I think the outcome of the Inquiry should be that more investigation is required.

"It is also frightening to observe the government's tunnel vision. Their image of the telco world is apparent in the following comment they made about the Inquiry.
'However, we are categorically and genuinely opposed to such an idea because it would have a disastrous effect on Telstra's competitiveness and the industry. We think the idea is just plain stupid.'

If this is indeed their view, then the government must believe that the OECD, the European Union, several European parliaments and Professor Allan Fels are stupid, since they all support the idea of structural separation. From its lofty position, the Australian government apparently believes it is the only one to get it right. But its track record proves the opposite. Competition in telco land is dying, thanks to the policies that have been implemented by the government since 1996/1997.

"Its digital TV policy is the worst in the world; its privatisation policy is in shambles; its regional policy has just been shot to pieces by the Estens Report - yet they take the high ground and call everyone else stupid.

"Structural separation is inevitable; the problem is how to identify the format that best suits us in Australia and how to implement it over a 3-5 year timeframe. This government continues to try to hold back the international tide in telco-land, they continue to fight battles that they are going to lose anyway, so why not at least try to follow the overseas trend and tap into the global think tanks that are operating on a much more mature level?

"The rest of the world doesn't privatise its telcos - only 3 out of the 30 OECD countries have fully privatised operators. Governments around the world consider telco infrastructure to be a national asset and accept the fact that long-term government involvement is required, at least for large sections of this network. We are still waiting to learn the government's position on this, as requested by the Estens Report, but up till now it has flatly denied any responsibility.

"We hold Inquiry after Inquiry, and the messages that come out of them are always pretty clear - yet the government is fighting progress every inch of the way."

Wednesday, December 18, 2002

No gifts, just cash

That's what some economists say. The person who knows how to get the most for Geraldine Doogue out of $50 spent on her is Geraldine herself. Anyone else trying to guess what will make Geraldine the happiest won't hit the spot as well. That's I told her on Life Matters this week and I presented estimates from the US last Christmas suggesting that eight billion dollars of the 50 billion dollars spent on gifts is wasted as a result.

The debate has important implications for welfare payments. Should needy people be given cash that they probably want, or gifts in kind that they might not such as cheap bus trips, discounted housing etc.

But there's another side to the debate, and I said on Monday that I was reluctantly quite taken with it. The paper I quoted from had the intriguing title of Here's something you never asked for, didn't know existed, and can't easily obtain: A search model of gift giving.

Inquiring all summer

On Life Matters 9 December I talked about the extraordinary number of important government inquiries taking place over summer and asked - why it is that John Howard (belatedly) seems in so much of a hurry.

By far the most important is the Prime Minister's Home Ownership Taskforce.

Set up at the end of November, with submissions due by the end of December and with a final report due by March the deadlines are tight.

But the work won't be as hard as it might have been. Virtually everyone on the Task Force and its subcommittees has already indicated that they support the idea that'll be investigated. (See John Quiggin for a note that suggests that this may have been a criteria for an invitation to work for the Taskforce.)

Malcolm Turnbull's Menzies Research Centre will run the Task Force. It is the group which has been pushing the proposal. As was once said about Allan Bond the Prime Minister appears to want his advisors to tell him how to do what he wants not whether he should.

Which worries me little. The idea of allowing individuals to buy houses through a limited partnership with financial institutions has much going for it...

Right now, many individuals are condemned to all of the indignities and uncertainties that go with renting because they can't afford to buy a house.

Almost as bad, most of those that can have put everything they own and more into "one property in one suburb of one city. No one who is engaged in any sort of responsible financial advice would ever advise someone to do such a thing, and yet most Australians do."

Super funds and financial institutions by contrast are crying out for an asset such as housing. In aggregate residential real estate is safe - a much-needed hedge against stocks and bonds.

The MRC wants stamp duty and other rules changed to allow financial institutions and individuals to buy houses in (say 50-50) partnership. The individual ("managing partner") would have the right to live in the house and make alterations etc to it for as long as they wished.

They would have an incentive to maintain the house well, because when they did decide to sell they would get to keep a certain proportion of the proceeds (say 50 per cent, or maybe 45 per cent).

Although the institution has no say in when the house is sold, in aggregate the resale rate will be predictable and will provide regular income, without the fund needing to lift a finger to manager the property.

Australia has led the way in financially innovative solutions before. We invented HECS, we invented the Child Support Agency ideas now copied elsewhere. This idea has the same sort of potential.

At least that's what the Prime Minister thinks. On Life Matters I said he is acting like a man who has little time, and wants to achieve something worthwhile before he goes. Curiously Ross Gittins arrived at the same conclusion (about little time) at about the same time.

Also inquirning over summer is the Dawson review of the Trade Practices Act which was due to report at the end of November but has had its deadline extended until the end of January. Allan Fels looks set to get much of what he wants.

And the HIH Royal Commission which has to report by the end of February. Its terms of reference do not include and have been interpreted not to include the political donations made by HIH and FAI. A pity. Because they may be part of the explanation for what happened.

And there's the hard-to-come-to-grips-with Prime Minister's review of the corporate governance of Commonwealth statutory authorities. John Uhrig ex of Westpac and CRA has been given until June to report on the management of organisations including the Australian Taxation Office, Australian Competition and Consumer Commission, Australian Prudential Regulation Authority, Reserve Bank of Australia, Australian Securities and Investments Commission, Health Insurance Commission and Centrelink.

What's it all about? The PM promised it during the election. He gives the impression it is about bringing the organisations which bug business under tighter control of Government Ministers. Which is probably exactly the wrong thing to do. As the Palmer Report into the collapse of HIH makes clear. If the relevant Minister (the then Treasurer John Howard) hadn't intervened to issue an insurance licence to FAI over the head of the Insurance and Superannuation Commission in late 1970's the HIH collapse may not have happened. The right answer is probably less Ministerial control over Allan Fels, Graeme Samuel and the lot of them. It must be said though that there was a failure of corporate governance at APRA. It was under funded and as the Palmer Report makes clear, its board members had a hands-off approach to their job.

I discuss here what appears to be a general laxity in these organisations when it comes to investigating complaints.

My fear is that the people to whom the Prime Minister promised the inquiry want more laxity not less.

Update/ Correction

A closer reading of Ross Gittins talk shows that he didn't suggest Howard was to resign in the year ahead. He canvassed the possibility in great detail before concluding that Howard wouldn't do it.

Monday, December 02, 2002

The physics of peer pressure

Bracks. Listens. Acts. Econophysists have a cynical view of elections. They say that's the way the evidence falls. I explained on Life Matters this morning that according to econophysists Jozef Sznajd and Katarzyna Sznajd-Weron from the Polish Academy of Sciences and also Dietrich Stauffer from Cologne University a 'signature' in the pattern of voting at elections matches that found in the alignment of metal filings. The metal filings get that pattern through the simple decision-making rule of each aligning itself in the same direction as most of its nearest neighbours. In other words, the filings decide their alignment based purely on the alignment of the filings they happen to rub up against. They don't decide based on the strength of an argument.

There are circumstances in which the strength of an argument does matter for magnetically-charged particles. It is when they are in solution, and they cluster around 'seed particles'. The most convincing particles build up the biggest clusters. But the 'signature' pattern of the distribution of alignments that results is completely different to that that we see in the results of human elections.

Peer pressure appears to matter when we decide to vote. Considering the issues does not.

Bruce Schechter, the author of the New Scientist article concludes that "there's only one way to be sure that our future elections are not determined by the opinions of our neighbours. We need to abolish the right to free speech: it's undermining democracy."

Perhaps he is right. Perhaps we need secret and silent deliberation of the issues, in the same way as we need a secret ballot.

Then again, perhaps our decisions about how to vote at elections are no different from any of our other decisions. (Whether to buy Levi's jeans etc.. etc.) Most of the "decisions" we make may in reality be no more than simple responses to simple stimuli. Our minds may invent a rationale after the event to make us feel that we are in control.

Inventing explanations might be the hardest work that our conscious mind does. A bit like a section of the bureaucracy that devotes most of its effort to proving that it actually has work to do.

Just a thought... or perhaps a simple response to stimuli, or perhaps an explanation for a simple response to stimuli.

Monday, November 25, 2002


Geraldine informed her listeners today that Mickey Mouse turns 74 this month. His debut was in a cartoon entitled "Steamboat Willie" on November 18 1928.

This means that next year he turns 75 and the Disney Corporation will no longer own the copyright for his distinctive image. Or it wouldn't have had it not been successful in persuading California congressman Sony Bono to introduce the Copyright Term Extension Act which blows the term out to 95 years. Mickey will now not be forced to leave home until he is 95 in 2003. The same for Donald who was due to enter the public domain in 2009. Disney will now continue to own his image until the year 2029. Bono and other legislators had support ass they drew up the Bill. Disney is reported to have spent $US 6.3 million in campaign donations in the leading up to the Act's proclamation.

Of course it affects everything. Documents and artistic works from the war which were about to become publicly available now won't for another 20 years. Unless of course Disney gets the copyright term extended again. And there's every reason to believe that it will. Sony Bono's widow Mary who now has his seat in Congress has foreshadowed extending the term of copyright again and again until it lasts "forever less one day".

Disney which itself has plundered the public domain for material (Cinderella Pinocchio, Alice in Wonderland, Snow White, The Jungle Book" etc) appears to want to make sure that it never has to give back to it...

To paraphrase Paul Keating (about tax) people who drink from the well should not complain about attempts to fill it."

And so there's a legal challenge before the US Supreme Court right now.

The US constitution says the Congress shall have the power "To promote the Progress of Science and useful Arts, by securing for limited times to authors and Inventors the exclusive right to their respective writings and discoveries."

The challenge asks how extending a term of copyright protection for a work already created can promote the progress of science and useful arts.

And anyway 95 years of exclusive rights seems a bit longer than is necessary to encourage people to draw cartoons. The US term of copyright used to be fourteen years. It's been extended eleven times since then, many of the extensions just as Mickey Mouse was about to enter the public domain. But Disney has continued to draw cartoons every step along the way.

Drug companies get by with patents of 14-15 years - and Australia's own Productivity Commission thinks that's too much.

Personally I am not sure copyright "protection" is needed at all. The internet (and blog sites) demonstrate that people are willing to create art and contribute ideas without the need for payment.

Elton John is unlikely to stop writing music just because he isn't given about 100 years in which to exclusively profit from it. It think one year would do him.

My Dad told me that many true inventors refused to have their inventions patented, believing that they belonged to the people.

Okay so my view is extreme and utopian. But what about the view attributed to the American Association of Publishers about Libraries. Libraries allow people to read books for free and so are apparently similar to "terrorist organisations" opposed to the basic principles of the US system.

My eldest daughter admires Walt Disney. She would like to emulate him. If the challenge to the Son Bono Act fails she is unlikely to ever be able to do so. The term of copyright will be extended and extended again way beyond the human lifespan leaving virtually nothing in the public domain to comment on or improve upon without falling foul of a lawsuit.

UPDATE January 17 2003 The constitutional challenge failed. Details here.

Any complaints?

I am not a real blogger. I talk on the radio Monday mornings and (these days) take forever to blog what I have just said. When I started bogging I would go straight into the studio next door to Geraldine's and blog what I had meant to say within minutes of not quite saying it. Recently I have waited up to a week.

So here goes, to catch up.

LAST Monday 18 November I spoke with Geraldine about what happens when you try to complain.

When you see a fire and you report it, you expect the Fire Brigade to investigate. But that wouldn't be a wise expectation when you report something to the Australian Prudential Regulation Authority, the Australian Securities and
Investments Commission
, the Australian Competition and Consumer Commission, or the Australian Tax Office.

The Palmer Report into APRA's conduct in the lead up to the collapse of HIH Insurance discloses an amazing mindset. "A company could not be considered to be in breach of the solvency standard until it had reported a breach in its returns." When HIH did fall below minimum solvency standards "no action was taken but to hope that it traded out of it." When in July 2000 APRA received an anonymous document that was a "road map" to HIH's troubles it warned its likely author that he was leaving himself open to legal action. HIH supervisors concluded that the comments should be treated with caution because they came from a disgruntled employee. Palmer appears to have been astounded.

APRA's attitude was partly cultural, the "London tea and bickies" approach in the words of APRA Board member Alan Cameron, and partly caused by very limited resources, according to Palmer. Only four people were supervising HIH and more than one-hundred other similar institutions, the man initially given hands-on responsibility for HIH was 24-years old with no general insurance experience.

So what?

Firstly APRA and its predecessor the Insurance and Superannuation Commission liked to give the impression that they were keeping our money safe. Some of us may have taken out insurance or extra supervision because we believed that they did.

And secondly APRA is not alone in, shall we say, a "selective" approach to complaints...

I quoted from annual reports that reveal that ASIC routinely investigates 2 to 3 per cent of the seven to eight thousand complaints it receives each year. It makes some contact with the complained about party in fifty per cent of the cases, and forty per cent of the complaints are merely "analysed, assessed and recorded."

Its lack of checking extends to prospectuses. Last year it inspected only 237 of the 913 prospectuses lodged with it. Not that the prospectuses lodged with it are squeaky clean. It had to issue stop orders for 67 of the 237 prospectuses it did examine.

The ACCC received 51,000 complaints last year. It investigated just 4,000 of them.

The copper isn't routinely on the beat.

The Tax Office copper no longer reveals in its annual reports the number of returns it selects for auditing.

The last time it did, in 1996 the number was -- 5,121.

Which isn't very many, in a nation the size of Australia.

Not that our tax returns are squeaky clean. No matter how many returns the Tax Office audits it seems the proportion that need correcting is about 70 per cent.

The last Budget gave the Tax Office an extra one billion dollars to start auditing again and the accounting profession is having kittens. They had grown so used to getting away with mistakes they'd forgotten that the act has grown just about too complex to apply, or so argues tax lawyer Michael Inglis in this and other brilliant pieces.

The Tax Office and its brethren bodies defend what they are doing by talking about "meta risk management". It is quite an interesting idea, but a bit like fighting the Taliban with technology and no troops or intelligence gatherers on the ground. And we know where that leads.

Wednesday, November 13, 2002


It may be as important to us as happiness.

After talking about happiness on Life Matters earlier this year, this week I returned to the subject and asked in the phrase made famous by Peggy Lee: is that all there is?

Our other big need appears to be meaning in what we do. We get it by having an identity and being true to that identity, or at least that is the persuasive argument made by two academics from the University of Connecticut.

Often the identity comes from religion. How else to explain the actions of people who don't eat or drink anything from dusk to dawn during Ramadan, or of people who don't eat pork without ever having tasted it, or of suicide bombers.

"They only do it in the pursuit of happiness" is an unsatisfying explanation. A better explanation is that most of the time people do such things in pursuit of meaning.

This means that changes in prices are likely to have very little effect on certain sorts of behaviours. I haven't eaten meat since I was 15 or 16 years old. A cut in the price of meat is unlikely to tempt me. A cut in the price of alternative leisure activities is unlikely to tempt a would-be suicide bomber.

And there are more issues raised in the paper. Traditional microeconomic analysis assumes that all our tastes are pretty much the same. (So much for classical economics celebrating the individual) Our behaviour is determined by our income and by relative prices.

The new approach recognises that different people have different tastes, and create different tastes as part of creating an identity. It means that behaviour is determined not only by changes in income and relative prices but also by who we are and who we have decided to be.

If taken on board it'd make economic modelling much more complicated (perhaps unnecessarily so).

But how else can we take seriously the actions of someone who won't eat or even drink water from dawn to dusk?

Worth a read.

Wednesday, November 06, 2002

Unpalatable as it is, we need a bond market

I spoke about the threatened demise of the Bond Market on Life Matters on Monday, which is where you will find several good references.

I am philosophically inclined to agree with Alex Erskine who refers to bond traders as "basket weavers and candlestick makers" who almost deserve the same fate as they've been prescribing for others workers made redundant by the progress of technology and new work practices.

If they weren't so arrogant (arrogant as a bunch - a few individuals in the bond market are humble) it'd be easier to feel sorry for them.

BUT the more I thought about this preparing for Life Matters the more I realised that, unpalatable as it is, we need a bond market.

And more. We need, yes we really need, the government to invest for the sake of it, and to borrow to raise the money.

Nicholas Gruen of Lateral Economics makes the point in a paper not on the net, although a dot-point version of it is.

He says for the Australian Government, as for any organisation, there is an optimal level of debt and an optimal level of funds invested. These should be decided quite separately from the question of whether or not the government should own a phone company.

Given the government's long-term investment horizon it makes sense to borrow at around 5 per cent and invest for an average return over the longer term of 10 per cent. Who wouldn't?

More importantly: there can be big benefits to the wider economy from the government doing so.

Buy buying Australian stocks when they are cheap and selling when they look pricey (an sensible practice) the government can deepen and smooth out volatility in the Australian stock market.

This is what the Reserve Bank of Australia does in the Australian Foreign Exchange market.

To the extent that the arms-length government investor put funds into the Australian stock market it would also would be helping to raise equity prices closer to their true value, reducing the debt-equity premium.

Everyone wins? That's how it looks.

I can see no good reason why the government should deny itself the right to invest and deny itself the right to raise funds. Indeed, it seems to me that the business of government is too important to deny it these rights.

What if a real crisis arises and the government suddenly needs to borrow - without a bond market it would find it hard. Australian might well regret the boldness of the brash Australian Treasurer who paid off his debts.

Update: Nicholas Gruen's paper IS on the web - here.

Wednesday, October 30, 2002


This week on Life Matters with Geraldine Doogue I discussed deflation, as I had on The Business Show on SBS TV on Sunday.

If you haven't thought much about deflation, that's okay. Many Australians hadn't thought much about inflation back at the start of the 1970's. They needed to be convinced that it could be a problem. That's the sort of situation we are in now with deflation. It is happening. Price indexes are falling in China, Japan, Singapore, Hong Kong and Taiwan. They are on the edge of falling in Europe, and may soon fall in the United States. But is it a problem?

Japan's problems are well known - but there's more than deflation involved. The argument is that falling prices encourage consumers to put off spending in the expectation that prices will fall further, which encourages producers to cut prices to try to sell goods. And so on. Also loans become harder, not easier, to repay over time, forcing investors to sell assets, which pushes down the value of houses etc. in another downward spiral.

Well, that's the argument. On Life Matters and on the Business Show I asked whether deflation was really that bad, just as skeptics asked the same about inflation in the early 1970's. The answer may be that it is a question of degree. Mild inflation (two or three per cent) probably doesn't encourage consumers to bring forward spending, just as mild deflation probably doesn't encourage them to postpone it. As the macroeconomist Barry Hughes asked me: If you save $200 on the price of a $20,000 car by delaying buying for a year, would you do it?

And the downward asset price spiral caused by the inability to pay off loans is probably unlikely to take hold while interest rates are falling.

Which brings us to the real fear about deflation - seen in Japan, that it'll be impossible to get out of by cutting interest rates. In Japan they are already at zero.

The US Fed has studied what happened in Japan and it finds that there's a fundamental asymmetry in the management of prices. Interest rates can always be pushed high enough to kill inflation, but they can't necessarily be pushed low enough to kill deflation. Therefore it says central banks should err on the side of caution when deflation is a possibility. It's better to have prices moving up too much than it is to have prices moving down too much. You can always correct inflation. You can't always correct deflation. It is a message Australia's Reserve Bank is probably taking on board.

So, does Australia need to worry? Our CPI looks healthy - it is moving up at the rate of 3.2 per cent a year, but within that, the price of goods is scarcely moving at all. The price index for private sector goods moved up only 0.1 per cent in the September quarter. And this after three years in which our dollar has devalued against the US by about 30 per cent. So deflation is clearly knocking on our door. But against that most of what we do in Australia is not particularly affected by the price of manufactured goods. Australia specialises in mining, agriculture and services. We may be one of the last countries in the world to succumb to worldwide deflation should it take hold. Although we would certainly be affected by any worldwide recession that resulted.

Friday, October 25, 2002

The limits to economics.

On Life Matters with Geraldine Doogue last week I discussed what the Bali tragedy and others like it tell us about the limits to economics and pricing.

After September 11 last year Allianz Insurance specifically excluded from its travel insurance policies cover for consequences of acts of terrorism.

Yet as soon as an act of terrorism took place that exactly fitted the criteria for exclusion, Allianz waived the exclusion.

Many Australian travelers to Bali chose not to take out travel insurance, knowing that their cost of travel back home would not be covered if something went wrong.

And yet within hours of the Bali tragedy the Australian government said it would help out anyone who wasn't insured.

Which might make you wonder whether there is any point in treating the wording on insurance policies seriously...

I am told (perhaps unreliably) that the first-class tickets for passengers on the Titanic entitled them to guaranteed access to lifeboats. Not so for the third-class tickets.

And yet when tragedy struck the clearly-defined rules fell apart.

Tragedy shows up the limits to economics and pricing.

As do religious matters. In 1990 Clive Hamilton headed research at the Resource Assessment Commission. He attempted to put a financial value on the worth of preserving Coronation Hill at Kakadu. He used to ascertain how much money Australians would be prepared to pay to have Coronation Hill not mined. He told me later that he lost his faith in such surveys when he asked himself how it would sound if he asked the same questions to an aboriginal people with spiritual ties to the land. Even to ask the questions would be offensive, and would degrade the religious attachment it was attempting to measure.

That's the concept I dealt with on Life Matters, quoting from a paper entitled Taboo Tradeoffs: Reactions to Transactions that Transgress the Spheres of Justice.

The Abstract says:

"Taboo trade-offs violate deeply held normative intuitions about the integrity, even sanctity, of certain relationships and the moral-political values underlying those relationships. For instance, if asked to estimate the monetary worth of one's children, of one's loyalty to one's country, or of acts of friendship, people find the questions more than merely confusing or cognitively intractable: they find such questions themselves morally offensive."

God, life and death, and love appear to be among the entities that pricing is not only bad at handling, but to which it can do enormous damage.

The authors Fiske and Tetlock attempt to explain why this is, and suggest ways how, in the absence of prices, we can rationally make the tradeoffs that we have to between say, mining and god, or prices and life.

I agree with them that prices are useless and actually cause damage in many circumstances, I think their explanations of why this should be the case are reasonable, but I find their suggested solution unsatisfying. Having said that, I can't think of a solution at all. How can you trade off apples and oranges if you can't use prices?

Worth a read.

Tuesday, October 15, 2002

More (maybe less) happiness

Returning to happiness once more (it is after all a research area of one of the winners of this year's Nobel Prize for Economics), Don posts this interesting comment:

"A lot of people have seized on this research because they like the conclusions it seems to lead to - things like wealth and income redistribution, direct job creation and high taxes on luxuries.

These people ought to stop and think.

Try these thought experiments:

1. A neuro-psychologist invents a therapy which she guarantees will instantly resolve feelings of bitterness and injustice and induce long lasting feelings of contentment and well being. She suggests administering it to Indigenous land rights campaigners and members of the stolen generation. If it makes everyone happier then what's the problem?

2. Imagine that new research demonstrates that people who are poor in relative terms are only unhappy because they know that others are better off. This leads to contentment sapping cognitions of unfairness. Should we improve their level of happiness by banning media portrayals of wealth? Could we improve their standard of psychological well being by segregating poor people so that wealth disparities are concealed from them?

3. Imagine that researchers discover that some people are using opera, classical music, and listening to Radio National as positional goods ('cultural capital'). They choose these things in order to set themselves apart from ordinary folks who prefer things like action movies, Kylie Minogue, and Alan Jones. Should we abolish government subsidies to opera, orchestras, and Radio National?

Could it be that there's more to life than being happy?"

My response: A very good point.

I said (on ABC Radio National) some years ago that the ultimate goal of life had to be more to life than merely happiness.

Otherwise we would all take a happiness drug or connect ourselves to electrodes that stimulated the happiness parts of our brains.

We need struggle, we need to be unsatisfied, we need stress in order to make life truly rich.

As I say to my daughter, stress, even anguish is like salt. We need some, but not too much in order to make life truly taste good.

The Nobel Prize for Economics

That was my topic of conversation with Geraldine Doogue on Monday.

The most interesting winner isn't even an economist. He is the psychologist Daniel Kahnerman. The most interesting thing I have read about him is in this article by Jason Zweig in the US magazine Money in May 2001.

"Kahneman was born in Tel Aviv in 1934, but his French parents returned home to Paris when he was three months old. Six years later, as Kahneman was finishing first grade, the Nazis invaded France, and his family was forced to wear the yellow star that marked Jews for deportation to the death camps. His father, a research chemist, was taken away but then released because he was considered useful to the war effort. The family escaped to unoccupied France and spent the rest of the war in hiding and on the run. His father died in 1944, and 12-year-old Danny moved to Palestine with his mother two years later.

Kahneman thought of becoming a physicist or economist, but he ended up studying math and psychology at Hebrew University in Jerusalem. He finished his B.A. at the age of 20. Having survived so many horrors, he had already developed a deep distrust of things that others take for granted--the notion that humans are rational, the confidence that knowledge can solve all problems, even the belief that there's a God. He entered the work force as an unorthodox thinker determined to challenge the status quo."

There is much, much more. As I said, it is the best account, and it was written 18 months ahead of the Nobel.

Here are two quizzes:

Quiz One:

600 individuals contract a severe illness. There exist two options:
A. Definitely saving 200 people;
B. There is a 33% chance of saving all the patients and a 66% chance that all will die.

Which would you choose?

Quiz Two:

600 individuals contract a severe illness. This time, the two options are:
A. 400 patients will definitely die.
B. There is a 33% chance that nobody will die.

Which would you choose?

Kahneman found that

Quiz One: 72% of subjects chose the first option.
Quiz Two: 78% of subjects chose the second option.

You may have noticed by now that Quiz One and Quiz Two are the same.

It felt a bit funny to be talking to Geraldine Doogue about such matters on Monday. Everything feels strange at the moment.

Monday, October 07, 2002

The law of small numbers

Today on Life Matters I used the excuse of the grand finals to speak to Rebecca Gorman about what psychologist Amos Tverski calls "The Law of Small Numbers.''

It is an ironic reference. The so-called law of big numbers states correctly that when an experiment such as a coin toss is repeated (say) thousands of times, heads will come up about half the time.

Tverski finds that people wrongly believe this bo be the case for very small numbers as well.

If a couple has two children, both of them girls, people attach significance to this. It must be in the man's genes. Yet this is highly likely (25 per cent) to happen just by chance.

When it comes to runs of heads, they are far more likely than we think. If you toss a coin 20 times, a run of 4 heads in a row (somewhere in the sequence) is extremely likely - the probability of that happening by chance alone is about 50 per cent!

But Tverski thinks that because we are victims of belief in "the law of small numbers" we feel the need to attach significance to a run of four wins in a row.

In sport in the US, this is called belief in "the hot hand". Tverski has shown that for basketball in the US the hot hand seems not to exist. Sone study reports that after a run of successes a certain player had a 75 per cent chance of having another success. After a run of failures the player also had a 75 per cent chance of success.

Neither players nor their supporters believe this.

We seem to have an almost programmed-in need to look for meaning in what might be meaningless noise....

Even the Australian Bureau of statistics publishes trend estimates, some of which are meaningless. I remember in 1993 that the direction of the trend for the current account deficit used to point up in some months, down in others. In reality the underlying movement in the current account deficit probably wasn't changing at all.

Which brings us to the Australian Securities and Investments Commission and its position paper on the advertising of investment returns. ASIC wants the rules governing the advertising of past performance tightened up.

It has commissioned a survey from the Financial Policy Research Centre which examines 100 surveys of the performance of funds managers over time. It says about half of the studies found no correlation at all between good past and future performance. "Good performance seems to, at best, a weak and unreliable predictor of good performance over the longer term."

There are all sorts of reasons why this should be the case. Without knowledge that the market doesn't have (which is illegal in equities) it should be impossible to consistently better predict where the market will end up than the market itself. An investment style which works in one set of market conditions may not work in the next. Successful funds managers will face a run on their staff, everyone will copy them, they will believe their hype. (Remember BT?)

I said on Life Matters that if a firm wins "Funds Manager of the Year" two years in a row, ditching it might be as good advice as keeping it.

Tverski points out that for sport there is no reason why a run of wins shouldn't signal something, it is just that the statistics show that it doesn't.

I must say that I personally found Tverski's findings about perception challenging. Until now I must have believed (subconsciously) that "god's hand" manipulates the outcome of a coin toss to ensure that a run of heads is always followed by a run of tails. I now see (late) that that isn't how it happens. A run of heads isn't reversed by the hand of god, its effect is diluted over time by other results, so that when the number of tosses gets very large the results are about 50-50. (If you toss a coin and get five heads in a row, and then keep tossing until you have tossed 1,000 times in total, probablity theory does not predict that the total number of heads will be 500, it predicts that the number will be about 502.)

Actually I still find the workings of probability hard to get my head around. Perhaps because I know from quantum physics that the hand of god does manipulate the results of wave/particle experiments to give us the result it wants us to see. So maybe our intuitive belief in a hand of god isn't so wrong after all.

Tuesday, October 01, 2002

The mathematics of inequality

That was the title of this week's discussion on Life Matters with Geraldine Doogue.

Two French physicists believe they can explain why in every society the distribution of incomes follows the same mathematical pattern.

The arguments are best sumarised in New Scientist.

There is not a lot to add except that it'll pay to follow the work of the new "econphysists" closely.

Tuesday, September 17, 2002

Information Technology - use it, don't make it

Noël Coward is said to have observed that TV is for appearing on, not for looking at.

The Wall Street Journal is now saying something similar about IT. It's for importing, not making.

And it cites Australia as the success story.

" of the biggest beneficiaries from information technology is Australia, which hasn't any high-tech industry at all. Yet it is one of the few economies to have enjoyed a 1990s surge in productivity (or output for each hour of work) as impressive as the one the U.S. has seen. Its secret: import high-tech gear that others make. As in the U.S., the spread of bar-coding, scanning and inventory-management systems is making Australian wholesalers much more efficient, and that is paying economywide dividends. Compared to its population, Australia has more secure servers, the sort used in e-commerce, than anyone else besides the U.S. and Iceland (that is another story)."

In 1997 our own Information Industries Taskforce produced a report entitled The Global Information Economy: The Way Ahead in which it advised the government quite differently. We had to make, not just use.

"Australia’s future as an advanced economy will depend on the extent to which it participates in the evolving global information industries as a provider of products and systems; not just a taker. Full participation in the digital economy will require a significant increase in current exports by the information industries based on a much more focused and cohesive export strategy."

Perhaps it is just as well the report lay largely unread...

As did many reports commissioned by the new government. What about the one by Charlie Bell advising the government to cut the burden of red tape on small business?


This week on Monday Economics with Geraldine Doogue I discussed the economics of tipping. Pure economic theory would suggest that we should not. We try to get the best possible price for things. So why pay more, and why do it after the service has been rendered? Especially if you are not likely to ever go to that town or restaurant again?

The Research at Cornell University suggests that we do it in large measure to ensure good service. Tipping is a sort of shadow market which fulfils a role legal contracts cannot. These days there is such a contract for employment. I will work more than the strict number of hours required, and in return you will pay me more than you are legally required to, and keep me on in a downturn.

We also do it for status. Ray Williams of HIH did it a lot. Men do it much more than women.

We are more likely to tip when other people are watching (say, in a big group).

And women are significantly more likely to do it when their waiter is a man, especially a man of eligible age.

For men, apparently, there is no such effect.

Some of the references are here.

Happiness 3

The debate continues in Ross Gittins' column over the weekend. Many people find these conclusions shocking. They are debating at Henry Thornton.

Tuesday, September 10, 2002

Happiness 2

Tom V writes: the correlation between having a job and being happy might be because theres so many negative connotations of being unemployed. perhaps because were stuck with the protestant notion of work ethic.

To decipher this cause, it would be interesting to take some people, and pay them the same amount but they dont actually have to turn up to work. i doubt their happiness will decline.

So two things: searching for a job might cause total misery, and then getting a job makes one happy. second, there may be a big difference in happiness for the small difference in income between welfare and entry level job.


I agree, there must be reasons why we want to work, and those reasons might be social, as well as biologicial.

But the experiment about taking some people, and paying them the same amount with some not having to turn up to work has been done (on paper and with economietrics at least). The finding, reported by Frank and Stutzer is that for the European countries observed, "a move from the lowest income quartile to the highest income quartile would not be enough to offset the adverse effect of unemployment."

It is true that some days I would quite like to be paid not to work. I would like to volunteer for any experiment in which I was paid not to work, but I am not sure I would like to be part of that experiment for ever.

Monday, September 09, 2002


Today on Life Matters with Geraldine Doogue I spoke about happiness.

Money doesn't matter much. The average Japanese can buy five times what they could after the war but is no more happy. The average American can buy 2.5 times what they could and is no more happy. Psychologist Bob Cummins from Deakin University refers to "homeostasis". He says our body regulates how happy we feel to keep our mood in a tight band, in much the same way as it regulates blood pressure and temperature. There are doubtless good adaptive reasons for doing that. Too little happiness and we'll commit suicide or forget to eat. Too much happiness and we won't bother to hunt, or look out for predators.

One way in which adaption happens is rising expections. The higher our income, the more income we feel we need. So we believe that a certain increase in our income will make us happy, but it never does. The Journal of Economic Literature article includes a graph which describes the process perfectly.

What does make us happy is work. Having a job is usually far more important to happiness than the income the job provides.

Even moving from the lowest quartile of income to the highest won't be enough to compensate for losing a job. It's worth paying money in order to be in work...

The implications for policy: a tax on employed Australians designed to create employment is a good idea. Also the economists obsession with GDP is probably the right one - but for the wrong reasons! We need high GDP not because of the goods that it will deliver us but because of the work that getting the high GDP will make for ourselves along the way!

The other thing that matters is democracy. The Swiss local government areas where citizens can take part in direct elections are far more happy than those where citizens can not. The process matters. Economists Frey and Stutzer determine this by observing that immigrants to Switzerland who can't vote, aren't made nearly as happy by living in a district with direct referenda as are those who can vote, even though they enjoy the same outcome in terms of good government.

Taken all together - the implications are that redistribution of income is a very good idea, positional goods should probably be banned (in aggregate they make people unhappy by raising expectations) jobs matter, and that democracy matters in its own right, regardless of where it leads us.

After the discussion Geraldine told me of a Background Briefing program on happiness which noted the importance of festivals. Experiences give a much bigger happiness bang for the buck than goods. (Unless it is the experience of buying the good. A new kitchen increases happiness at the time it is bought, but not a lot after that). Much of India is very poor, but poor Indians devote a lot of effort to festivals (and weddings, as some recent films make clear).

Also aftert the discussion Kathy Golllan, the Life Matters Executive Producer, told me of her amazing finding. Teaching English to upper class children in Indonesia, she asked, as a language excercise: "What would you do if you had a million dollars?" One of the replies shocked her. "I would get a job".

Thursday, September 05, 2002

Game Shows.

Each Monday I discuss economics with Geraldine Doogue on Life Matters on ABC Radio National.

This Monday I talked about what economists are learning from TV game shows. The Price is Right and The Weakest Link are almost-perfect laboratories in which to study financial behaviour. Unlike artificial laboratories the money is real (six million for the price is right) and the data is rich (7,000 banking decisions in 70 episodes of the Weakest Link.)

The findings are that we don't behave entirely rationally. We approximate rational behaviour by using easy rules of thumb.

We make a rational decision to be economical with our thinking resources. Ironic, huh?

And there was more besides.

Here are some of the references.

Next Monday, I'll be discussing happiness, using the references dug up this week by Ross Gittins.

I'll go further. I'll reveal what really does make us happy.

For the SBS Business Show I am researching a panel discussion about the unwieldy nature of taxation in Australia.

The problem is that it is an unwieldy topic.

That discussion should go to air on Sunday September 15.

Monday, September 02, 2002


This is my first post.

I report for "The Business Show" on SBS television in Australia. 6.00pm Sunday nights.

For most of the two decades before that I was the Economics Correspondent for ABC Radio Current Affairs.

I am a former Treasury economist with an honours degree in economics.

I am married to the award winning journalist Toni Hassan, and I have two children, Alexandra and Grace.

My email address is peter at