Monthly Archives: January 2006

Inventing stories

Paul de Grauwe, an economics professor at the University of Leuven in Belgium, relates a nice tale about the value of Belgian chocolates and how that can tell us something about the value of the dollar in today’s Financial Times (subscribers only):

A few weeks ago an interesting experiment was undertaken at the Brussels food fair, a yearly affair where food lovers wander around among the many stalls stuffed with all imaginable delicacies. A shop was put up selling boxes of Belgian chocolates. The first day the price was set at €9 for each box. Sales went well. The next day the price was raised to €15 per box. Steeped in economic theory, you might think that demand now declined. Wrong. Demand doubled. On the third day the price was lowered to €2 for each box. Demand for chocolates collapsed. What went wrong with the law of demand?

The explanation is given by psychologists. It is very difficult, if not impossible, for the consumer to find out the quality of chocolates by just looking at their appearance in the shop. When confronted with such uncertainty about the intrinsic value of things, consumers use simple rules of thumb that they understand. Psychologists call these “heuristics”. In this case, the price of the chocolates provides the rule of thumb.

Most consumers have some experience that allows them to associate high price with high quality. It is not always like that, but on average it probably is. Thus when looking at the €15 box the consumers infer that the high price reflects high quality and they buy the chocolates. Consumers who see the boxes priced at €2 infer that the quality of these chocolates is not to be trusted, and they do not buy them. The law of demand is turned upside down.

So it is with the dollar, argues de Grauwe. Because within certain bounds, no one knows the “right” value, they follow the herd. If the dollar is going up, there must be something to it. Ditto when it is going down. The analyst earns his keep by inventing stories appropriate to the situation.

The analyst, who does not know more about the fundamental value of the dollar than the unsuspecting buyer, invents stories. Thus when the dollar goes up, the analyst goes on a search for variables that move in the right direction and that can be linked to the rising dollar, carefully eliminating from the analysis all the other fundamental variables that move in the wrong direction. And so we are told that the strength of the dollar last year was due to interest rate differentials favouring the dollar. The further widening of the current account deficit, which in a previous analysis got centre stage, is carefully dropped from the new analysis.

The honest story of why the dollar increased last year is that we simply do not know. But we do not like to admit that we do not know. Our psyche abhors the darkness of ignorance. That is why analysts’ services continue to be demanded. They fulfil a psychological need to understand. Exchange rate economics these days satisfies this need by telling a new story each time the dollar goes up or down.

Like just about everyone else, at the end de Grauwe confesses he thinks the dollar must come down. “But,” he warns, “do not ask me when this will happen.”

The ultimate transgression in California

I’m contemplating a startling act for a Californian: relying on public transport to get to work.

A Boston-based friend of mine commented when we moved to Berkeley that the Bay Area had one of the better public transport systems in the country. That’s a sad comment on the country (as my friend was aware). In the middle-class professional circles we frequent, I know only one person who takes Bart to work. Everyone else depends on the car for everything.

I have no doubt that if my office was in San Francisco, I would bart (I think the verbal form is allowed). San Francisco Bay is glorious, but it also means that the choke points of a handful of bridges create terrible traffic in commuter hours. Bart is efficient, clean and reasonably fast. And once you’re in San Francisco, there is very little need for a car during the working day.

My office, however, is in Berkeley. In the summer, I cycled to work reasonably regularly. But I don’t want to cycle in the rain (we’ve had quite a bit in the last month) or the dark. So I’m reliant on the bus network. On the map, this looks fine. There’s a good network of buses tying the various parts of Berkeley together. The reality, however, isn’t so great. Because so many people use their cars, the buses are very underused. Because they are underused, the frequency is low. Because the frequency is low, people are reluctant to use the buses. And so on.

Still, I tried the buses for the last couple of weeks, and I might persevere. The one hitch is that without a car at lunchtime, I’m restricted to a handful of places, unless a colleague is going somewhere I want to go. But it feels good to defy the completely car-reliant culture I now live in. In a small way.

You're an animal

I’ve just romped through You’re An Animal, Viskovitz, by Alessandro Boffa, which is one of the funniest and most original books I’ve read in years.

If you can imagine Aesop crossed with EO Wilson, you have some idea of what Boffa has done. The 20 brief fables of the book tell the tales of Viskovitz, who is a different animal each time. His struggle for survival, his love life with Lara and Ljuba, and his rivalry with Zucotic, Petrovic and Lopez are constants, but each is defracted through the lens of accurate biology and animal behavior.

Uncategorizable and unmissable.

How do you run a business with half your staff?

The Financial Times has an extraordinary story on its front page today: “HSBC, the world’s third largest bank, is estimating that up to half of its staff could fall ill or be absent from work at the peak of the next flu pandemic.”

HSBC’s calculation isn’t a forecast. Instead, the bank’s head of group crisis management is trying to plan prudently. “None of us know the virulence of the virus, but I would rather be prepared for the worst,” the FT quotes Bob Piggott as saying. In contrast, the FT reports that the UK government reckons “an average of 8% of the workforce absent at any one time and 25% cumulatively throughout the duration of a pandemic”.

What’s worrying in the report is not only the high estimates of potential illnesses and disruption. Most organizations have yet to develop real contigency plans.

I recently wrote something about expecting the unexpected. In the case of a pandemic, what happens to supplies from food processing plants? And what about the economic well-being of whole swathes of the modern economy that rely on sourcing parts from around the globe, as governments respond to pandemic by clamping down on travel and trade that could spread a virus?

Rather than hope for the best, sensible leaders will be making their contingency plans.

Even shriller

For many months, Berkeley economist Brad DeLong has been ending his weblog posts that deal with the Bush administration with a consistent tagline: “Impeach George W. Bush. Impeach Richard Cheney. Do it now.”

But Brad has understandably moved the goalposts today: “Impeach George W. Bush. Impeach Richard Cheney. Impeach everyone who has sat at the table in the Roosevelt Room during the George W. Bush administration. Do it now.”

Distorted balance

Scott Rosenberg: “The greatest achievement of the right over the past decade — oh, setting aside the seizure of ‘all three branches of government’ in the wake of a disputed election, the plundering of the Treasury, and the derailing of the war on al-Qaida — is this: By a wide swath of American opinion-makers, ‘balance’ is understood to mean that the usual welter of mainstream American voices needs to be weighed down by a gang of beady-eyed ideologues on right-wing think-tank payrolls who can barely construct a sensible argument.”

A blog for everyone in Davos

Way back in 1999, before the 2000 Annual Meeting of the World Economic Forum in Davos, Dave Winer urged me to provide every participant in Davos with a blog. It was a great idea, but so far ahead of its time that I couldn’t come close to persuading my colleagues at the Forum to do it.

Well, ideas come around. The Forum has taken a laudatory step in the right direction for this year’s Annual Meeting. “Every participant of the Annual Meeting – ranging from business leaders to political leaders, heads of NGOs, religious leaders academics and journalists – will be asked to join the Forum blog. The World Economic Forum was the first international organization to set up a blog at the Annual Meeting in January 2005 and the upcoming Annual Meeting will see a significant development in the experiment. All of the more than 2,000 participants, including presidents and prime ministers, will be asked to provide at least one posting for the blog.”

I think that’s great. It would be even better if every participant had their own blog, rather than be aggregated on the one, central Forum blog. Still, huzzahs all round.