Saturday, September 25, 2021

Protecting Children

If you watch mass media and believe what you see, you think the reason to require masks on school children, the reason to vaccinate them, is to protect the children. It’s a lie. Over the entire period of the pandemic fewer than five hundred children under 18 have died in the US, well under one in a hundred thousand of the population — about half as many as died from pneumonia. The IFR, the chance that someone who is infected with Covid will die of it, is about 1/100,000 for ages 5-14, somewhat higher for older teens. The reason to keep children from getting Covid is to protect the adults those children could pass the disease on to. Any  reduction in deaths of the children themselves is a minor side benefit.

But dying children make better news stories, more emotionally moving arguments, than statistics on infection rates.

Wednesday, September 22, 2021

The Equity Premium Puzzle: A Suggested Solution

Most investors are free to invest in either stocks or bonds, so one would expect the return of both investments to be similar. It is an obvious argument, at least to an economist, but the conclusion does not appear to be true. In the U.S. over the past century, stocks have consistently outperformed bonds. This is the Equity Premium Puzzle.

A variety of explanations have been offered. The most obvious is that the return of stocks, both individual stocks and stock portfolios, is more uncertain than the return of bonds, at least over the short run, so risk averse investors would be willing to accept a lower return on bonds in exchange for lower risk. Attempts to estimate how risk averse investors would have to be to explain the observed premium, however, produce implausible answers: 

To quantify the level of risk aversion implied if these figures represented the expected outperformance of equities over bonds, investors would prefer a certain payoff of $51,300 to a 50/50 bet paying either $50,000 or $100,000.[1]

A variety of other explanations have been offered but none appears to be generally accepted.

I have another one.

Imagine a market where many investors are insider traders on a small scale, in an economic but not necessarily a legal sense. I know more than the market about the firm I work for. You know more than the market about a firm you have repeatedly had dealings with. He knows more than the market about a technology he has worked with extensively that will affect the performance of several firms.

Each person invests some of his money where he has an edge, buys a stock that is going to go up or sells short one that is going to go down. By the standard analysis of insider trading, he makes an above market return. Because he is risk averse he wants to diversify his investment, so part of his money goes into other investments. His marginal return is the return he can get without inside knowledge, his average return is a suitably weighted average of that and his insider return. Bond investments only have to do as well as his marginal investments, so the return on bonds is lower than the average return on stocks.

When I first came up with the idea, someone I described it to offered a proof that it could not be true, one that at the time seemed convincing. My argument implies that everyone, the investor without inside knowledge and the investor with inside knowledge making marginal investments,  is getting less than the average return. Why can’t he buy a random collection of stocks, in the limit a millionth of a percent of the stock of every company, and so guarantee himself the average return?

That proves too much, only that my explanation of the equity premium puzzle is inconsistent with rational behavior by investors but also that an insider cannot profit by his inside knowledge: If some insiders are getting an above average return, everyone else must be getting, on average, a below average return, and anyone who is could get an average return by buying stock at random.

The solution to the paradox is that it is not possible for every uninformed investor to end up with an equal share of every company on the market because some of those shares, the shares of companies particularly likely to go up, belong to insiders. That explains both how it is possible for insiders to make an above average return and why my explanation of the Equity Premium Puzzle is not inconsistent with investor rationality.

Whether it is the correct explanation, of course, I do not know.

Comments welcome.



[1] Mankiw, N. Gregory; Zeldes, Stephen P. (1991). "The Consumption of Stockholders and Nonstockholders". Journal of Financial Economics. 29 (1): 97–112.

 

Monday, September 13, 2021

Three Comments on the Recall Election

1. Larry Elder's decision to prominently announce his plan to replace Senator Feinstein, when and if she leaves office during her term, with a Republican, was tactically stupid. Elder is going to win the second half of the election, so what matters is the first half. Raising the possibility that recalling him will cost the Democrats their senate majority will surely increase the number of Democrats willing to vote to retain; Republicans were already going to vote to recall. That single decision may decide the election.

2. Raising a scandalous accusation against Newsom's wife only a few days before the election — Rose McGowan's claim that Jennifer Newsom tried to persuade her not to accuse Harvey Weinstein of rape — is pretty good evidence that the accusation, if true, cannot be supported with evidence.

3. But I still plan to vote for recall and for Larry Elder, since he is the nearest thing to a libertarian to have any significant chance of becoming governor of California. I doubt he can do much good even if he wins, given the legislature, but he can at least do less damage than Newsom would.

Tuesday, September 07, 2021

The Ivermectin Mess

Scott Alexander, my favorite source for online information and discussion, has a recent post touching on the Ivermectin controversy. The point of his post, which is mostly about a Rolling Stone article that was wildly inaccurate, is that people on both sides of the political spectrum are too willing to believe whatever fits their prior beliefs. A good deal of the comment thread, however, dealt with the controversy over Ivermectin, which turned out to be interesting.

Ivermectin is a drug approved by the FDA and extensively used for treating problems having nothing to do with Covid, an anti-parasitic drug. There is some evidence that it is useful for treating Covid but apparently not very solid evidence; the FDA says it is not known to help with Covid and that studies are currently being done. True to the usual FDA policy, they disapprove of people experimenting on themselves by using it against Covid before the FDA has approved it for that purpose. Ivermectin is also used to treat animals for parasites, and some people have taken the animal version, a much larger dose, with bad effects. 

Unfortunately, the question of whether it works has somehow gotten linked to political polarization, with people on the right thinking it does, people on the left that it doesn’t. This may be connected to the controversy over vaccination, since the more people believe Covid is treatable, the less the pressure to get vaccinated. The media, not surprisingly, mostly support the left’s view. Much of the reporting is dishonest, representing it as a horse drug dangerous for humans and ignoring the fact that it is also a human drug and that the serious problems are due to people taking the animal version instead of the pill prescribed for humans. That misrepresentation can be found in a tweet, but not the web page, from the FDA. A likely result of the campaign to demonize Ivermectin is to make doctors reluctant to prescribe it even for its approved use, even more for off label use against Covid. That will make people more likely to use the veterinary version, making the problem worse, not better.

Two people in the comments responding to Scott’s piece asserted that Ivermectin had been approved by India. That got me curious, so I googled for information on the subject. The closest I could find to confirmation was a story that two states in India were using it. I then switched my search engine to Duck Duck Go and found a story, from ForbesIndia, which reported that India recommended Ivermectin in its guidelines — along with the statement that WHO and the FDA disapproved of it. I went back to Google and did the same search and was unable to find that article. There were some pro-ivermectin articles but none I found that reported that India had officially recommended the drug and none from a source that a reader, especially a left wing reader, would be likely to take seriously. This at least mildly suggests that Google filters in part on a political basis, which would be disturbing it true.

Since I raised the issue of vaccination ... . My view is that the current vaccines sharply reduce the risk of dying from Covid; I am not sure how good the evidence is that they substantially reduce infection and transmission. Common side effects appear to be minor, ranging from a sore arm to feeling sick for a few days. I therefor expect that it is in the interest of most people to get vaccinated, with the possible exception of people, especially young adults, who have already had Covid. The result of vaccination becoming a political issue is almost certainly to reduce the number of people who get vaccinated, which is unfortunate. It also produces a lot of self-righteous posturing on both sides, as became strikingly clear to me when I put my previous blog post on FaceBook.