Digital Musings

And the winner is....

The Olympic Games of Athens are over. You may not be aware of it but another kind of competition was taking place behind the scene. Indeed, two professors of economics, Andrew Bernard (Dartmouth) and Meghan Busse (Berkeley) who have recently published an article entitled: "Who Wins the Olympic Games: Economic Resources and Medal Totals" have tried again to predict the number of medals that countries may collect at the end of the Athens game. They did it already for the 2000 games in Sidney and the accuracy of their results was pretty remarkable (their results are both compared to actual results and to results stemming from a naive strategy where the medals are the same as in the previous games).

So, how do they fare this year?

A snapshot of their results (published in Review of Economics and Statistics , 2004, Vol. 86, no.1.) is here and here. See for yourself! Whatever you think of econometrics (see also the wine notes in this Blog), this is a great way to teach econometrics by (timely) example!

Thanks to Craig Newmark for the info !

Do you know what 5 exabytes are?

Ever wondered how much information there is out there. Well, according to a 2003 estimate made by two professors at the University of California at Berkeley? Peter Lyman and Hal Varian, roughly 5 exabytes. Sounds a bit hard to figure out how much this is! You can read the executive summary the two professors and their research team have put together there. If you want to get the full story download the full report here.

Here is a hint:

"Exabyte = 1,000,000,000,000,000,000 bytes OR 10 to the power of 18 bytes
2 Exabytes: Total volume of information generated in 1999.
5 Exabytes: All words ever spoken by human beings. "

To be even more specific:

"How big is five exabytes? If digitized with full formatting, the seventeen million books in the Library of Congress contain about 136 terabytes of information; five exabytes of information is equivalent in size to the information contained in 37,000 new libraries the size of the Library of Congress book collections."

To make this number even more palatable, another metric is useful: How much new information is produced per person on earth?

Answer: "How much new information per person? According to the Population Reference Bureau, the world population is 6.3 billion, thus almost 800 MB of recorded information is produced per person each year. It would take about 30 feet of books to store the equivalent of 800 MB of information on paper. "

No need to add that this year bloggers will add more than their share to this mind-boggling number!

PS: This story is on Simon Garfinkel's blog at MIT Technology Review

Trade your blog!!!

Ever wondered whether your blog was trading at a premium or a discount? Well, you have a way now. Go to BlogShares and you'll be up and running:

"BlogShares is a simulated, fantasy stock market for weblogs where players invest fictional money to buy stocks and bonds in an artificial economy where attention is the commodity and weblogs are the companies. Weblogs, or blogs for short, are valued by their incoming links from other known blogs. In effect, links become the business deals in the simulation and players speculate on the fortunes of thousands of blogs by buying and selling shares. A whole host of options exist for advanced play including gifting shares, leveraged buy-outs, stock splits, additional share issues, market and player bonds."

Blogshares claim they have 5,000 active players. Rather impressive.

PS: Jim, this site is for you! Now, the question is about market efficiency and market manipulation? What if players collude and artificially inflate links back and forth. Jim, seriously, you have to investigate! Maybe a good project for your students!

Global warming: Debunking common pitfalls

Global warming, greenhouse effect, ozone layer holes are widely debated and it seems a common wisdom that we are heading for worse. At least, that's what you hear if you listen to media, Green peace activists or watch movies such as "The Day after Tomorrow."

Well, things may not be that simple after all. A first step towards a more cautious stance was made with the release of Bjorn Lomborg's book The Skeptical Environmentalist. This book triggered a true worldwide controversy which is obviously not over yet. It is rather strange, indeed, that people tend to be willing to listen to Cassandras and not so much to observers with a more balanced view (any idea why is that?).

New intellectual blood has come to give more substance, more background to the debate. This was indeed badly needed. Spencer Weart who is Director of the Center for History of Physics at the American Institute of Physics, has published in 2003 a book entitled "The Discovery of Global Warming" where he tackles challenging questions:

"The story in a nutshell: From ancient times people suspected that human activity could change the climate. For example, in the 19th century many Americans believed that cutting down forests brought more rainfall to a region. The discovery of ice ages in the distant past proved that climate could change all by itself, and radically. But what caused these changes — was it variations in the heat of the Sun? Volcanoes erupting clouds of smoke? The raising and lowering of mountain ranges, which diverted wind patterns and ocean currents? Or could it be changes in the composition of the air itself?... Read more here

The great thing about Weart is his wllingness to share his knowledge beyond the boudaries of his book. To do so, he has implemented a virtual version of his book through a remarkable companion website. Would not it be great if Weart started a blog on the topic (admittedly he tells us why and how he started the site but, reading what he says I think he is ready for blogging!)

Now, if you want to debate on global warming, look before you leap. Spencer did it for you!

PS: Thanks to David Warsh for pointing out the reference. David, founder of Economic Principals (advice: subscribe to David's Economic Principals, this is first class reading!), wrote an in-depth review of the book, which he rightly rates as an antidote to sensationalism.

Viewing the videos for PC/Windows users

Just a quick piece of advice. To view (seamlessly) the videos that we usually post on this blog, you're better off having Quicktime 6. You can download it there.

PS: Alternatively you can buy a Mac!

Entrepreneurship, optimism and (not) knowing the odds

Daniel Kahneman is a faculty member at Princeton University and a fellow at Hebrew University. He is the winner of the 2002 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel (erroneously known as the Nobel Prize in Economics), despite being a research psychologist and not an economist. Along with Amos Tverski, he has developped the so called "prospect theory" . On important feature of prospect theory is loss aversion.

According to Wikipedia, loss aversion refers to the tendency for people to strongly prefer avoiding losses than acquiring gains. Some studies suggest that losses are as much as twice as psychologically powerful than gains.

In the following video, Daniel Kahneman gives his latest thinking on loss aversion. What is quite interesting is the point he makes on the difference between knowing the odds and not knowing them. When you toss a coin, you know the odds. When you innovate, fairly good chances, you don't know the odds.

When people don't know the odds, loss aversion disappears. People, according to Kahneman, behave optimistically. They are no longer shying away. They even tend to be overoptimistic.

That is what makes entrepreneurs a different kind of people: If they really knew the odds, they would never start in the first place! It seems, though, that venture capitalists are precisely those who want to know the odds (business plans, Powerpoint presentation, valuation...). This may explain why they are so loss averse.

What is even more troubling though is how people, especially managers, can be fooled by randomness. They often take for genuine skills what is purely luck driven. Think of portfolio managers claiming to outperform the market (do you really believe them and how many of them started the race in the first place?), of CEOs loaded with stock options who were fortunate enough (few years ago) to see them end up in the money (see what happens when the stock market plummet, stock options are under water, does this mean that this time CEOs lack relevant skills or lost them?) etc...

Not knowing the odds is another way of saying that anything can happen. So, the first quality of an entrepreneur, apart from being an optimist à la Kahneman, is recognizing that disentangling skill from luck is a real hard one!

PS: I strongly recommend the free encyclopedia Wikipedia. Another great example of the usefulness of wikis.

Viral videos

Here is an example of a viral marketing clip. Corporations manufacture such clips in the hope that people spread them as widely as possible. I don't know whether or not it enhances the brand profile but, for sure, it is fun to watch! I am sure there must be someone out there who has started (or may start) a blog dedicated to viral marketing clips.

Finance at its best by two academic heavyweights!

Two great interviews of two great professors who have made major contributions to our understanding of financial markets, namely Eugene Fama and Kenneth French.

Enjoy!

The Art and Science of valuation

So, be frank! Do you intend to Google or not? Given the recent hype around Google's IPO, this is indeed a question to ask. The problem is whether you buy Google's intended stock valuation.
I f you still have not made your mind yet, let me advise you to read John Kay's piece on Google:

"Could Google, founded less than a decade ago, really be worth $35bn? In a competitive market, the maximum value of an asset is the cost of replicating it. The economic principles could hardly be simpler. If it is possible and profitable for companies to do something, they will. A competitive market is one in which others are free to do anything that they see is rewarding for someone else.

The replication principle does not help much in valuing Barclays Bank, General Electric, BP or Microsoft. Barclays Bank is one of the few survivors of the hundreds of small banks that existed in Britain two centuries ago. Its family tree is complex and impossible to reproduce. You could establish new businesses such as those you find within General Electric, although it would be difficult to create a new manufacturer of aero engines from scratch. You would certainly find it a long and costly process to reproduce the depth of management talent in that corporation....

But the replication principle is very helpful in appraising new businesses in markets where entry is easy and frequent. A mobile phone company is worth the cost of building its network and of acquiring its customers. A telephone engineer can estimate the first and a marketing consultant the second. The sum of these two is much less than the market valuation. If you had made such a calculation, you would not invest in mobile phone companies. The replication principle is not an alternative to discounted cash flow calculations and earnings projections, but a check on them. It tells you what is likely to happen to cash flow and earnings as competition intensifies and the market matures...

Imitation takes time and innovators can earn substantial rewards in the transitional period before others understand why their idea was such a good one. Even in high technology markets, where demand is often focused on the best product available at the time, innovation produces a flow of new entrants - look at the history of spreadsheets, where Lotus overtook Visicalc and Excel overtook Lotus. But the better the idea, the shorter that interval is likely to be.

This column is not in the business of giving investment advice. But you would be correct to infer that Google will remain on my favourites list, but not in my portfolio. You can do a lot of software engineering for $35bn. "(bold added by me)

So what about your own portfolio?

Any other example apart from Google you'd like to submit to Kay's replication litmus test?

Pierre Omidyar's blog

Although it does not seem that he has added any recent posts, interesting to see that Pierre Omidyar, eBay's founder, is running a personal blog.

Too bad he is not blogging more often!