What Causes the Relative Inefficiency of the Public Sector?

Private organisations die when they run out of money. Public organisations don’t need to worry about running out of money directly. When considering their behaviour and efficiency, is there a more important difference between them? I suggest that any observed differences in efficiency may be due only to survivorship bias, rather than superior management.

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Pinyin and the Roman Alphabet

Maybe there’s an argument for ditching pinyin in teaching Chinese as a foreign language?

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Business Purpose versus Strategy

Large companies might have strategies. Small companies can’t afford them.

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Fallacies By Example, Part One

Thanks to Andrew Orlowski at The Register, here is some Appeal to Consequences:


Brit global warming skeptics now outnumber believers

Nothing like a taste of climate policy to put you off


It would seem that the more people hear the arguments and study the policies, the less they like them.

These suggest that people will become skeptics on the question of whether global warming is true or false after reading about suggested policies for dealing with it. Look at the negative form of the Appeal to Consequences:

If P, then Q will occur.

Q is undesirable.

Therefore, P is false.

Orlowski is suggesting that people do not like suggested policies for dealing with global warming (“Q is undesirable”), and that therefore they become skeptics (“Therefore, P is false.”). Of course, it’s not possible to tell whether global warming is happening, or how it is caused, by looking at suggested policy responses to it.

Market Participant Numbers and ZOPA Capture

I was introduced to the idea of ZOPA – zone of possible agreement – before ever turning up to business school. It’s the range of prices for a transaction over which both parties still come out ahead, so should rationally still be happy to take part in the transaction.

For example, if I’m buying a house from you, you may know the minimum amount that you will sell for, and I know the maximum amount I will pay. If I am prepared to pay more than the minimum you will accept, then we can make a deal. Obviously, we both still want to maximise our own returns from the transaction.

In a market where one side of the transaction is highly concentrated – a monopoly or monopsony –  then the other side will have to accept the price dictated by the more concentrated side. The more concentrated side will be able to claim nearly all of the economic value created by the typical transaction.

How is price determined when there are large numbers of parties on both sides of the transaction? If the number of buyers suddenly doubles without changing the transaction volume, we would expect the price to go up, but by how much?

I don’t have an answer to this, and I don’t think there’s much literature on it. I wonder if it can be usefully modeled by a game allowing sellers to alter their offer price, at a cost, and making buyers pay a certain amount to view all the sellers in the market.

Awful Things, pt One

This is what happens when people get hold of graphics tools they’re not ready for. This is why PowerPoint is the devil.

Look at this diagram for the PESTEL framework.

The PESTEL framework, apparently. Source: http://www.mbatutes.com/tt-approach-to-gd/

Now, my Strategy lecturer taught this framework, so naturally I love it. But I don’t remember there being two “Economic” factors in the framework, and I definitely don’t remember “Social” leading to “Technology” leading to “Economic”. The factors are unordered, and this representation is mis-leading.

The Value of a Human Life

If the consultation on increasing the speed limit goes ahead, we will presumably get figures for both an expected increase in GDP, and expected increase in road deaths. Assuming the consultation gives recommendations that are implemented, this gives an implied value for a human life, or at least sets a maximum bound on its minimum cost.

This calculation must have been performed before, but the only example I can think of is the $50,000 per quality-adjusted life year value used in evaluating the cost-effectiveness of medical treatments in America.

It will be interesting to compare the value from the consultation to any other values used by the UK government.

Managed Fund Portfolios versus Tracker Portfolios, and the Efficient-Market Hypothesis

It’s a common observation that tracker funds outperform managed funds over the long term. The charges levied on managed funds to support their staff are substantial, and make the effective return lower.

What about the underlying portfolios, though? Do any of them outperform the market in the long run (i.e. in a statistically significant manner)?

I suspect that the answer to this is no, but what if it is yes? What would it mean for the efficient-market hypothesis?

Clearly, if someone is earning excess returns, then the strong form is incorrect1.

The semi-strong form, that all public information is baked in to current prices, can only hold under dubious circumstances if someone is earning excess returns. Those earning excess returns must be party to private information. So if the semi-strong form is true, and some managed fund portfolios do outperform the market, then their charges could be viewed as the price of that private information. The market of managed funds is then a market in the effective obtaining and using of private information.

The weak form need not be challenged by any (statistically significant) outperforming portfolio, provided that it is not managed on the basis of past prices.

Assuming that any successful managed funds are not using private information to generate their excess returns, could there be an argument for a further form of the efficient market hypothesis? This fourth form would effectively lie between the weak and semi-strong form forms. Let’s call it the mild form for the moment.

The weak form prohibits successful technical analysis, and the semi-strong form prohibits successful fundamental analysis on public information. A mild form of the efficient market hypothesis, between those two forms, might look like this:

All past prices are reflected in current prices, and some easy-to-discover public information is also reflected.

Some managed portfolios can then outperform the market by reflecting more public information than the market does. The cost of that public information is external to the portfolio, but included in the cost of the fund. Managed funds then compete to use public information more efficiently than each other.

To re-iterate, all of this discussion turns on the existence of managed portfolios that significantly outperform the market. If managed portfolios do not outperform the market in a significant way, then the semi-strong form can hold.

What have I missed? How am I wrong?

1 – I believe that some investors on fundamentals, famously including Warren Buffett, consistently outperform the market. I’m not sure if these outperformances are statistically significant, although I would guess that they are. If they are, then the strong form is empirically disproved.

Gender Differentials

Thought experiment:

  1. Take a very large group of men
  2. Rank them by physical attractiveness
  3. Count their children of both genders
  4. Compare the results of 3 for the top and bottom quartiles (deciles, whatever) established in 2.

My guess is that with a large enough sample, there would be a difference. I would expect better-looking men to have more male children than female. I wonder if someone else has already done this experiement?

Charity Cheating (Perverse Incentives I)

Some incentives to give to charity

A notice to employees

“Sponsor a colleague and [we] will double match your donation – £2 for £1”; “Volunteer with a charity in your own time and [we] will ‘time-match‘ with a cash donation to the charity up to the value of £1, 200 p.a.”

I believe this employer has just created the right incentives for charities to pay their employees to donate to them! Not, I’m sure, that anyone would be interested in that.