Global Barefoot Marathon

I have never run a marathon.  I never considered myself a runner. But lately I have grown to enjoy the rhythm of running, the pureness, and the simplicity of putting one leg in front of the other.

It is with this in mind that I propose to run my first marathon on the 20^th June 2010.   Want to join me?

Here’s the deal.  I know there are a lot of passionate runners out there all around the world, and I want to share this run with them.  While we cannot share the run with a physical presence, we can share the spirit of the run by all running together – a global marathon, synchronised, with people participating in the experience from around the world.

Randomness and probability: quantify with caution

One of the main lessons (or reminders for those trained in statistics) found in the Drunkards Walk deals with the reliability of data. Mlodino makes the important point that people latch on to numerical values. He uses wine tasting rankings as an example of how the numerical ranking has a huge impact on price, yet under blind tests, the people ranking are next to useless at actually determining which wine they are drinking.

Let’s look at a recent example of people latching on to the quantity without thinking of the error. Lately, ABS data has shown that unemployment has fallen by 0.1% - what is the probability that in reality unemployment has actually risen?

CPI update

I was attempting to create a 'Make your own CPI' spreadsheet that uses the ABS price indexes for each commodity group and allows you to assign your own weighting.  I was also using the weighting from the German CPI as a comparison (which weights housing as 30% of the basket, while Australia's CPI has housing at 19% of the basket).

But there was a problem.

The price indexes for each commodity group were so completely manipulated by quality adjustment (and any other unknown statistical manipulation that occurs) that you could not dramatically change the final CPI figure.  Using German weightings I was within one percent (of the total change) over a 10 year period.

Have a look at the house purchase index used for the CPI against the ABS' own capital city house price index in the graph below.  The extreme magnitude of the disparity is quite shocking.  The index used for the CPI increased by 36% over the 7 year period, while the capital city median price index increased 92%.

What lesson should we take away from all this?  I for one will never trust an official statistic without first understanding the methodology behind it.

Food packaging less wasteful than none at all!

I wrote once before that the concept of waste has been distracting environmentalist for decades. Today I came across this exceptionally interesting article on food packaging. The main point is that packaging serves an important purpose - to preserve food. The longer food is preserved, the more likely it is to be eaten rather than wasted. Thus, packaging cuts down immensely on food waste.

I do however believe that some packaging, such as the excessive size of cereal boxes to ensure good shelf space, does not always result in benefits for consumers.

Fail: CPI, housing and the cost of living

This short article about inflation, and the ABS review of the Consumer Price Index (CPI), prompted me to write again on the subject.  In fact, some friends and family who recently returned from a few years abroad have also been bugging me about why Australian prices have shot up so much, yet we hear almost nothing about rapid inflation.  Housing prices in Brisbane have typically increased 200% in the past decade - around 7% per year.  If housing was just 10% of the CPI basket, it alone would contribute 0.7%pa growth to the index.

First, let's be clear about the purpose of the CPI.  In principle I believe that measuring the price level is impossible as the type and quality of goods and services in the economy changes constantly. However, some indicator about the changing cost of living is still important for determining changes to welfare payments and calculating real growth in incomes. 

Unfortunately, not many people know that the CPI does not measure the change in the cost of living (see p6 of the ABS CPI overview report here).  The ABS method, including quality adjustments and the weighting of household consumption goods, means that the CPI fails to be a useful measure for determining real incomes and purchasing power. 

Randomness and probability: can people intuit probability?

One of my concerns with the evidence on the misinterpretation of randomness and probability in The Drunkards Walk arises during the discussion of the first law of probability: The probability that two events will both occur can never be greater than the probability that each will occur individually. While the law makes intuitive sense, the evidence that people fail to apply it to their reasoning is a little flimsy.

Mlodino asks us to consider an experiment from Khaneman, Slovic and Tversky’s famous book on judgement under uncertainty. Given the brief description about the Linda below, eighty eight subject were asked to rank the statements that follow on a scale of 1 to 8 according to their probability, with 1 representing the most probable, and 8 the least. The results are in the order ranked by the participants from most probable to least probable.

See the results under the fold and why their finding, that people have poor intuition of probability, may be incorrect.

What I've found interesting lately...

There has been a lot of comment on bonuses in the banking industry since the onset of the GFC.  Read Dan Ariely's take on the effectiveness of bonuses here.

For those who believe that economics generally gets things half right, behavioural economics might be your thing.  A mix of psychology and economics, this field has been enlightening economists for the past two decades.  Some of the latest findings in behavioural economics are found here (highly recommended).

Ugly city syndrome

This article suggests that ugly cities are the result of poor political leadership. That seems like a long bow to draw. I believe the cause of ‘ugly city syndrome’ is more subtle, and maybe we just have ourselves to blame. The simple answer might be that in the modern day of cheap international travel we are comparing ourselves to a wider selection of cities.

But where are the incentives to create a beautiful city? 

The Australian property market debt gamble

Investing and gambling are often mistaken for each another.  In one, you take risks based on known probabilities, in the other, unknown probabilities.  In one, you will probably win in the long run, in the other, you are bound to lose out.  In both pursuits we are psychologically predisposed to scams.

I find it interesting that prudent advice for gamblers is to risk only your own money, while for investors it's a different story - the more leverage the better.  But there must be an optimal level of leverage, otherwise we would all simply continue to borrow and destroy the value of the currency through money creation.

Given the realities of our world, one would expect that leverage below this optimal level would not persist for an extended period, as people would begin to notice the advantages of more leverage, nor would leverage or debt beyond this optimal level be able to persist.   It is therefore interesting to ask how would we know if we are above this optimal level?

UPDATE - How not to climb the property ladder

I really appreciated the discussion on my last post, and wanted to clarify some of the issues raised.

My two key points were:
1. The capital gain made from buying a cheap home and upgrading later does not always improve your ability to buy a larger place in the future, and
2. That forgoing life's little luxuries to start a savings plan directed at owning your own home is not always effective.  The 'work hard and save' mantra does not work if prices increase faster than your ability to save.

The issues flagged by readers were that
1. I ignored increased wages
2. I ignored the paying down of principle, and
3. I ignored the fact that rents increase in line with CPI while loan repayments do not.

My response is under the fold.