disequilibrium

A three-tier system for Amazon

2007-04-18T17:02:00.001-05:00

What would cost Tennessee more revenue: half of all wine purchases being smuggled in from out of the state, or people eschewing the local Borders in favor of Amazon.com?

The most common defense of the three tier system forwarded by the liquor distributor cabal is that it ensures the collection and distribution of sales and excise taxes, without which Tennessee roads may no longer be the State's pride, and Tennessee schools might fall out of the top 49 in graduation rates.

Since interstate shipments would not be directly taxable, it is a valid point. But how valid, in dollar terms? Consider a comparison.

In 2004, Amazon.com had sales of nearly seven billion dollars. While they do not break this out by state, the Bureau of Economic Analysis reports that in 2004, Tennessee accounted for 1.8% of National Income. If book demand is roughly in proportion (avoiding the easy jabs linking demand for books and graduation rates), $125 million worth of Amazon merchandise was shipped into Tennessee. Of course, while the law-abiding citizen would declare this purchase and remit taxes to the State, lets assume that this does not happen often. This suggests about eleven million dollars in taxes foregone due to a single online retailer.

But what about wine? Collections from the wine excise tax amounted to less than eight million dollars in fiscal 2004 (TN Dept. of Revenue). Figures from industry lobbyists (pdf) put the total collections at about seventeen million, including licensing fees, fines, and confiscation income.

In short, even if we take the higher industry figure, and assume that 70% of all wine sales will be lost to out-of-state sales (a ridiculous idea when shipping costs are factored in), then the state still loses more from a single online retailer than the entire wine industry.

Following up on a previous post, and slightly paraphrasing Lipman's dishonest defense of the monopolization of alcohol, we have (original in italics):

Requiring Amazon.com to sell through our local Borders Books promotes a safe marketplace and environment for citizens by limiting the authorized channels through which books enter our state. The system also helps ensure that minors are not given access to immoral, objectionable smut and that the state can collect taxes on alcohol sales. It also allows for a level playing field for retailers of all sizes, increasing competition and supporting small business. By having exclusive rights to distribution, Borders has a vested interest in helping build brands over a long period of time, affording better growth for the brand within the market.

Senators, please pass the Book Distribution Act now to stop the madness. Think of the children.

Search costs, collusion, and moral banter

2010-01-11T19:10:00.025-06:00

Think of the Children! (But only on Sundays, say area liquor stores)

Connecticut is considering a law lifting the ban on Sunday liquor sales. The current prohibition is a throwback to the religious blue laws. Of course, like most legislation that comes under the banner of morality, someone is sneering and profiteering. Opposed to the legislation is the Connecticut association of liquor stores. Head cretin (err, President) Alan Wilensky justifies his opposition:

We retailers are smart business people. If we thought that an additional day of operation would be profitable and in the public interest, we would have proposed the bill ourselves years ago.

Smart business people compete effectively. Very smart morally bankrupt business people collude effectively. Coordinated store hours raise search costs for consumers, allowing retailers to charge higher prices. Such coordinated closure is illegal; see, for example, the case of the FTC vs. Detroit Auto Dealers). But if we can get legislation to do it for us under some cynical moral banter, all the better:

We do not feel that this sensitive product should be more available ... at a time when there is great concern regarding sales to minors.

Of course, protecting the children is the liquor cabal's favorite non sequitur. I'm sure that Mr. Wilensky's own liquor store is diligently screening underage consumers the six days it is open. Presumably, adequate safeguards don't expire every Saturday evening, only to be reborn Monday mornings.

UPDATE: I promoted Mr. Alan Wilensky from "cynic" to "cretin" in proportion to his hyperbole. On his association's web site, he claims that Sunday sales are "blood money". Sales on Saturday, from which Mr. Wilensky handsomely profits, are presumably more holy.

All asterisks lead to contradictions

2009-09-30T16:26:00.004-05:00

Free!^*

No money Down!^*

Satisfaction Guaranteed!^*

Those ubiquitous asterisks used to point to standard disclaimers about war, riots, or force majeure, but the small print at four point font now occupies tomes. There is a fine line between disclaimers, limitations, conditions, restrictions, and outright fraud. The following examples are nowhere near that line.

"Accident Forgiveness... Helps keep your rates from going up just because of an accident. Even if it’s your fault."

Fine print: "Safe Driving Bonus is based on eligible premium for prior policy period and won't apply after an accident."
[Allstate Auto Insurance]
Translation: "We forgive you! (but you still pay)"

More examples

"You won’t find a more comprehensive price guarantee available on any other travel site today."

Fine print: "Expedia reserves the right in its sole discretion to modify or discontinue the Best Price Guarantee or to restrict its availability to any person, at any time, for any or no reason."
[Expedia]
Translation: "We guarantee our prices! (unless we don't)"

"Unlimited nights and weekends. You never pay roaming or wireless long distance."

Fine print: "If your minutes of use ... exceeds your off-net usage allowance, AT&T may at its option terminate your service ... or change your plan to one imposing usage charges for off-net usage."
[AT&T Wireless]
Translation: "Unlimited! (unless it is too much)"

"Genuine Steakhouse Brand steaks are 100% guaranteed fresh."

Fine print: "Restrictions apply. Please see store for details."
[Wal-Mart]
Translation: This one is just scary. At best, it is 98% fresh?

"Think overnight, guaranteed with Express Mail"

Fine print: "Some restrictions apply, please check with your Post Office for details."
[US Postal Service]
Translation: "We guarantee overnight! (which may take a few days)"

"When you make a reservation, we guarantee to provide you with the equipment size, location, and pickup time as agreed."

Fine print: "The rental location will contact you the day prior to your requested pickup date to schedule the equipment and actual pick up time, date and location."
[U-Haul]
Translation: "Terms are guaranteed! (but changeable, by us)"

"Say goodbye to password hassles—now you can log on to your computer and your favorite Web sites with your fingerprint."

Fine print: "The Fingerprint Reader should not be used for protecting sensitive data ... use a strong password for these types of activities."
[Microsoft]
Translation: "Avoids password hassles! (by not protecting anything)"

"We have your size or its free. We guarantee to have your size in stock."

Fine print: "If we can't have it shipped into your local JCPenny store within 5 working days you will receive the pants FREE!"
[JCPenny] (via Mouse Print)
Translation: "In stock now! (now = soon...ish)"

Have more examples? Post them below. I guarantee to read them!*

*Restrictions apply. Actual reading may not occur.

Sunspots in Nashville

2008-09-23T10:16:00.004-05:00

Last weekend, Nashville ran out of gas. This was not because of significant shortages, but because of a belief that there were significant shortages. So, people rushed to get gas. And we ran out.

This is a demonstration of sunspot equilibria, one of the items on my still- incomplete list of the five useful things I learned in macroeconomics. What if people believed that sunspots cause the populace to turn into violent beasts who, behind their smiles, "good morning"s, and "bless your heart"s, secretly plot our demise; they appear to act normal in every way but wait for their chance to attack us. In what Charles Gibson incorrectly labeled the "Bush Doctrine," we may all contemplate preemptive self-defense by attacking first. Then, of course, sunspots did cause the populace to turn violent.

A feature of these self-fulfilling prophecies is that there are multiple equilibria; usually one very good one where we expect calm and act calmly, and another very bad one where we expect the worst and, by our reaction to it, cause it.

One simple role of government is to help coordinate the populace on the better outcome. Neither our local Nashville government, nor our presidential candidates, seem to grasp that.

If "English Only" passes

2009-01-19T15:26:00.006-06:00

This Thursday, Nashville votes whether to prohibit public business from being conducted in any language other than English.

In an impassioned speech, Councilman Eric Crafton contends that newcomers to foreign lands must learn the local language. Strangely, this sentiment was not expressed in Cherokee, Iroquois, or Choctaw! Exhibiting his penchant for irony, Crafton delivered the speech in a recently adulterated dialect of the imperialist powers that, for effect, I adopt in this blog post.

Crafton, fresh off a three year crusade affirming Jesus Christ legislatively, is still not content wasting his time in Metro Council on such mundane issues as schools or zoning.

But there's a positive side to this bill if it passes. If English is to be mandated, every time Crafton begins a sentence with "If I was" he can be held in contempt, and required to attend a lecture on subjunctive mood.

Gaming the rankings

2009-06-18T14:04:00.006-05:00

Among the many issues with ranking schools, one of the most glaring is incorporating the input of those who are impacted by the result. Students reporting on MBA programs or University presidents ranking schools all put people influenced by the result in a position to influence the results. This creates quite the incentive problem.

Recent evidence comes from the rankings of schools (pdf) provided by University of Florida President Bernie Machen. The surveyed rankings are an integral part of the U.S. News ranking formula, and were obtained by the Gainesville Sun in a public records request. Other Florida university presidents were shrewd enough to "lose" theirs.

See Machen game the rankings

U.S. News treats the surveys as anonymous, meaning that a university president's ranking of his own school carries equal weight as others' rankings. On Machen's survey, the University of Florida was given the highest possible ranking, one that he granted several generally well-regarded schools only after some revision.

(excerpt of Machen's rankings)

More telling is the rankings Machen gave to other Florida public schools which are competitors for State funds. Machen rated more Florida schools as "marginal" (the lowest possible category) than schools from all other states combined.

Editors responsible for the ratings claim that "statistical methods" are used to adjust for such biases. The reality, of course, is that no statistical test can divine thoughts separate from incentives. If you asked me to rate myself as a "good person" on a scale of 1 to 10, a period of reflection would follow. If you added that my results would be anonymous, unverifiable, and come with a million dollar payment if I circled "10," you would learn nothing about me from the exercise except my responsiveness to incentives. So why would U.S. News editors contend that as-yet uninvented statistical methods protect the integrity of their results? Perhaps they, like President Machen, have a stake in the results.

UPDATE: I am not suggesting that UF does not deserve to be ranked highly along several dimensions. For example, one reader reports that UF must be at the top of its peer group in criminology, with over 4% of its students arrested annually.

Circular reasoning and the debasement of science

2009-06-09T18:15:00.013-05:00

Ranking journals is a popular pastime among academics. Each of us has a favorite ranking, largely chosen by the results fitting with our favorite publication outlets. There are more debates over the methodology of journal rankings than of ranking business schools. There may be no universal agreement on the right method but there certainly is a wrong one.

Kristie Engemann and Howard Wall have published a new ranking of economics journals. Their method consists of "a simple rule that considers citations only from a short list of top general-interest journals in economics." In short, they arbitrarily select the "top" journals, count the number of citations from these to other journals, add an adjustment here and there for effect, and presto! We determine the top journals by counting citations from top journals. Seems a bit circular.

If you walk into a random high school and want to know who the popular kids are, the Engemann and Wall method would have you identify them by seeing with whom the popular kids choose to hang out. The procedure might produce slightly different results if you started with the debate team than if you started with the cheerleading squad.^† It might not be a surprise, then, the top five journals in their results are included in the list of top journals by assumption. I don't disagree with the list, intuitively, but science should perhaps take a more objective path.

A more objective path does indeed exist. A commonly-used recursive algorithm initially assigns all journals an equal value. Each iteration of the algorithm assigns value from one journal to another based on citations. The iterative procedure, by the way, is at the heart of Google search results (replace "citations" with "links"). From the Google founders' monumental paper:

PageRank or PR(A) can be calculated using a simple iterative algorithm, and corresponds to the principal eigenvector of the normalized link matrix of the web.

The authors of the new ranking poo-poo this mathy stuff:

[The iterative] procedure is largely a black box: It is not possible to see how sensitive the weights (and therefore the rankings) are to a variety of factors. The obvious objection to our rule is its blatant subjectivity. Our counter to this objection is to point out that the [iterative] procedure, despite its sheen of objectivity, contains technical features that make it implicitly subjective.

Ummm... Sensitivity analysis even has its own Wikipedia page.

If Engemann and Wall were to start their own search engine, the Google formula would presumably be replaced with "pages with links from pages we like."

^† This is not to say that cheerleaders don't often overlap with the debate team. But, seriously, they don't.

Hat tip, Mankiw

This post cannot be proven true

2007-10-04T12:37:00.001-05:00

Randall Munroe has a solution to Gödel's incompleteness theorem, and to self-referential puzzlement in general.

First, John von Neumann's profound take on Gödel's result:

It was a very serious conceptual crisis, dealing with rigor and the proper way to carry out a correct mathematical proof. In view of the earlier notions of the absolute rigor of mathematics, it is surprising that such a thing could have happened, and even more surprising that it could have happened in these latter days when miracles are not supposed to take place. Yet it did happen.

And Randall's slightly more pithy (but no less profound) version:

See the rest

I blame the public schools

2009-05-10T11:10:00.016-05:00

Preparing for my upcoming Canada trip, I initiated an online chat with a Sprint rep to find out the roaming voice and data rates. Sending an average-length email would, according to the agent, cost somewhere between a few cents and a few hundred dollars. Transcript below the jump.

Read the transcript

Me: Hi, I will be going to Canada this week, and wanted to know what the voice and data rates are with and without the Canada package.

Lakisha: Hi, my name is Lakisha. Thank you for your chat request. Please wait while I review your information.

Lakisha: I will be more than happy to assist you today.

Lakisha: While roaming in Canada with your Sprint device all calls will be billed $0.59/minute, data service is $0.002/KB. Sprint does offer a Canada Roaming plan for $2.99 per month; this plan reduces the voice rate to only $0.20/minute.

Me: But not the data?

Lakisha: Correct.

Me: And data is 2/10 of one cent per KB, is that right?

Lakisha: Data is $2.00 per kb.

Me: $0.002/KB is very different from $2.00/kb - could you please confirm the rate

Lakisha: $0.002/KB is the same as $2 per kb

Me: $0.002 is 2/1000th, right? Which is very different from 2.

Lakisha: The data rate if you were to use it will be $2 per kb.

Me: Above, you wrote $0.002/KB.

Lakisha: Which is the same.

Me: You're kidding, right? So, a 5KB email is $100 or 10 cents?

Lakisha: It will not be 10 cents because you will pay $2 per kb.

Me: Can you please review the transcript above. The first thing you said is $0.002/KB.

Lakisha: I do understand

Lakisha: The data rate within Canada will be $0.002kb which is compatible to $2 per kb.

Lakisha: Would you be activating the Canada reduce rate plan today?

Me: 1 cent = $0.01 ! There's a difference between using 1000KB and being billed $2 and $2000

Lakisha: You can always call our toll number which is 8882267212

Lakisha: Thanks again for choosing Sprint Worldwide chat. Have a great day.

Lakisha: has disconnected.

So, $1=$0.001 (=1/10 of one cent), and 1 kb = 1 kilobit = 1 KB = 1 kilobyte (=8 kilobits). Using Lakisha's "is compatible to" operator (you'll learn about it in higher-level math classes), a 5 KB email costs 1 cent, which is compatible to $80.

Before you go mocking Sprint, note Verizon isn't much better.

Rules are for sissies, not MBAs

2008-09-24T08:45:00.009-05:00

At an online forum for aspiring MBA students, participants are discussing an application essay (400 word limit) for a top ten program:

Applicant 1: Quick question guys! How stringent is the word limit? I am at 423 words.

Applicant 2: I wouldn't worry about it. I've been following the +10% max rule.

Applicant 3: mmm... it's not like they count the words right? I'm thinking if you don't push it too much, they won't even notice.

A suggested essay topic for the above applicants: "Discuss the importance of corporate ethics, respect for the law, and sound editing skills. Compare the above applicant statements to the principles displayed in recent accounting and financial scandals."

The actual essay topic in question: "What is your greatest example of leadership and what personal qualities helped you succeed in that role? (400 word limit)." How about a 500 word essay on thinking outside the box?

What Erica Gilmore can learn from the Soviets

2008-09-04T17:40:00.008-05:00

Nashville Councilwoman Erica Gilmore has resurrected a bill banning single-bottle sales of beer in a misguided attempt to curb drinking and littering. To understand the unintended consequences of hair-trigger paternalism, we turn to the Soviets.

To curb alcohol and vagrancy, the Soviet Union tried everything from burning some of the oldest grape vines in Europe (fine wine is often the alcoholic's cheap fix) to banning sales of vodka in containers smaller than one liter. Since Ms. Gilmore has not yet suggested a torching of wine stocks, it is the latter experience that is instructive.

Vagrants of the social-drinker ilk would certainly consider a liter excessive, as three is the optimal number of people for splitting such a volume (really!). A simple social convention was born. The first thirsty citizen arriving at the store would stand outside with three extended fingers held against his chest. The symbol conveys an attempt to create a troika, or group of three held by the common interest of securing the appropriate measure of the beverage. A second would arrive and assume a similar loitering stance. Upon a third compatriot's arrival, a bottle would be purchased and shared.

Result: more loitering, more nuisance, more litter, and a slight uptick in violence, partly resolved by bringing a 1/3 liter measure.

Burning the grapes didn't do much, either, except hinder the economic growth of modern Moldova and Georgia.

Hat tip thinktrain, though one who asks "who really needs just one beer" has probably never heard of Trappist ales, imperial stouts, doppelbocks, barley wine, and, well, beer.

The media's shrill sanctimony

2008-09-04T13:04:00.021-05:00

Compare:

New York Times on single-father Biden being sworn in as Senator days after losing his wife:
"After taking office, he refused to move to Washington and commuted daily from Wilmington to help bring up his sons ... The Washington-to-Wilmington train run has since become a leitmotif of Mr. Biden's devotion to family.
[June 10, 1987]

New York Times on husbanded Sarah Palin running for Vice President:
"Ms. Palin has set off a fierce argument among women about whether there are enough hours in the day for her to take on the vice presidency, and whether she is right to try."
[September 1, 2008]

CNN on a civilian contractor choosing to go to Iraq:
"Too old at 34 to start over as a soldier, becoming a contractor is a way for Masonry to fulfill his sense of duty... Masonry is a father of three, his youngest with Down's Syndrome."
[April 26, 2004]

CNN on Sarah Palin's choice to run:
"Children with Down's syndrome require an awful lot of attention. The role of Vice President, it seems to me, would take up an awful lot of her time, and it raises the issue of how much time will she have to dedicate to her newborn child?"
[August 29, 2008]

CBS News on the credibility of the National Enquirer's John Edwards story:
"Even as some national news organizations tried halfheartedly to confirm the tawdry tale ... Only Edwards's belated confession Friday to ABC's Bob Woodruff allowed news organizations to jump"
[August 11, 2008] (10 months after Enquirer story)

CBS News on the credibility of the National Enquirer's Sarah Palin story:
"Running a story about McCain’s running mate, Sarah Palin, allegedly having an affair with her husband’s business partner ... the story is based entirely on unnamed sources."
[September 3, 2008] (10 hours after Enquirer story)

I'm not one to post on national politics (with the notable exception of my quadrennial presidential debate bingo cards), but I was very much looking forward to a proper vetting of the new candidate. Instead, we are treated to hours of self-referential tautologies ("some in the media are saying..."), statements that become true as soon as these six words are spoken.

Gloria Steinem in making the case for Hillary Clinton asked her readers rhetorically if a woman with Obama's resume would ever be taken seriously as a candidate, arguing that "there is still no `right' way to be a woman in public power without being considered a you-know-what." I actually didn't know what, until Ms. Steinem let me know describing Palin's speech as "down-home" and "divisive."

The most obvious example of this sanctimonious scandle-mongering is Politico's electron-wasting columnist Roger Simon. His most recent sarcastic screed demands to know why the media is precluded from questioning Palin's qualifications and beliefs. Three days prior, Mr. Simon demonstrated his noble journalistic inquisition in a piece titled "Sex dominates GOP's opening day," opining: "If the campaign could just manage to arrange Bristol’s marriage on stage at the convention, it might generate some much-needed positive buzz and a good photo op."

Mr Simon, perhaps the main obstacle to your journalistic pursuits is ... you.

Life, liberty, and that other thing

2008-07-08T11:59:00.019-05:00

A local recording studio is being confiscated by the city of Nashville to put it to a "higher valued use." Apparently, the music emanating from Music Row in Music City sounds sweeter from a high-tax-rate high-rise than from an historic, independent label. Joy Ford was unwilling to sell her business of thirty years to the Lionstone Development Group, the Houston-based buyer of "underdeveloped real estate assets." In response, City officials slipped under the covers with the developer to transfer the property from one private interest (its owner) to another—a Robin Hood in reverse.

I blame Karl Dean. I blame Phil Ryan. And yes, I blame (despite this being grounds for revocation of my UVA diploma) Thomas Jefferson. He should have foreseen the impact of his aspirational turning of the phrase. Sandra Day O'Connor did, but she was outvoted.

Let's review...

A bit of history

John Locke's tripartite statement of natural rights, life, liberty, and estate made its way into the first resolution of the Declaration of Colonial Rights, encoding the principles of a new nation. Thomas Jefferson, also borrowing heavily from John Locke, saw the phrase as insufficiently wishy-washy, penning "pursuit of happiness" in the place of property as the third pillar of natural rights. This was partly rectified by the fifth amendment which allows property to be ceased only for "public use."

"Public use" becomes "whatever we want"

Since railroads prefer to run more or less straight, the taking of private property was originally construed as necessary for the establishment of public utilities. Soon, towns stumbled on a remarkable idea: if we "condemn" a building and hand it over to a developer who will build a more expensive building, doesn't that raise our tax base? Isn't a higher tax base in the public interest? Answer "yes" to both questions and you have found a way around the Fifth Amendment. Public use is whatever public officials want it to be.

The Supremes

This self-serving interpretation in the face of constitutional protections is ripe for a vehement smack-down by the Supreme Court Defenders of Liberty. Alas, no. In the 2005 Kelo decision, the five-person majority expanded government's "takings" power even when (i) no blight is present, (ii) the transfer is from one private party to another, and (iii) the land use will not be open to the public. The government need only identify monetary or even "aesthetic" benefits.

In her dissenting opinion, Justice O'Connor wrote

Any property may now be taken for the benefit of another private party, but the fallout from this decision will not be random. The beneficiaries are likely to be those citizens with disproportionate influence and power in the political process, including large corporations and development firms. As for the victims, the government now has license to transfer property from those with fewer resources to those with more. The Founders cannot have intended this perverse result.

Intended, certainly not. But TJ's transmutation of Locke's key word suggests that they didn't foresee it, either.

Justice Stevens, writing for the constitutionally-challenged majority (pun intended), explains that we need not worry as "legislative judgments" would carefully construe public use. Teach a man to fish...fine, but if you legalize tossing grenades into a fish-stocked pond, don't expect a hungry man to exercise "judgment." Perhaps Mr. Stevens should watch a Metro Council meeting.

Back to Music Row

And so Nashville's Metropolitan Development and Housing Agency (MDHA) (ironic motto: "We value integrity") has decided that Music Row needs more high rises, current property owners be (con)dæmned! The MDHA's authority to act as it pleases stems from a ten-year old City Council ordinance that found Music Row circa 1995 "detrimental to the safety, health, morals, or welfare of the community."

Several local bloggers have been following the story (since local purported journalist/advocate can't get off the dime):

Kay Brooks goes on location and finds that Joy Ford's business is the only thing not blighted, with surrounding properties (already owned by the developer) looking a bit neglected.
BlueCollarMuse provides adequate background in her two part series, and is not afraid to name names.
We hear tones ranging from concern to outrage at eminent domain abuses from a local home inspector, real estate investor, professor of entrepreneurship, talk show host, and more. The action is opposed by at least one Metro Council member, State Representative, and local perennial candidate.

But none of those people run the MDHA, whose Director and Board of Commissioners play with a city-sized cookie jar of private-house treats.

Two years ago, MDHA Director Phil Ryan lamented that "public housing is not a priority" at the federal level. Nashville laments that private property is not a priority for Mr. Ryan.

Where I take a turn at ranking business schools

2008-05-30T04:05:00.028-05:00

Rankings of business schools generally fail to evaluate the inherent quality of an institution, instead ranking the people who choose to attend it.

UPDATE: If you came here from a source that did not make clear the wry, tongue-in-cheek nature of my rankings, also read the clarification.

An MBA student from UC-Davis will graduate, on average, with a starting salary that is $30,000 lower than a graduate from nearby UC-Berkeley. Can we take from this that two similarly-credentialed students at the two schools would have such a high difference in their market values? This reasoning ignores the selection bias. A student accepted by both schools is quite likely to choose the one often ranked in the top 10.

As long as top candidates choose to go to top programs, a higher ranking confounds the quality of students and the quality of a school. The proper interpretation of Business Week's rankings, for example, is not that Harvard is a better school than Blah College, but that the type of students who go to Harvard do better after graduating from Harvard than the type of students who go to Blah College after graduating from Blah. Thus, a high starting salary for Harvard graduates might imply that Harvard's professors can polish rough stone into beautiful rubies, but it is also possible that Harvard has the benefit of students who could have very well succeeded anywhere. (Note: I pick on Harvard because it actually does quite well in my rankings, supporting the rubies theory).

Which schools do best with the students they have? Traditional rankings fail to tell a given student with a given skill set which schools are most likely to increase his market value. That's the goal of these rankings, highlighting that a change in methodology significantly alters the results. Methodological disclaimers (and there are many) are at the very bottom.

On to the rankings ...

Ranking of Business Schools by Efficacy

			Data
Rank	School	Market Value	GMAT	GPA	Adj. Sal
1	Cornell (Johnson)	$14K	682	3.31	118
2	Indiana–Bloomington (Kelley)	$13K	656	3.37	104
3	University of Virginia (Darden)	$12K	688	3.33	120
4	Texas–Austin (McCombs)	$12K	673	3.38	109
5	Harvard	$8K	713	3.63	134
6	Vanderbilt (Owen)	$7K	644	3.27	101
7	Rice (Jones)	$6K	642	3.25	100
8	Minnesota–Twin Cities (Carlson)	$7K	661	3.37	99
9	MIT (Sloan)	$6K	705	3.5	126
10	Maryland–College Park (Smith)	$6K	650	3.34	98
11	Georgetown (McDonough)	$6K	677	3.26	108
12	Ohio State (Fisher)	$6K	661	3.41	97
13	NYU (Stern)	$6K	700	3.4	123
14	Duke (Fuqua)	$6K	690	3.38	114
15	UNC–Chapel Hill (Kenan-Flagler)	$6K	681	3.27	110
16	Brigham Young (Marriott)	$5K	661	3.53	93
17	Rochester (Simon)	$5K	673	3.52	98
18	Texas A&M (Mays)	$5K	665	3.4	97
19	Northwestern (Kellogg)	$3K	704	3.5	122
20	Boston College (Carroll)	$3K	651	3.35	94
21	Univ. of Pennsylvania (Wharton)	$2K	712	3.53	130
22	Columbia	$2K	707	3.4	128
23	Southern Methodist (Cox)	$2K	640	3.3	95
24	Arizona State (Carey)	$2K	675	3.44	98
25	Wisconsin–Madison	$1K	656	3.37	92
26	Michigan State (Broad)	$1K	633	3.22	97
27	Chicago	$1K	709	3.5	126
28	Yale	$1K	700	3.47	116
29	Purdue (Krannert)	$0K	662	3.32	94
30	Penn. State (Smeal)	$-1K	650	3.3	92
31	Emory (Goizueta)	$-1K	685	3.3	106
32	Washington Univ, St. Louis (Olin)	$-2K	674	3.38	95
33	Michigan–Ann Arbor (Ross)	$-2K	700	3.3	118
34	Illinois–Urbana-Champaign	$-2K	627	3.4	92
35	UCLA (Anderson)	$-2K	704	3.6	114
36	Boston University	$-3K	668	3.38	92
37	Dartmouth (Tuck)	$-4K	713	3.46	127
38	Carnegie Mellon (Tepper)	$-5K	696	3.32	111
39	Georgia Institute of Technology	$-5K	665	3.4	88
40	Babson College (Olin)	$-5K	631	3.21	93
41	Stanford	$-5K	721	3.61	133
42	Notre Dame (Mendoza)	$-7K	673	3.2	95
43	Univ. of Southern Cal. (Marshall)	$-8K	689	3.3	102
44	Univ. of Washington (Foster)	$-8K	679	3.38	92
45	U. California–Berkeley (Haas)	$-9K	710	3.57	115
46	Univ. of California–Davis	$-11K	674	3.37	87
47	Univ. of Iowa (Tippie)	$-15K	652	3.34	76
48	U. California–Irvine (Merage)	$-16K	667	3.34	79
49	Univ. of Georgia (Terry)	$-16K	653	3.4	74
50	Univ. of Florida (Hough)	$-30K	680	3.4	70

These rankings consider only the 50 schools in the most recent U.S. News rankings. Specific methodological details are available at the bottom.

Adjusted salary (in thousands of dollars) reflects both the starting salary of those employed within three months of graduation, and a downward adjustment for those who are not.

Market value denotes the difference between a school's adjusted salary and what that school's students would expect to earn (given their qualifications at admission) at an average business school (for a loose definition of an "average" school in this context, see no. 29). A student with a high GMAT score and an exceptional undergraduate GPA is likely to receive higher offers than one with lower scores regardless of the MBA program he attends (not because of the undergrad GPA, but because of what it reveals about the person). Market value indicates how much a school improves on this given its actual student population.

The notion of market value is akin to the distinction between two corporate tasks: recruiting the best talent, and guiding that talent to its potential. Most of the popular business school rankings are biased towards achievements in recruiting, while the above rankings measure efficacy with the given talent. Of the U.S. News top ten, only Harvard and MIT are also in the top ten in efficacy. Conversely, Stanford and Berkeley, also top ten U.S. News schools, are in the bottom ten here, suggesting that members of their admissions staff deserve sizable bonuses.

By way of example, UT-Austin, Wash U, St. Louis, and UC-Davis admit nearly identical student bodies, quantitatively, yet differ greatly in the market's value of these students two years later. On the other hand, Yale and Cornell have nearly identical starting salaries, and therefore end up only one spot apart in U.S. News. Yet, given the superior class, in terms of GMAT, GPA, and selectivity, Yale should do better, thus ranking in efficacy 27 spots below Cornell, which takes the number one spot.

So, what's the goal of this? Perhaps there's a deep philosophical point about the purpose of education. I adopt market salaries as a measure of value purely because it is available, and is the most common quality measure in business rankings (or perhaps because of my unfaltering adherence to the social philosophy underlying classical economics). There's also a mundane point: rankings are not difficult to generate, easy to game, and even easier to tailor toward mass hysteria and overreaction. To that end, extra credit ("adjustment factors") will be applied to next year's rankings for posting a comment below ("brand management and awareness index"), sending me money ("investment index"), or publishing my papers ("scholarship discovery index").

METHODOLOGY

Disclaimer: This was done in great haste, and, in keeping with tradition of business school rankings, without too much regard for the appropriateness of statistical procedures.

Overview: The rankings are based on the residuals in a regression of average GPA and GMAT score on adjusted starting salary. That is, a school's score is the difference between its adjusted starting salary and the predicted salary from an ordinary least squares regression.

Data: Obtained from the 2009 U.S. News rankings of the top 50 business schools, which compiled data on the 2007 graduating class.

Adjusted salary: All students not employed within three months of graduation are (pessimistically) assumed to have a salary equal to 80% of the average salary of employed students at their institution. This biases results against schools with low placement rates. If S=average salary and e=percentage employed, then
adjusted salary = Se+.8S(1-e)

Model selection: The only predictive variables of average earning potential available are average GPA and GMAT, though these are not bad as far as instrumental variables go. A model linear in GPA and/or GMAT badly fails specification tests. Various transformations of average GPA and average GMAT were tested. The final model is given by:
adjusted salary = GPA + GMAT + GMAT^2
The model has an adjusted R²=0.70. Both GMAT parameters are highly significant (p<.001) and GPA is marginally significant (p=.084).

Residuals: From the estimated model, we obtain the studentized residuals by which schools are ranked. The "value" reported is simply the difference between actual and predicted adjusted salary.

Diagnostics: I ran all of the diagnostic tests that I could think of in three minutes. Heteroskedasticity is not a problem. Specification tests are mixed. Test for normality: not even close. GMAT and GPA are not significantly correlated with the final rankings. Overall, on the tests, some looked good, some didn't. After all, if the methodology was completely sound, how could I tweak it next year to produce an entirely different ranking despite very little change in the schools?

Bias: All of the above methodology was performed prior to matching the rankings to the identities of the schools. If I have a bias, it is this: those who rank schools based on whether its faculty's books make your journal's best seller list or on the number of downloads from your proprietary system antithetical to the open access concept of working papers, or who threaten to drop schools from the rankings for adhering to ethical privacy standards, are cynical freeboating knaves.

Where I predict a recall

2008-06-27T10:01:00.015-05:00

A parent of a toddler spends approximately half of his time teaching a child the distinction between food (not for playing) and toys (not for eating, especially when they are the choke-hazard kind). Now, a most diabolical joint venture contributes a new traverse to the gauntlet of parenting.

Read about choking children

Compare

Kellogg's, the company founded by a "physician" who espoused yogurt enemas as the key to good health, has teamed up with Lego to reduce the population of children. Here are a few basic product differences:

Lego: Fun Snacks	Lego: Pieces
Look just like Legos ...	... are just like Legos
Fun to eat ...	... will CHOKE your children
Sweet and gummy-like ...	... will CHOKE your children
No nutritional value ...	... will CHOKE your children

Here we see little Stevie approaching his play area where we secretly replaced one of his errant Lego Fun Snacks with a real Lego piece. Let's see if he notices. Good luck, Stevie!

How to become (in)famous in under three hours

2008-06-23T16:11:00.020-05:00

In a recent blog post, I took a tongue-in-cheek approach to the contentious topic of ranking business schools. The genesis of the post was a very different question: how to rank hospitals' success rates with a specific operation when some hospitals only accept less risky cases while others take on more challenging ones. Accepting only less risky cases should imply a higher success rate for obvious reasons having little to do with the quality of care. Business schools endowed with brighter, more capable students likewise should see higher success among their students independent of the quality of education the students receive.

To demonstrate this point, I provided a quick and dirty analysis, completed between the hours of 1 and 3 am, restricted to data on hand, and without the careful statistical standards that would constitute "research." The point was to show that changes to the assumptions underlying rankings can significantly change the results.

The resulting hoopla over the post, which begot university press releases and took my blog's traffic from a handful of loyal-reader friends into the thousands, is both enlightening and frightening. Below I offer a few clarifications.

See the clarifications

"What silly methodology! You've got to be kidding": I received many emails and comments of this form. The answer, of course, is "yes, I am." My friends, the frequent consumers of my blog, have sufficient personal context to inject sarcasm into my written word. I very much believe that there is insufficient discussion about what rankings try to measure, and whether they do this well. This point of my post was quite serious. However, the very aim of the post (literally stated) was to note that rankings (i) fail to account for self-selection, and (ii) are too easy to generate and cause mass hysteria among schools and students. The media coverage, some of which reported on these rankings without any hint of humor, seems to prove this point. A case in point: any ranking which offers "extra credit for sending me money ('investment index'), or publishing my papers ('scholarship discovery index')" was likely not intended to supplant Business Week.

The value of salary: I do not buy the premise that salaries equate to school quality. Assuming that some students care about social, career, and life issues apart from maximizing net present value of future salary stream, starting salaries may say more about the student's priorities than the quality of the school.

I did not "name" any school as a top school: A few universities took to releasing press releases, indicating that "an Economist names SCHOOL X Top Y." While I do consider myself an economist, that hardly confers authority status on business schools. My rankings aimed only to demonstrate that if you accept starting salary as a valid sole measure of schools, then one should contemplate the increase in salary a school provides, not its absolute value. These press releases, issued without any communication with me, became articles in papers (absent the tongue-in-cheek nature of the numerical rankings) heralding my "research."

The self-selection bias is ever-present: An editor at Business Week blogged about my rankings. Despite ever so slightly impugning my motives (and misspelling my name), he seems like an all-round good guy and found "a lot to recommend" about my methodology, though perhaps in part because he viewed my post as more critical of US News than Business Week's ranking methodology. While Business Week does not explicitly include GPA or GMAT in its rankings, recruiter evaluations of students still necessarily conflate the quality of the student with the quality of the school. Recruiters are not asked "how much do you think the school contributed to this individual's market value above what she would likely have had if she went to another school?" Instead, a recruiter simply saying "I like these students" can very well reflect that the kind of students that go to this school would be well-liked by recruiters even if they went elsewhere or did not pursue an MBA.

This is not "research": Not all mutterings by those of us in ivory towers constitute research. Some are just mutterings. While I would love for a journal editor to attest to my PTRC that my blog has contributed to general knowledge, the standards for research are quite different from those for personal blogs. While I was unaware of them at the time (my research priorities have nothing to do with ranking schools), several articles that did survive (or are currently in the process of) peer review offer similar methodologies or conceptual discussions for ranking business schools:

Tracy and Waldfogel, Journal of Business, 70, 1.
Dichev, Journal of Business, 72, 201.
Bednowitz, CHERI Working Paper #6, 2000.
Arcidiacono, Cooley, Hussey, International Economic Review, forthcoming.
Devinney, Dowling, Perm-Ajchariyawong, Australian School of Business Working paper, 2007.

So why did you do this?

geekiness
sleeplessness
curiosity

I should have learned my lesson last year. The only other post of mine ever to receive attention was my ranking of local restaurants by wine prices. It, too, resulted in well-placing restaurants citing my "study" under their list of "awards" and received its share of detractors from those lower down the list.

Methodology versus assumptions: If I was to rank dog breeds by average size, a careful methodology would account for variance, measurement error, etc. If I then labeled this list "The top dogs for kids" one should pause, wondering what breed size has to do with loyal pets. The methodology I employed had significant disclaimers, but was mostly correct. A follow-up by resident statistician extraordinaire Bruce Cooil found an empirical model that improves on mine. This is not surprising since Bruce ranks first on the noted Global Statisticians by Efficacy annual ranking, though his tweaking, while resulting in a statistically superior model, leads to few qualitative changes.

In any event, methodological questions like "did you account for standard error," or "did you account for ..." any of the other million issues miss the point entirely. Clearly, I didn't (though those questions are better directed to the publishers of rankings that people actually use to make life-altering decisions). Instead, ask what the rankings ought to measure, and if the methodology achieves that aim.

The best "breed" of dog, of course, is a mutt.

Soliciting for purported eleemosynary purposes

2006-09-13T00:00:00.003-05:00

In deciding what are reasonable methods for businesses to solicit customers, Nashville makes exception for solicitations with a charitable purpose. How do we differentiate between these noble goals and the subaltern drive for the mighty dollar? Nashville codes (6.64.070) to the rescue:

"Charitable purpose" means any purpose which is benevolent, ..., philanthropic, ..., eleemosynary, either actual or purported.

Apparently, Council members are provided a thesaurus and are not afraid to use it. A dictionary, unfortunately, does not seem standard issue:

purport: To have or present the often false appearance of being or intending

We don't ask you to be charitable, but merely to feign concern.

UPDATE: I have been made aware that (i) many towns have this precise definition of charitable purpose (google search) and (ii) at least one member of Council has no idea what "eleemosynary" means.

Opening your garage door now a felony

2004-08-24T00:00:00.002-05:00

Not only does the Digital Millennium Copyright Act turn recording industry execs into cops and jurists, and empower them to place in jail those who develop reading technologies for the blind, and to stifle scientific debate through threats, but now declares competition in the garage door opener industry as unlawful circumvention (pdf link).

The judge found that making a universal garage door opener violates the DMCA.

The Skylink transmitter is designed to send a signal that mimics the Chamberlain resynchronization procedure and thereby circumvents Chamberlain's protective measure.

No word yet on when raids of homes using universal television remotes will begin...

Kentucky lawmaker misses forest, trees, dirt, leaves, ...

2008-03-10T11:08:00.008-05:00

I get to take a break from mocking my own elected officials to recognize the truly dumbarse lawmakers in a neighboring state. After apparently resolving the less important problems facing Kentucky, Representative Tim Couch (mug on right) turned his attention to more substantial issues:

Kentucky Representative Tim Couch filed a bill this week to make anonymous posting online illegal. ... If the bill becomes law, the website operator would have to pay if someone was allowed to post anonymously on their site.

What major constitutional doctrine does our sanguine legislator forward as more important than freedom of speech?

Representative Couch says he filed the bill in hopes of cutting down on online bullying.

Ah yes, the 593rd Amendment: Freedom from (anonymous) bullying. Beyond the constitutional, jurisdiction, enforcement, and due process issues this raises, did the good lawmaker even think about the benefits of anonymity which just might offset a little bit of the verbal abuse that plagues our thin-skinned technocrat? Perhaps the twelve step programs, including Alcoholics Anonymous and Narcotics Anonymous could change their names. I presume the many online forums for childhood abuse, rape, and spousal abuse survivors would benefit from banishing bullying in their midst. What of online medical forums, corporate whistle-blower and crime reporting sites?

Really, I don't blame Tim. He obviously had that rare combination of political ambition to help his fellow Kentuckians and ability to spell his name sufficiently close to what appears on legal documents to satisfy the (seemingly low) standards to get on the ballot. My blame is reserved for everyone who voted for him without checking if he was at least sentient.

Can't legislators get back to the important issues, like proposing legislation that declares Cornhole the official game of Kentucky? Really! Go check! Maybe my high school's bully was right when he declared that the ones who get bullied are just asking for it.

Competition policy after several martinis

2007-02-07T00:00:00.001-06:00

A brief two-question quiz on industrial organization:

QUESTION 1: A manufacturer sells his goods to a retailer. A law is passed that forbids the manufacturer from selling to the retailer. Instead, the manufacturer is required to sell to a middleman, who may then sell to a retailer. This helps:

A. The middleman

B. The retailer

C. The manufacturer

D. ALL OF THE ABOVE! and Children. And small businesses.

QUESTION 2: A new law would forbid manufacturers from talking to more than one middleman, so that each middleman is, by law, given the exclusive ability to connect a specific manufacturer to the retailers. Who would benefit from this law?

A. The middleman

B. The retailer

C. The manufacturer

D. ALL OF THE ABOVE!

If you answered D for both questions, you're right, according to the oldest member of the liquor distributors' cabal:

The three-tier system promotes a safe marketplace and environment for citizens by limiting the authorized channels through which alcohol enters our state ... It also allows for a level playing field for retailers of all sizes, increasing competition and supporting small business.
Tennessee is known as a franchise state, meaning that wholesalers have exclusive relationships with suppliers' brands. By having exclusive rights to distribution, wholesalers have a vested interest in helping build brands over a long period of time, affording better growth for the brand within the market.

The second paragraph is beguiling, containing a gram of truth. Downstream monopolization does imply greater brand-specific investment, but only because it leads to a greater capture of surplus. It is certainly not a net positive for anyone but the monopolist. The first paragraph is so deceitful as to be laughable, if not for venal state politicians who regularly parrot it.

UPDATE (11 October 2007): Fun with Google.

Presumably because of the above link, a search for the phrase liquor distributors' cabal now yields as the first result Lipman's somewhat questionable justification of the three-tier system. I wonder if unscrupulous cretins can catch on...

Has Tennessee evolved since the Scopes trial?

2007-02-27T00:01:00.001-06:00

While Dayton, Tennessee annually celebrates its conviction of the heretical teacher, John Scopes, one state legislator wants the fanfare expanded state-wide.

Tennessee State Senator Raymond Finney (R) proposed a bill that would require the state's Education Commissioner to answer questions, in flow-chart form, on the origins of the universe.

First, the Commissioner would be asked if a Supreme Being exists (presumably, in Jesus-form, rather than all of those heathen supreme beings). A "no" answer would, according to the legislation, earn the Education Commissioner "the General Assembly's admiration for being able to decide conclusively a question that has long perplexed and occupied the attention of scientists."

Creationism, biting sarcasm, and legislative power -- a unity made in heaven... or here on earth... depending on your view.

"There has never been any proof offered that Darwin's theory of evolution is correct," Senator Finney explained, presumably before taking listeners on an exotic voyage through circular-argument world.

Tennessee legislator in search of TV remote

2007-01-13T00:01:00.002-06:00

Tennessee State Senator Doug Jackson (D) proposed a ban on "Girls Gone Wild" commercials because, as he was intently watching one, he was unable to change the channel.

"This is being interjected right into our living room," Jackson said, presumably explaining how televisions work in general.

"People feel like, as they sit in their living rooms, they just have to surrender; there's nothing that can be done."

Unless, of course, your cable service offers multiple channels. Or an off button.

"You know, it's time to draw the line," he said, and immediately demanded that he be in charge of the Official First Amendment Line Drawing Institute.

But what if I’m easily annoyed?

2006-09-18T00:00:00.001-05:00

Another gem from the Nashville Codes (6.72.400)

No taxicab driver shall solicit patronage in a loud or annoying tone of voice or in any manner annoy any person.

There’s a hard criterion to meet.

Your type of auction theory ain’t welcome here

2006-09-10T00:00:00.001-05:00

I decided to combine two activities that frequently occupy my day: study of auctions for my research, and perusal of the Nashville Codes for entertainment. The section of Nashville law on auctions and auctioneers (Chapter 6.84) defines an auction as:

The offering for sale or selling of such property by the method known as “down hill selling” by which is meant first offering any article at a higher price and then offering the same at successive lower prices until a bidder is secured.

So, the elegant Dutch Auction is legally permitted. I wonder who determined that this method is “known as down hill selling.” The Dutch have yet to discover a single elevation change in Holland that can in any way be construed a “hill.”

The definition continues:

“Selling at auction” also means the offering for sale or selling of such property to the highest bidder.

And there you have the exhaustive list of market mechanisms that the Metropolitan Government of Nashville and Davidson County considers an auction.

Preferential auctions, where I might care about who wins? Procurement auctions, where the lowest bidder should be selected? Take that crazy stuff out of state!

A premature celebration

2005-05-17T00:00:00.001-05:00

The press has been quite jubilant about yesterday's Supreme Court ruling on direct shipment of wine ("Let those wine sales flow" claims USA Today) but we shouldn't pop the cork on that last bottle of bubbly since it may not get easier to acquire more.

All that the Court requires in its decision is that states adopt comparable winery-to-consumer shipping laws for out-of-state wineries as they do for in-state wineries. I applaud the decision on legal grounds, asserting that fair interstate commerce applies to alcohol sales, but expect it will make wine even harder to acquire.

We can classify states into three catgeories:

States that allow shipment from all wineries
States that allow shipment only from in-state wineries
States that allow no shipments at all (like Tennessee)

The case has no impact on the first and third category, since the decision requires only that policies for in-state and out-of-state wineries correspond. Additionally, it seems to apply to wineries only, not retailers, thus having no impact on Internet sales from cheaper retailers out of state.

But certainly there is good news for consumers in the few states with discriminatory policies? Perhaps not. What will states in the second category do when forced to set identical policies for out of state wineries. They either allow out of state wineries to ship or prohibit in-state wineries from doing so. Since the latter option is preferred by the well-funded distributor lobby, I'm guessing this is more likely

So, the Supreme Court decision is a victory for the principle of competition, but likely to reduce than create more competition, in practice.