Markets
Sex and statistics
Marginal Revolution had the post Sex and Statistics or Heteroscedasticity is Hot which reports on the OkTrends post The Mathematics of Beauty.
The summary is that conditional on their average beauty rating, the women with more variable ratings get more interest. The post proposes a theory that there is less competition for someone when not everyone is attracted, so they are more worthwhile to pursue.
The topic of the post is the market for love (or a proxy thereof), but could it apply to markets for assets as well? If so, perhaps it is a piece of the volatility puzzle.
Market contest
The eFinancialCareers Investment Challenge is sponsored by Bank of America Merrill Lynch. Registration has already opened. The trading period is 2011 January 17 to 2011 February 18.
Economics
Forecasting
Falkenblog had the post Forecasting Charlatans. My favorite sentence:
In selling forecasts to the masses, honesty is a strictly dominated strategy.
Price changes
Tim Harford wrote Outside Edge: Of turtle doves and inflation hawks. This includes the situation of petrol (translated into American, that’s “gasoline”) prices shooting up when the price of oil rises, but slowly coming down when oil prices fall.
I have no difficulty finding evidence that people think that happens. But the statistician in me wants to know if that really happens. Where’s the data?
Regarding data on petrol prices, Tim Harford kindly gave links to two papers. The more interesting one for me is http://web.econ.ohio-state.edu/mlewis/Research/Lewis_hurricane_current.pdf
The more theoretical one is http://web.econ.ohio-state.edu/mlewis/Research/Lewis_Asymmetric_Adjustment.pdf
The graph in the first paper shows the price of wholesale and retail gasoline over the period in which Hurricane Katrina and Hurricane Rita impacted oil prices. Retail prices do indeed fall slower than the wholesale prices. But when the spikes occur, the retail price is essentially equal to the wholesale price. So during those times the retail operators are losing money.
The retail operators are providing a service to their customers of smoothing prices. The attention principle is perhaps a reasonable theory of why they would be forced into doing that.
The error that the common person is likely to make is to complain about prices not falling fast, but not acknowledging that the prices didn’t rise as fast as they “should” have. This is especially true since it looks like even the wholesale spikes might go up faster than they go down.
The really interesting thing in the paper is that some markets (cities) of retail gasoline have cyclical prices — there seems to be some sort of game theory thing happening that causes the price to cycle above and below the prices of “normal” markets.