So, the San Jose Sharks just got bounced out of the playoffs in the first round, to the #8 seed Ducks, after compiling the best regular season record of any team in the NHL. I think that this poor performance was specifically a matchup issue; during six or seven games in the regular season, the Sharks and Ducks scored an equal number of goals, suggesting that while the Sharks were good against most teams, they did not enjoy that much of an advantage against this specific team.

I’ve never really liked playoffs. I understand that they keep things interesting at the end of the season for most fans, and thus they’re a necessity for ticket and TV revenue (and as Bill Simmons points out at the end of this article, the NHL needs money badly). But they diminish the importance of the regular season and undercut the accomplishments of the team that played the best over the course of the season. Furthermore, most sports don’t take efforts to favor the top teams – the bracket is set at the beginning of the playoffs and never re-set. Hockey deserves plaudits; the top seeded team remaining in every round faces off against the lowest seeded team remaining in the tournament.

Again, sports leagues in the US could do well to emulate their European counterparts. European leagues strike an excellent balance between rewarding the top teams and keeping things interesting for fans. The top 20 teams in England play a round robin series of 38 games, and at the end of the league season the first placed team is the champion. The league championship is the most coveted prize for every fan and every team, and comes with prize money and automatic entrance into the European Championship in the following year. There are multiple “prizes” available for teams out of the running for first place – the next three teams also make the European Championship, the next two teams after them qualify for a lesser continental tournament, and the worst three teams in the league are sent down to the lower divisions. Really, how exciting is that! If the Lions, the Knicks and the Pirates faced demotion every season, how much faster do you think the dysfunctional parts of the organization would be tossed out? Everyone has an incentive to play hard through the end, and owners have to spend money on their teams or risk relegation. Still, if you’re between 14th and 8th, there’s not much excitement. That’s where the second great part of English soccer kicks in.

The playoff atmosphere in England is created by the FA Cup, which is the second-best trophy to win. Everyone, from college teams to semi-pro to the Premiership teams, faces off in one giant bracket, sort of like the Indiana high school basketball championship. Furthermore, after every round the matchups are drawn out of a giant pot just like the lottery, so such oddities occur as the two best teams facing off in the first round, or non-league (roughly, the 100th best team and below) teams hosting teams in the Premier League. There are vagaries and more vagaries and matches are rarely uncompetitive.

In sum, the European league system is vastly superior because they set up parallel trophies: one to reward the best overall team, and one to reward the winner-take-all, luck-driven playoff system. In the US, not every team makes it to the playoffs, and the best team doesn’t win a trophy every time. Winning the league doesn’t matter so much as getting hot at the end of the season, as the Ducks were in six games this past week.

Robin Hanson summarizes the literature, in case you weren’t convinced:

Decades of research on financial markets have shown that it is hard to find biases in
market estimates. The few direct comparisons made so far have found markets to be at
least as accurate as other institutions. Orange Juice futures improve on National Weather
Service forecasts (Roll, 1984), horse race markets beat horse race experts (Figlewski,
1979), Oscar markets beat columnist forecasts (Pennock, Giles, & Nielsen, 2001), gas
demand markets beat gas demand experts (Spencer, 2004), stock markets beat the official
NASA panel at fingering the guilty company in the Challenger accident (Maloney &
Mulherin, 2003), markets on economic statistics beat surveys of professional forecasters
(Grkaynak & Wolfers, 2006), election markets beat national opinion polls (Berg, Nelson,
& Rietz, 2001), and corporate sales markets beat official corporate forecasts (Chen &
Plott, 1998)

Torture is illegal, and unethical, but the death penalty is legal. I think if polled most people wpuld rate torture as worse, ethically speaking, than death. Why?

If an interrogation technique is painful enough to make a person divulge information that they would not have otherwise divulged, in order to make the pain stop, it’s torture. It’s that simple. You can’t use pain to gain a confession. There are studies of evidence showing that tortured prisoners will confess to anything and everything to avoid further pain. If you don’t believe it, read 1984 again.

If a technique is so soft (as “walling” supposedly is) that we can describe its effects on the prisoner as “not torture,” then it probably wouldn’t make anyone reveal anything. But if that assumption is correct, then why were the interrogators using the technique? The only possible argument is that the information we received from torturing prisoners prevented attacks on US, and this benefit outweighs the harm to our reputation, our flaunting of the Geneva Convention, the reciprocal pain that American POWs can expect from now on when they’re captured, and the droves of Arabs who want to join terrorist groups to get back at us for torturing their fellow citizens. But we’ve been given no evidence that the information gained from torture foiled any specific plots. In any event, the marginal benefit from the 183rd waterboarding of a single prisoner is low.

We tortured prisoners. Someone high up in the Bush administration either authorized this torture, knew about it and allowed it to proceed, or had no idea, which given this administration, is possible, but sad.

More American Workers Outsourcing Own Jobs Overseas

It’s simple time arbitrage, and it’ll work as long as your boss doesn’t find out. I’ve wondered when students are going to start hiring overseas assistants.

“Here’s how to know if you have the makeup to be an investor. How would you handle the following situation? Let’s say you own a Procter & Gamble in your portfolio and the stock price goes down by half. Do you like it better? If it falls in half, do you reinvest dividends? Do you take cash out of savings to buy more? If you have the confidence to do that, then you’re an investor. If you don’t, you’re not an investor, you’re a speculator, and you shouldn’t be in the stock market in the first place.”

From Jeffrey Goldberg in this month’s Atlantic. Goldberg’s panicking and selling at the bottom, giving the article a view of the market from a speculator’s perspective. The quotes from Robert Soros are particularly telling (and remind me  of my post from last week).

I’d recommend Less Antman, and fee-based planners in general, to Jeff.

Zero growth in 2001 and 2002 and slow (under 2%) in each year of 2003-2006. H/t Calculated Risk.

Video of the Big Dog robot we watched today in class:

The way it recovers from slipping on the ice and being kicked is incredible. It’s carrying a 300-pound payload on its back.

Here’s an early version of the same project:

Can you spot the difference?

Investing

There are two schools of thought on investing as a college student. One says that because your current income is low and your future income is high, spend money now because you’re going to make more later. The other says that the earlier you start investing, the higher your return will be in the future, because with compounding and exponential growth, you make the majority of the return in the last periods of investment. I take a middle road; I save when I can but I spend a large chunk of my money.

The preponderance of information on the internet likens investing to gambling. Get this straight:

If someone has a proven, mathematically rigorous method for beating the stock market, they will not tell you about it.

It would be like Coke giving away its formula or KFC giving up its chicken recipe. If you have a good tip, and you tell other people, they’ll bid up the price until it’s no longer a valuable tip. The repercussion is simple: all financial advice telling you about ways you can beat the market is complete and utter bullshit. All of the advice sounds really good; we love gambling, we love new ways to gamble and we love thinking that we have a foolproof strategy. But the only people that make money off of this advice are the givers and the market makers. I’ll explain why in a little bit.

I make a small exception for people who are giving advice based on how they have their own money invested; at least if they’re wrong, they’re losing money too. For example, Warren Buffett’s letter to shareholders, where he discusses how his company is invested in light of the current market climate.

I got the following in my email box recently, from an online trading company:

Here are a few reasons we think you’ll find forex trading interesting:

Large and Liquid Market
Forex is the most traded market in the world, with a daily volume exceeding $3.2 trillion, according to the Bank for International Settlements (BIS). 

Alternative Asset Class
Zecco Forex provides access to another asset class where you can make trades independent of overall equity market direction. So if the Dow is plummeting, the dollar could be rallying. And if the dollar is plummeting against the Euro, you might decide to jump on the Euro and ride that wave. 

Leverage
You can get up to 200 to 1 leverage trading foreign currencies. That means $500 cash can purchase up to $100,000 in currencies (my note: and a 2 percent loss will not only wipe out your $500 investment, but leave you owing a further $1500!). Now before you go investing your kid’s college funds in currencies, you should recognize that a high degree of leverage can lead to large losses as well as gains. As with any other investment, you should only risk what you can afford to lose. 

Technical
We believe forex trading will be very attractive to active and technical traders. With a multitude of trading opportunities, and a full array of technical strategies, we believe you will find this market worth trading. And because we’re Zecco, you’ll get some of the tightest bid-ask spreads in the business. 

Every transaction has two sides; a buyer and a seller – someone who thinks the stock’s going up and someone who thinks it’s going down. If you don’t think you know more than the other party (an institutional investor, a hedge fund trader, a math Ph.D in the basement at Goldman Sachs), don’t trade. Note how much the email compares this to gambling – they cover every possible investor, from the guy who wants to “ride that Euro wave” to the one with “a full array of technical strategies.”

A simplified story of how to invest money:

Let’s say you’re at the horse races for the day, at a special horse track called “Dow Jones Fields.” Normally, a horse track will post odds, collect everyone’s money, remove a 15% cut and then pay out the remaining 85% to the winners – this is called parimutuel betting, because your winnings are funded by your fellow man’s loss. Because this is a special track, the return varies – some races, the owners remove 20% of the money pool, some races they put in 30%, and over every race at the track we know that on average, at the end of the day, the owners (Mr. and Mrs. Profits) pitch in four or five percent to the total pool, so there’s more money out than went in. Given that this is a racing track, there are lots of individual horses, each with a different record, a different jockey, different starting gate, different odds etc. In addition each horse at this track has qualities called “Beta” and “P/E Ratio” and “Projected Analyst Earnings.” We have a pocket full of cash and three possibilities: we can earn below 4-5% return, we can earn exactly 4-5% return, or we can try to beat the market. Three levels up, you can see a bunch of guys in suits and sunglasses making bets. They’re trained in horse betting, and make their living making money at the tracks. They’re your competition.

Now, the surefire way to lose a lot of money is to look at which horses have been winning, figure out who their jockeys are, what their betas are, and what their odds are, and then bet those horses in future races. As humans, we’re more than capable of making patterns out of random data. This is exactly what we do when we gamble: in roulette, bet on a “hot” number, or whatever. We could try to bet on the “hot” horses. And we might get lucky and win but odds are we’re going to lose, or at least earn less than 4-5%, because of the guys in the suits at the top who know everything and make bets for a living.

The best thing to do is to bet every single horse in every single race. This way you guarantee you’ll get the market return. Now in an individual race you may be way up or way down depending on how big the pool is. But we more or less know in the long run things are going to be positive.

I read this Sports Illustrated article about Findlay Prep, the “school” set up by a UNLV booster for top young players. They live together in a house with plasma-screen TV’s, equipment, food and furniture all paid for by the booster.

Spoiling young athletes seems ridiculous at first glance, because it seems like it’s circumventing the rules that everyone else plays by, but the spoiling is a consequence of a system where the players are not allowed to be paid directly until they graduate or leave college. It’s silly that we force top athletes to go through the farce of high school and college classes, with the idea that they are “students first,” as all those silly NCAA commercials remind us, who happen to be extremely talented at sports.

In sports the normal economic relationship between Europe and the USA is reversed; European players enjoy contractual freedom, while the American system limits players freedom to earn market wages and play for the teams that they want to. In Europe, the best young players live full time at sports academies, where they take some classes but spend most of their time training and practicing. Top clubs often sign and recruit players at young ages; compensation and contract length for players under the age of 16 is limited. Manchester United recently made headlines for signing a 9-year old, but it’s pretty common practice in England – the United spokesman said “the club signs about 40 players of Davis’s age every year and, as is standard, will decide annually whether to renew his contract or release him.” Furthermore, there’s no such thing as a draft – players sign contracts with teams. Contracts can be bought or sold but player trades are rare (I’ve wondered why this system hasn’t caught on in the US – paying cash for players means you can express their value more directly, rather than through the players on your team). Universities field teams, but their players are drawn from the student body – “recruiting” is a little outdated when pro teams can and do pay wages to players directly.
But instead of actually compensating young players for their current and future value to the teams they play for, colleges go through an elaborate courting process, recruiting, and pro teams gather every June to take turns drafting players – for the first time they’ll be able to earn money playing basketball, but they get no say in where they can play. So I believe the academy system makes more sense – top players can focus on basketball, and universities can admit more qualified students.