William M. Briggs

Statistician to the Stars!

Page 395 of 546

Earth Day: Book 1

In the beginning Great Spirit created clean air and Gaia.

And Gaia was without form, and void; and darkness was upon the face of the deep. And Great Spirit moved upon the face of the waters.

And Great Spirit said, Let there be light: and there was light.

And Great Spirit said, Let Gaia bring forth grass, O so green, and the moving creature that hath life, and fowl that may fly above Gaia in the open firmament of the clean air.

And Great Spirit made the beast of Gaia after his kind, and cattle after their kind, and every thing that creepeth upon Gaia after his kind: and Great Spirit saw that all lived in peace and harmony.

But Great Spirit looked and saw man; and that was not good. He asked, how did Adam appear? We did not order him. He doth look too smug.

So Great Spirit caused a deep sleep to fall upon Adam, and he slept: and Great Spirit took one of Adam’s ribs, and closed up the flesh instead thereof; and from the rib made a woman, and brought her unto the man.

Now a Bush Serpent, more subtle than any beast, said unto the woman, Yea, hath Great Spirit said, Ye shall not eat of the flesh of beasts?

And the woman said, We may eat whatever we find lying about: But of the flesh of beasts, Great Spirit hath said, Ye shall not eat of it lest ye die.

And the Bush Serpent said unto the woman, Ye shall not surely die: For Great Spirit doth know that in the day ye eat thereof, then your eyes shall be opened, and ye shall be as capitalists, knowing good and evil.

And when the woman saw that the beasts were good for food, and that slow roasting them was pleasant to the eyes, particularly with a side of fried potatoes immersed in the congealed milk of the cow beast. So she took of the beast’s flesh thereof, and did eat, and gave also unto her husband with her; and he did eat.

And the eyes of them both were opened, and they knew that they would have to secure a loan from the bank to buy land on which to plant their corn seed; the seed bringing forth plants which to eat and to feed the stock.

And they heard the voice of the Great Spirit walking in the garden in the cool of the day: and Adam and his equal partner hid themselves.

And the Great Spirit called unto Adam, and said unto him, Where art thou? Hast thou eaten roast beast, whereof I commanded thee that thou shouldest not eat?

And the man said, The woman gave me a choice cut, and I did eat.

And Great Spirit said unto the woman, What is this that thou hast done? And the woman said, The Bush Serpent beguiled me, and I did eat.

And Great Spirit said unto the Bush Serpent, Because thou hast done this, thou art cursed: thy flesh shalt rot and become as oil in the ground thereof; and man and woman shall burn that oil and pollute the firmament and cause Gaia to develop a Great Fever.

Unto the woman Great Spirit said, I will greatly multiply thy sorrow; in sorrow shalt you eat and grow fat; and the weight shalt not come off easily; no, not even with yoga; and thy desire shall be to thy husband, and he shall rule over thee, much to thy consternation.

And unto Adam Great Spirit said, Because thou hast hearkened unto the voice of thy wife, and hast eaten flesh, of which I commanded thee, saying, Thou shalt not eat of it: cursed art thy arteries; in sorrow shalt thou watch them grow less patent all the days of thy life.

Thou shalt grow uncaring of the environment thereof and cease to be Green. I will put enmity between thee and Nature; thou wilt thyself become an unnatural thing; and in thy Business thy shalt commit great sins against Gaia.

In the sweat of thy face shalt thy eat genetically modified organisms, till thou return unto the Organic; for out of it wast thou taken: for Organic thou art, and unto Organic shalt thou return.

Therefore Great Spirit sent them forth from the garden of Eden, to till and despoil the ground from whence they were taken.

eBook Business: iPad, Kindle, Nook, etc.

Traditional publishing is screwy. Book makers set a cover price, say $25. They sell that book at half that to bookstores; which nets publishers $12.50.

Publishers give authors about 15 percent royalty on the cover price, which is $3.75. This leaves the publisher $8.75. From that, all bills must be paid: salaries, lights, printing, shipping, warehousing, marketing.

There is a twist: booksellers are allowed to return unsold merchandise for a refund! Depends on the book, but returns average about 50% or more. Paperbacks are not even physically returned; the cost of shipping not making it worth reselling them.

This means the publisher has to eek a profit out of about $4.38 per book. Most reports say profit is about a buck a book.

That’s “on average” which, regular readers will know, is always a dangerous way of presenting statistics. Much can be hidden in a single-number.

For example, bestsellers won’t be, by definition, returned (the discounting booksellers apply to blockbusters affects publishers only indirectly). Plus, backlists—classics that remain in copyright—are also unreturned.

This means publishers make their money on backlists and bestsellers—however, big-name authors are freer to negotiate bigger royalties. Publishers lose money on many other books.

Electronic books save money three ways: no printing, no shipping, and no returns. Eliminating the first two saves only about two bucks a book. Eliminating returns saves about four bucks—but only for those titles that would be returned.

No money is saved on returns for blockbusters or the backlist. That means we should not expect e-books price points to be much less than the regular price. Say, about $3 to $5 less, which would put hardbacks at $20 to $22.

That’s my calculation: but publishers calculate a $13 e-book cover price. Even if the only e-books are bestsellers and backlist—so that publishers realize the full benefit of no returns—the cover price would only come down to about $18.50.

That must mean that publishers are willing to take a hit on e-books so that they will sell. But: they also do not spend much additional money on marketing, salaries, and so forth, because nearly all e-books are also real books.

That savings—temporarily in place as long as there are real books for each e-book; and because e-books represent only 4% of sales—does make the $13 price point reasonable.

Amazon sells—I should say licenses—them for about $10 for the Kindle reader. Obviously, they do so at a loss. According to the New Yorker, this angers publishers, who are afraid “consumers” (people) will grow used to the $10 price point.

Jeff Bezos doesn’t care. What he would like is to work directly with authors who self-publish. Those authors would (probably) receive a larger royalty, Amazon would see larger margins, publishers would see nothing. (This can work, but then authors lose out on such services as copy-editing: right, readers?)

Now, in almost every review of e-readers, writers whined about “lack of color” on the readers’ screens. There was moderate glee when Barnes and Noble brought out their Nook because it showed thumbnail covers in glorious full color! The text was still black and white.

Everybody also complained about the “lack of a browser.” Sure, the Kindle could display a book—in the sun, in the dark—just as it would appear on paper, but readers couldn’t check Facebook with it!

Enter Steve Jobs and his iPad, who gave reviewers what they wanted: color and a browser. Appearance drove its design: page turns are like a video games. But readability suffers: it has a standard glare-prone, eye-straining screen.

Jobs entered the business of selling books to people who don’t read. The New Yorker quotes: “It doesn’t matter how good or bad the [e-reader] is, the fact is that people don’t read anymore,” Jobs said. “Forty per cent of the people in the U.S. read one book or less last year.”

Apple will, through its already well-established channels, sell—license—e-books for $15. Which is, as my calculator shows, $5 more than Amazon charges. Jobs is counting on impulse buys.

Publishers are delighted. They also (nowadays) don’t care whether anybody reads their books. They want the money.

Given the religious fervor which Apple is able to generate, their e-book model may beat Amazon’s. But that might create a negative feedback where publishers fashion titles that are designed not to be read.

Books with “interactivity” will soon be found. These will be marketed as “educational.” Look for more books-of-the-moment “written” by celebrities, politicians, and other transients.

Also look for a decline in the number of mid-list books: those which usually fail. But they don’t always. The ones that succeed create new bestselling authors, or became entries in the backlist.

In other words, by focusing on the quick profit, publishers could be shooting themselves in the foot.

Update I wrote before I read this quote (one prediction is already coming true):

To thrive, [Grandinetti] believes, publishers have to reimagine the book as multimedia entertainment. David Rosenthal, the publisher of Simon & Schuster, says that his company is racing “to embed audio and video and other value-added features in e-books. It could be an author discussing his book, or a clip from a movie that touches on the book’s topic.” The other major publishers are working on similar projects, experimenting with music, video from news clips, and animation.

Update Thursday morning. Boy, if you want to increase your spam by over 100%, just write a post with the word “iPad” in it. Dozens of link spam overnight.

Goldman Sachs, Bubbles, Global Warming, and Statistics

Matt Taibbi’s article on Goldman Sachs, “The Great American Bubble Machine” is up and should be read (you’ll have already seen it if you homepage, as you should, Arts & Letters Daily).

As I read this piece, my view was reconfirmed that no company is too big to die. Taibbi writes:

The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a Who’s Who of Goldman Sachs graduates.

I had only an indirect experience with Goldman, when I was at internet ad server DoubleClick (which is now part of Google). Goldman Sachs was one of the firms that took DoubleClick public. I had stock, as all employees did, and benefited from this offering.

When the crash came—as it does for all bubbles—but which nobody ever remembers—certain “improprieties” in the IPO were discovered by lawyers representing investors who lost money on DoubleClick stock. DoubleClick and Goldman were sued.

I cannot rate the merit of these suits, other than to say that they were thick on the ground when the internet bubble burst. A point in its favor: DoubleClick, unlike most other internet startups, made money.

Not every company Goldman represented in internet IPOs did well. Worse, Taibbi says that Goldman was aware that they would not. Their line was to tout the stocks as shamelessly as the Lemon Drop Kid pushed horses.

After the film of the tech bubble was being wiped off of Wall Street, and as we all know, Goldman and other banks turned to houses and money.

When I was a graduate student in statistics in the mid ’90s, finance was huge. There were lines out the door for stochastic calculus courses. Conferences had endless sessions (sermons) on “portfolio analysis.”

“What, you’re not doing finance!?” was the inevitable question to the poor saps who didn’t have the brains to see that money was it.

The math was complicated, but not that complicated. The models could be beautiful. They made sense once you assimilated a few key equations. News twists and turns were easy to propose and investigate. The future was green.

But I could never get past the feeling that these models, and the careers that went with them, were soul-sucking. Everybody would tell horror stories of statisticians they knew that went to Merrill, Credit Suisse, Goldman and others and were worked harder than young Conan was at the Wheel of Pain1.

You made a lot of money, sure, but you had no life.

The closest I came to working in finance was in the early 2000s, interviewing for a startup that believed it had discovered a fraction-of-a-cent arbitrage model for trades to be executed before any other firms’ computers became aware of them.

Somehow the profits were going to be just larger than transaction costs: bulk trades would guarantee riches. I was to assess the performance of this model and suggest improvements.

The leader did not, evidently, enjoy my stated lack of faith in the performance of finance models in general; perhaps he worried I would bring bad luck because of this, because I never heard from him again. The company is gone (I never followed them closely after the interview), but that doesn’t mean it died: it could easily have been absorbed, and probably was, during the growth of the last bubble.

The newest bubbles are, according to Taibbi, the “bailout”:

After the oil bubble…the financial safari…moved elsewhere, and the big game in the hunt has become the only remaining pool of dumb, unguarded capital left to feed upon: taxpayer money…Goldman went right back to business as usual, dreaming up impossibly convoluted schemes to pick the American carcass clean of its loose capital.

And then “global warming”: especially the upcoming Cap & Trade legislation. “Goldman wants this bill”, he says. Not for altruistic reasons, not to “save” the planet, but to systematically cheat the public out of trillions by managing this new mechanism for speculation.

Yes, it’s a bright future for finance. Too bad there isn’t an instrument for betting on bubbles themselves: guessing the nature of them and so forth. I would make a killing.

How? Well, I have this proprietary computer model that uses sophisticated, powerful mathematics. Send me some money and I’ll tell you how it works.

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1This was where he was taken after his parents, and his entire village, were wiped out.

Pajamas Media: The Dismal Economics of Utopia

Today’s post is at Pajamas Media: The Dismal Economics of Utopia.


Pajamas Media

This is first is a short series. I thought it would be fun to show how the utopian ideas of income equality and the traditionally misused statistics of “household income” come together to create massive inequalities.

The point behind this series in logical economics is to show that ideas of equality are either horribly confused, purposely and hatefully vague, or impossible—not unlikely, impossible.

As I say,

Socialists and other utopians are usually content to let this definition float, and let its fuzziness work to their advantage. This sly trick puts realists on the defensive, who are ever nervous about making statements that might be judged hostile to equality.

See you on the tofu lines.

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