Wednesday, July 22, 2009

Make a difference

Q: Do you matter?
A: Depends on if you can make a difference.

Q: How do you make a difference?
A: By setting a good goal and work dilligently to achieve the goal.

Q: How do you set a good goal?
A: You consider the interest of your family, your company, your society, as well as your own. The goal has to be specific, measurable, achieveable, realistic, and time-based.

Q: How do you achieve your goal?
A: by being methodical and persistent.

Friday, June 26, 2009

God and Science don't mix

By Mr. Krauss of Arizona State U.

Very good reasoning and thought proviking.

Is religion solving or contributing to the world's trouble?

Friday, May 29, 2009

Free Market as a Religion

Overall I support the claim that free market system is better than any other systems. But a lot of free market ideology that is being promoted, such as the version Stephen Moore of WSJ is promoting (see, is far beyond economics as a science and approaching a political ideology that akin to religion.

When I was in school my economics profession told us that market can fail when there is information asymmetry. That usually means when buyers don’t know what they are buying. In those situation regulations are necessary.

What does it mean buyers don’t know what they are buying? Let me give some example:
Pharmacy – we have no idea if a new drug will kill us, so we want FDA to be our gate keeper.
Insurance – we have no idea what all the fine print has done to exclude our coverage, so certain unfair provisions can be prohibited by insurance commissioners.
Credit Card – fine prints are challenging to understand, so the new law requires companies to make it easy for us to understand how much interest and fees we pay.
Banking – do you know which bank is unsafe to deposit if there is no FDIC?

You get the idea. I found it disturbing that some people push deregulation and smaller government as a religion. The motive behind it is obviously for profit, but they claim it is for the good of society. I am not a fan of big government, but I think the existence of FDA is certainly necessary. Why would you want a private “drug rating agency” to replace FDA? What happens if they make a mistake like the credit rating agencies have before the crisis? What if these drug rating agencies become captives of the pharmaceutical companies?

When you push a generally correct idea to the extreme and make a religion out of it, you lose the benefit of common sense. Small government is good, but anarchy is not.

Tuesday, May 26, 2009


An Actuary’s job is to predict mortality. Death is certain in life but the timing is uncertain. Using the rule of large numbers (statistical jargon on converging expected value), an actuary can make some reasonable forecast.

Forecast in general is applied in many aspect of life: GDP, employment, sales revenue, weather, and so on. Guessing what is going to happen next is never easy. But experience and logic usually make some forecasting possible. There is some margin of error but within range. These forecasts are what you depend on for decision making.

When making a decision, you also weigh the benefit of upside and the risk of downside on you options. In other words you consider both the severity and the probability. If one of the outcomes can be catastrophic, you want to insure against it even if the probability of happening is low. You should not be paranoid about risk, though, as risk taking usually has a benefit, too. By assessing both upside and downside, the severity and probability, we can make decisions methodically, systematically, and rigorously.

Relationship Management

A successful business man needs to be able to build amicable relationship with customer, colleague, supplier, and the general public. So it is important to be able to speak to a group of people and build relationship. This ability has to do with public speaking, salesmanship, and understanding the value of customers and society in general. Successful relationship management is more than half of the success, so is very important.

Friday, May 22, 2009

Too big to fail is a problem

What makes capitalism work is market discipline. When you have institutions that are “too big to fail” the market discipline breaks down. Efficiency argument for free market no longer stands.

After the Fed pumped trillions of dollars into the financial system, is there any regulatory change that makes the financial system safer?

Wednesday, March 25, 2009

US Health Insurance

Americans on a per capita basis pay about twice the price Japanese pay on health care, and yet life expectancy in Japan is longer than in the US. Arguably Americans are the least efficient health producer in the world if health performance is measured by life expectancy. There are a lot of reasons that contribute to this phenomenon but the central piece is an America idea about liberty.

In Europe and Japan mandatory health insurance or health tax is a norm. Mandatory health insurance avoids the classic insurance problem: adverse selection. Adverse selection is an insurance industry jargon referring to a market phenomenon that young, healthy people avoid buying insurance while the sickest all sign up. In order to be profitable private insurance companies either drop coverage for the sickest by way of pre-existing condition, or raise the premium significantly for everyone. The result is a combination of high health insurance cost and lack of coverage in the US.

Mandatory insurance is the solution to adverse selection, but it runs counter to American’s idea about liberty. “I, as a consumer, should have the right to decide what I am going to buy. If I decide food, clothes, and housing come in priority to health care, it is my decision and no one else’s.” That might be true, but sooner or later, people will get sick and eventually everyone will die. People who don’t buy health insurance usually end up in emergency room, costing expensive resources without paying. There is no solution to this problem, except for mandatory insurance or the inhumane way of throwing out very sick and injured people out of hospital.

It is hard to convince people that health care is something you have to buy, though. I have heard people say: “Some say everyone is required to have insurance to operate a car, and the same should apply to health insurance. That is not right. I can do without a car but I can’t do without myself. Mandatory health insurance is an unfair tax that helps the sick” Another fear that Americans have for a health tax is that people will lose their choice of health care provider. “When you don’t pay out of your pocket, you don’t have a say who is your doctor or nurse. But health care is so personal that I demand a choice.”

With this conflict between American idea about liberty and the need to avoid adverse selection, no answer is easy. Maybe there won’t be a solution in the US for health care. Coverage will continue to be insufficient and cost will continue to be high.

Friday, February 27, 2009

How did we get into this mess?

1. Housing price steadily went up since 2001.
2. Buyers of all sorts sensed opportunity and started buying.
3. Lenders loosened lending standard because they saw low risk in the short term, due to rising price of housing; long term they had planed to sell the loan to Wall Street for repackaging and resell
4. Wall Street used financial models to create complex securities based on mortgages and then sold them to investors, especially from China and Oil countries
5. China and Oil countries accumulated savings and need to invest. Treasury was yielding low so they invested in these mortgage backed security thinking they have good collateral behind it.
6. Credit rating agencies didn’t understand the new instruments, such as CDO square, and went to Wall Street for help. They use the same financial models to assess the risk of these new financial instruments, and gave AAA rating to a lot of the product that turned out to be CCC.
7. China and Oil exporting countries see the AAA rating and bought those securities in bulk. This creates a credit boom as liquidity is everywhere.
8. But when housing market reversed its upward trend and started to go down, everything turned.
9. Buyers stop buying, foreclosures are rising, lenders stop lending, Wall Street can’t sell the securities they repackaged, foreigners stop buying those security, and rating agencies quickly down graded previous AAA to CCC, consumers are reeling, corporations cut back and layoff, and quickly we are in a financial crisis plus recession.
10. Deleveraging process needs to run its course. We will see down turn extend beyond 2010. When everything is purged, the economy will grow again.

Wednesday, January 21, 2009

System integration

System interaction causes system failure: when you look at individual pieces they work as expected, but when you integrate the pieces into a system the system will fail in certain situation. Example: Our financial system. Which piece causes the broke down? Is it Wall Street financial engineers who created the securities that pool risks, slice and tranche these risks and sell to different investors? Is it rating agencies who rate the CDOs as triple A? Is it the investor who bought these securities without knowing the risk, and relied solely on rating agencies? Is it the borrower over extended their leverage based on the belief that credit will always be available?

Financial engineering creates easy credit. Rating agencies rate and investors buy financial products they don't understand. Risk and credit assessment failed. The ensuing credit boom inflated housing price. The booming housing market created a booming economy and high share price. Everything is linked so when one piece breaks the entire system breaks down.

We can have a segmented, inefficient system that is reliable and low risk within its limits. Or we can have an integrated system that resources can be shared and flow to the most efficient use, but when one piece breaks down the entire system breaks down. There are costs to integration but these costs are not seriously considered. Experts believe the risk is low until the entire system failed.

Specialization is the source of efficiency. But who is going to look at system integration - making sure that every specialized component works smoothly with each other and won't cause a breakdown?