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?