Information | John Barrdear

Tag Archive for 'Information'

The Baltic Dry Index and the information value of markets

Published
by
John Barrdear
on 31 October 2008
in Economics, Epistemology and Finance
. 2 Comments

I have some questions about on the Baltic Dry Index (a rough guide to the price of moving dry goods by sea - more detail available here):

Since the supply of shipping is enormously inelastic in the short-run, changes in the BDI are generally held to represent changes in demand.  I’m okay with that.  Since the dry goods carried are usually raw materials that are used as inputs in creating intermediate and final goods, movements in the BDI are therefore commonly seen as a leading indicator of economic activity.

But for whom? Is it an indicator of aggregate global demand, or is it weighted in such a way as to provide a better leading indicator of just part of the world economy? The Baltic Exchange is based in London; does the BDI over-sample shipping to the UK and Rotterdam? The US is freakin’ enormous; does the BDI over-represent them? Is the BDI, as an indicator, biased towards describing the forthcoming state of those economies that are net importers over those that are net exporters?

The BDI is also commonly regarded as being devoid of speculative content.  For example:

Unlike stock and bond markets, the BDI “is totally devoid of speculative content,” says Howard Simons, an economist and columnist at TheStreet.com. People don’t book freighters unless they have cargo to move.

I’m not 100% convinced. If I can play in energy markets by buying a contract for the delivery of X tonnes of coal and then selling it on before the date of delivery arrives, why can’t I do the same with space on the a ship departing port Y for port Z, selling the space on before the departure date?  Is it because space on the ships is sold only very shortly before they begin loading?

But even if it is immune to speculation, that doesn’t mean it’s a clear measure of the state of aggregate demand.  For example, sending stuff by freight is contingent on the market in letters of credit. If that dries up, then even if there is latent demand for shipping, the actual demand seen by the Greek shipping magnates will be forced down.  This article in the FT would suggest that this is happening right now:

It all goes back to that Lehman bankruptcy. Among the more serious casualties of that colossal failure of leadership was the letter of credit business. There is nothing more vanilla than the l/c for an international shipment. One bank tells another bank that it will accept the credit risk of an individual importer or exporter. They document that, with forms that have been around forever, clerks and computers shuffle the paper around. A fee is charged and goods are released for shipping, inspection, and delivery. The most boring business in the world. Until it stops.

After Lehman those clerks, and their computers, stopped trusting the clerks and computers at other banks. Treasury secretary Hank Paulson’s ignorant and clumsy attempt to avoid moral hazard and systemic risk resulted in uncounted quantities of goods piling up on loading docks, and customers living off inventories and consuming less.

This is interesting, because the value of a market is usually in its ability to aggregate and communicate information through the price, but if the supply or demand are artificially constrained, then the usefulness of the price is brought into question.  A disruption in the letter of credit market will force demand for shipping to fall, but conceivably all four possible constraints can occur:

  • Demand forced down:  Economically sound demand that is contingent on supply in a second market.
  • Demand forced up:  Short-selling temporarily lifts the demand curve at low quantities.  Normally, this wouldn’t affect the equilibrium price, but if supply contracts for some reason, it can.  Witness the share price of Volkswagen this week.
  • Supply forced up:  Distressed sales.  Margin calls.
  • Supply forced down:  As with demand, supply can be contingent on other markets.

All of which has implications for the information value of market prices …

Low-information advertising

Published
by
John Barrdear
on 21 November 2007
in Economics and Epistemology
. 0 Comments

Go here to read a wonderful question from Richard Posner.  It’s much too long to post here, but here is his topic:

At the same time that sellers forgo much product disclosure that would seem advantageous both to them and to their customers, they make disclosures that have no information value and should not persuade any rational consumer, such as implausible, self-serving, and empty claims that their product is better, or super; and these claims are often wrapped in clever, funny pictures or anecdotes that are designed to seize the attention of the viewer, but that convey no information.

Posner’s question is a simple one:  why?  In their typical conversational posting style, Gary Becker posted his opinion.  It’s again too long to post in it’s entirety, but two paragraphs of note are:

Economists have generally not been friendly toward persuasive advertising since it is much easier with the usual economic analysis to discuss advertisements that provide information or misinformation. Yet tools are also available for considering the persuasive formation of attitudes and preferences with rational consumer behavior - see my book of essays, Accounting for Tastes, 1996. Although such an analysis of preference formation is dependent on some underlying psychological mechanisms that are not well understood, the process appears to be quite rational.

…

That said, challenging puzzles remain in using economic analysis to explain the types of information used and not used in advertisements, whether or not there are comparisons to the products of rivals. However, given all the professional time and thought that goes into advertisements, I am reluctant to claim that advertisers are not rational in what they do, for we do not understand all the relevant considerations that enter into the determination of the types of persuasion and information that are highlighted.

I have been fascinated by this for a while.  I think a good example lies in product packaging.  A year or two ago I was shopping for a new web-camera.  At the time, a major producer of webcams offered a “Webcam Live!” and a “Webcam Live! Pro”, with the latter 20% more expensive, in a noticeably larger box (despite housing a product of the same volume) and with insufficient information printed on either box to allow a potential customer to identify the functional difference between the two.

More than simple vertical product differentiation, this seems to me to also be a form of “information discrimination”.  By denying the consumer the details of the differences between the two options and offering only general, suggestive signals of their respective quality, the producer seems to ensure that wealthier consumers will purchase the more expensive option and that poorer individuals will choose the cheaper option, irrespective of their functional or qualitative differences.  Armed with complete information, the wealthy consumer might recognise that they only require the functionality of the cheaper option, or the poorer consumer - who cannot afford the more expensive option - might consider the cheaper option insufficient for their needs and so not buy either.

Of course, such a tactic on the part of the manufacturer would necessarily rely on two social norms: (a) that people generally accept the information presented to them and make their decision on that basis without seeking more; and (b) that people generally believe that information presented to them, if not entirely accurate, is at least indicative of the truth.

We can expand this by considering the retail outlet that sells the webcams. The retailer would be capable of circumventing the producer’s packaging strategy by, for example, putting information cards beside the two boxes or employing highly knowledgeable retail staff. However, assuming that the retailer shares in the profit from the product sales and not just the revenue, it is in their best interest to collude with the producer and provide no additional information.  Without naming names, I can assure readers that this is exactly the scenario that I encountered (the no extra information, that is, not the collusion).

Of course, the two companies would carry a risk of reputation damage as a result of their discrimination.  If, as seems intuitively reasonable to me, there is also a third social norm of tending to allot blame to the most visible perpetrator, the retailer carries the bulk of this risk.  How can they offset this?  By having an advertising campaign emphasise how helpful and informative their staff are …