The Sunnyboys : Trouble In My Brain

Does invested $1 in retrofitting saves $6 in health expenditure? @PhilTwyford @PeterDunneMP @AndrewLittleMP

Various bold claims have been made about the payoff from investing more in retrofitting insulation into housing. The government recently spent $600 million on such retrofitting of insulation.

There is a private member’s bill before Parliament to introduce minimum standards for rental properties with regard to insulation and other matters. Little is by the Leader of the Opposition Andrew Little said for the consequences for rents of this additional expense to landlords.

Ian Harrison of Tail Risk Economics initially estimated that the $600 million invested in retrofitting of insulation will save barely half of that:

After correcting for this major error and taking a more realistic view of the benefit estimates in other studies, the net benefits of $630 million disappear.

The $600 million insulation investment will probably generate benefits of closer to $170 million, for an economic loss of $430 million.

After meeting with Ian, I read through the rather dull background documents behind a cost benefit analysis relied upon by the government to spend the $600 million dollars.

The most interesting part of the cost benefit analysis is most of the benefits come from fewer cardiovascular related hospitalisation of the elderly and not from respiratory diseases among children.

I found the error was far more fundamental than a incorrect transfer of a calculation between tables discussed in the first publication by Harrison. I had to read the background documents several times to understand what had been done wrong.

The cost benefit analysis for the Warm Up New Zealand Heat Smart Programme assumes that the number of elderly occupants of the newly insulated house increases by one each year and after 5 years, one of these dies but is replaced by a new elderly occupant.

We have modelled the probability of a vulnerable person avoiding mortality as a result of the intervention. The probability of this is (112.7/1000)*0.27= 0.03 (3%). We treat avoidance of mortality by treatment in each year as independent events.

The multi-year benefit calculated above would accrue based on the life years gained as a result of deaths avoided in year one.

However, we would expect these benefits to accrue in year two for different vulnerable individuals (aged 65 and over with a cardiovascular related hospitalisation in previous 18 months), and for different individuals again in every subsequent year that the treatment continues to have an effect, i.e. an on-going stream of benefits of $1,050.74 per year. This assumes a constant proportion of people aged 65+ who have recently been hospitalised with circulatory problems….( p.38).

In the first year of the new insulation, the first occupant benefits and the net present value is included in the benefit cost analysis calculation – the erroneous benefit cost analysis calculations which its authors still defend.

In the 2nd year, another elderly person moves into that same house and the same calculation is done for them. In the following year, yet another elderly person moves into the same house and the net present value calculation is repeated.

By the end of 5 years, there are 5 occupants in this house all benefiting from the same insulation investment. In the 6th year, the first elderly occupant dies to be replaced by a new elderly occupant who then gains from the insulation upgrade.

There was double counting of the number of people who benefited from the insulation as Iain Harrison explains

The analysis assumed that there was not one, but five occupants who had been hospitalised with a cardiovascular illness in the previous 18 months in each of the relevant insulated houses. There should have been only one such occupant.

The retrofitting of insulation was estimated to cost $600 million. Iain Harrison estimated the benefits to be $300 million, not $1.2 billion. That is a benefit cost ratio of 0.5.


Source: Iain Harrison, The mortality reduction benefits of insulation: the error identified.

How much do you get paid if you can pick winners? @JulieAnneGenter @simonjbridges

Electric cars have joined the long list of mendicant mendicant businesses that have been backed by the New Zealand government of late. Picking winners again.

The payrolls of entire government departments in New Zealand are not enough to hire a single successful hedge fund manager to pick winners for their political masters. To get on the list of the top 25 hedge fund managers, you need to earn at least $300 million a year.


The 25 highest-earning hedge fund managers and traders made a combined $12 billion in 2015, slightly less than the $12.5 billion the 25 top-earning hedge fund managers together made in 2014.

Why do investment advisors sell and often give away their sage advice? If their insights were any good, they could trade on the share market before others caught on and make a killing!

I will give a personal example based on the skills of bureaucracies in picking winners. The test of my hypothesis is based on the transferability of human capital across jobs.

My graduate school professors in Japan included many retired bureaucrats from the Ministry of Finance and MITI. These agencies were heralded by Joe Stiglitz and others for picking winners and guiding Japanese companies to choose the right technologies and what to export.

The skills that my graduate school professors learned at picking winners over their careers with the Ministry of Finance and MITI in the high-growth years in the 1970s would now be available to them in their retirements to trade on their own account.

My graduate school professors should quickly become very rich after retiring because of the skills they learned in picking winners while at the Ministry of Finance and MITI, which should cross over into their private share portfolios. The rich lists world-wide should be full of retired industry and finance ministry bureaucrats.

Instead, my graduate school professors took the train and bus to work and their families lived off their salaries in standard sized Japanese government apartments. All looked forward to their annual bonus of 5.15 months salary.

If governments are any good at picking winners, people should be willing to pay big time to get jobs at ministries of finance and ministries of international trade and industry to get access to their unique and highly secret skills they learn therein on how to pick winners.

I am still waiting for that tell-all book by an insider on these skills. Why is there no Picking Winners for Dummies on Amazon kindle as yet?

Asymmetric Information and Used Cars

Does ethical investment pay? @JulieAnneGenter @jamespeshaw @RusselNorman

The Vanguard Investment Fund has set up an passive investment index to invest in ethical investments. No flies on them regarding entrepreneurial alertness.

The drawback of ethical investing is the higher management expenses to administer negative screens (to eliminate arms manufacturers and other frowned upon activities) and positive screens (to favour businesses with a good record on corporate social responsibility or that are involved in low-carbon industries etc.)

An index-linked passive fund allows socially conscious investor to have a diversified ethical portfolio at least cost. Vanguard pitches its ethical investing passive fund thus

Some individuals choose investments based on social and personal beliefs. For this type of investor, we have offered Vanguard FTSE Social Index Fund since 2000.

This low-cost fund seeks to track a benchmark of large- and mid-capitalization stocks that have been screened for certain social, human rights, and environmental criteria.

In addition to stock market volatility, one of the fund’s other key risks is that this socially conscious approach may produce returns that diverge from those of the broad market.

The expenses ratio of this index linked passive fund for socially conscious investors is 0.25%. The usual investment expenses ratio of a Vanguard Fund is 0.1% which is much less than that of active funds.

As is well known, ethical investing offers a poorer return on standard diversification strategies as the chart below show.


Source: The case against socially responsible investing (SRI) – Flannel Guy ROI.

Virtue must be its own reward because it does not pay off in the share market

As you can see value of $10,000 at the end of 10 years would be worth almost $24,000 with the total stock market ETF but only about $20,000 with the FTSE social index.

The initial reaction is that $4,000 over 10 years isn’t that big of a deal, but there are two things to point out.  First, that $4,000 difference is worth almost half the initial investment!  Secondly, on a compound annual basis, the SRI fund returns about 2% less than the total stock market fund.

Deirdre McCloskey and George Will discuss bourgeois inquality

Source: “Goldman Sachs Is a Public Service. Wal-Mart Is a Public Service.” Yes. – Cafe Hayek

Is the Future of Electricity Generation Really Distributed?

Does bad regulatory policy sow the seeds of better regulatory policy?

Knowledge Problem

Severin Borenstein asks whether growth of distributed energy is mostly an uneconomic response to regulatory dysfunction, and raises the question of whether uneconomic responses might lead to regulatory improvements. He doesn’t quite frame the issues quite like that, his post is somewhat exploratory in form, but I think this is the question he is aiming at. The questions point to some pretty interesting political-economy-of-regulation stuff, so let’s join Borenstein on the exploration.

In a post at the Energy Institute at Haas blog, Borenstein notes a conversation he had with a former student. The student, who he calls “Pat” in the post, agreed with Borenstein’s overall perspective that grid-scale generation is likely overall more efficient than distributed generation, even for renewable power, and that distribution generation only makes some sense in California because electric rates are so high for so many customers in the state. (Customers of the major regulated investor-owned utilities…

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Whither Conservatism?

Uneasy Money

sure why – well, maybe I can guess – but I have been thinking about an article (“Hayek and the Conservatives”) I wrote in 1992 for Commentary. I just reread it — probably for the first time this century — and although I can’t say that I agree with everything I wrote over 20 years ago, it somehow still seems relevant, perhaps even more so now than then. So I thought I would share it.

At the time of his death on March 23, 1992, less than two months before his ninety-third birthday, F.A. Hayek was widely if not universally acknowledged as this century’s preeminent intellectual advocate of the free market and one of its leading opponents of socialism. His death, coming so soon after the collapse of Communism in Eastern Europe and the abandonment of Marxism and socialism as intellectual ideals, occasioned understandable comment by his admirers about…

View original post 1,411 more words

Creative destruction in top ICT company pay

I am surprised to see that Yahoo is in business much less competing for top talent. Microsoft is in decline too. Apple does not pay people as much as everybody else.


Source: Paysa Company Rank | Paysa.

Some other colours seem to duplicate so you will have to work out which is which by when they exploded in hiring top talent.

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