The Laboratorium
April 2004

Individual Investors Do Worse


There’s a Slate story up reporting on a recent study showing that when individuals are given investment freedom, they make crappy choices:

Over the last 20 years, the stock market has averaged a 12 percent annual return. But according to a study by Dalbar Financial, individual mutual fund investors earned only about 4 percent. A survey by Vanguard finds participants in its 401(k) plans earn only about one-half the average�6 percent a year. It is almost impossible to believe, and unpleasant to contemplate, but practically all individual investors are below average.

This point is not entirely new. We’ve known “forever” that individual fund managers tend to underperform the market; it’s one piece of the large package of related observations that make up the Efficient Markets Hypothsis Extended Remix. The article itself gets even deeper into the ironies of the situation, all of which seem to track quite closely post-EMH conventional wisdom that the smartest thing you (as an individual) can do is diversify and then leave your portfolio untouched. Anything else is uncompensated risk.

What the study adds, I think, is empirical evidence that indvidual investors haven’t absorbed this learning. They underdiversify; they churn. The result is that people with great freedom in their investment choices can be expected to do much worse, on average, than people whose investments are made for them.

In short, we’re looking at one of those places where liberal economic theory just plain goes off the rails: people tend to be better off when they’re deprived of a certain kind of freedom. What to do about it is an ugly, ugly question. The paternalistc answer would be to say that we shouldn’t be allowed make our own investments: professionals should be appointed to run them for us.

But that answer’s not acceptable, for various reasons. There’s the libertarian reply, that you can’t morally deprive someone of freedom just because they’ll use that freedom in a way that hurts only themselves. There’s the entreprenuerial reply, that it’s unfair to deprive those people who can beat the market of the chance to do so, just because others are not so wise. And there’s the managerial reply, that the only reason we have a market that works so well is that investors have autonomy.

Of course, none of these replies is conclusive; we can go through a whole process of rejoinders and rebuttals and so on and so forth. The anti-libertarian might observer that we deprive children of the freedom to make bad choices; the anti-entrepreneur will point out that under the EMH, the market-beating enterpreneurs are merely extraordinarily lucky, not extraordinarily skilled; the anti-manager will observe that there are other techniques (e.g. elections) for constraining managers other than the freedom to uninvest. The debates are endless.

Fun with Citations


Spotted this one in the footnotes of Mueller and Kirkpatrick’s Evidence treatise:

See Bates v. Newmann, 121 Cal. App. 2d 800, 264 P.2d 197, 201 (1954) (trial court properly refused plaintiff’s offer to demonstrate to jury his ability to hold an erection).

Now, that’s pretty interesting. But one of the things you pick up between the lines here in law school is never to trust someone else’s summary of a case. So I looked it up, and lo — here is the relevant passage from the opinion:

Third: Did the trial court err in refusing to receive in evidence as part of plaintiff’s rebuttal two color slides of the plaintiff’s penis in erection, which slides had been in the possion of plaintiff during plaintiff’s case in chief?

No. Plaintiff urges that such slides were admissible upon the theory that they were proper rebuttal of the testimony of Doctors Crane and Zukor, stating in his brief:

Until this testimony (Crane and Zukor) came in on defendant’s case, the plaintiff had nothing to rebut in connection with the question of the downward slant of his penis upon erection and the inability by reason thereof to have normal intercourse, and the effect of the abdominal apron, if any, on the penis in erection. The necessity to rebut such testimony came about at the close of defendant’s case.

In advancing this argument plaintiff acknowledges the testimony of his own witness, Dr. Sloan, on cross-examination wherein he stated that it would be impossible for plaintiff to observe his genitals when standing up due to the fatty abdominal apron. Without objection Dr. Sloan stated that he examined plaintiff and his notes revealed the following:

Patient in the office. Examination of the penis shows complete healing and the patient has more shaft exposed than he ever had available for intercourse before surgery. Whether his personal anatomical conformation will permit his insertion of penis for intercourse is a doubtful matter to me. The size of his abdomen most likely would prevent this accomplishment.

Dr. Sloan further testified:

“The Court: … Do you mean the position of the abdomen was such that it would rest on the penis when erect, if he were standing?

“The Witness: There is no speculation in my mind about that. The weight of the fat apron of the abdomen would depress the erect penis in a downward direction.”

The foregoing testimony was received during the presentation of plaintiff’s case in chief. Therefore there was evidence prior to the testimony of the two defense witnesses, Doctors Zukor and Crane, relative to the inability of plaintiff to have intercourse due to his abdominal apron.

The law is established that one who has the affirmative of an issue may not reserve a portion of his evidence until an opposite party has exhausted his evidence to negative that offered in the first instance. If he does so the court may refuse to allow him to introduce additional evidence on the subject after defendant rests. ( Lipman v. Ashburn, 106 Cal.App.2d 616, 620.)

There is likewise no merit in plaintiff’s contention that the trial court erred in refusing plaintiff the right to demonstrate to the jury his ability to sustain an erection. Such evidence was merely cumulative of evidence previously received. It is within the discretion of the trial court whether or not to receive cumulative evidence. ( Code Civ. Proc., � 2044; Kalmus v. Kalmus, 103 Cal.App.2d 405, 423 (hearing denied by the Supreme Court); Moore v. Marshall, 41 Cal.App.2d 490, 494.)

Now, the point for which M&K cite this case is the “subject to decorum and decency” piece of:

Courts are particularly likely to allow displays of real evidence such as physical injuries, wounds, scars, tattoos, and other relevant physical attributes, subject to standards of decorum and decency.”

Thus, the parenthetical in the citation is misleading in two completely opposite ways. On the one hand, the legal rationale for excluding the display was not because it offended notions of “decorum and decency” but because it was an unnecessary repetition of evidence already available. Citing the case for “decorum and decency” concerns seems to involve some measure of guesswork about the court’s “real” reason, rather than its stated one.

On the other hand, the facts of the case—think of that “fat apron of the abdomen”—are even worse for “decorum and decency” than M&K’s bald citation would suggest.

Too Much Time on This Paper


… fighting uphill against a rising tide.

I just wrote these words. What’s more, I’m leaving them in.

Some Tax Help


A reader better-versed in tax law than I responds to my suggestion that copyight’s useful life for purposes of depreciation deductions be tied to its duration by point out that it already is:

Regarding your below post about depreciation of intangibles: acquired patents and copyrights are, in fact, generally depreciated over their terms (i.e., their useful lives). Treas. Reg. sec. 1.167(a)-14(c)(4). (There is also another way to depreciate them, called the “income forecast method,” that tries to take into account the fact that their value may actually be frontweighted. Sec. 167(g). And self-made patents are immediately deductible, as R&D expenses. Sec. 174(a).)

Patents and copyrights are section 197 intangibles, and thus subject to fifteen-year straight-line depreciation, only if they are acquired in in a transaction involving the acquisition of assets constituting a trade or business. Sec. 197(e)(4)(C) (excluding patents and copyrights acquired separately from the definition of “section 197 intangible”). The IRS’s concern here is that taxpayers would try to game the system when purchasing a bunch of intangibles (as in the purchase of a trade or business) by allocating value so as to produce greater depreciation deductions. The IRS solves the problem by lumping all intangibles together. When there’s not that risk, as noted above, they do try to have amortization of patents and copyrights reflect their terms.

This is actually rather sensible. There are places in which the tax law doesn’t make much sense, but as I’ve been learning, there are also places in which it does.

But Worth It


I’m puzzled by this story at CNN:

Nearly half the Iraqis polled in a survey conducted primarily in March and early April said they believed the U.S.-led war had done more harm than good, but 61 percent of respondents said Saddam Hussein’s ouster made it worth any hardships.

Further down, the story says that “nearly half” means 46 percent. Doing the math out, at least seven percent of the Iraqis answering the survey believed both that the war did more harm than good and that the war was worthwhile.

Whatever that seven percent may be, they’re not utilitarians.

Not a Place of Honor


This place is not a place of honor.
No highly esteemed deed is commemorated here.
Nothing valued is here.
This place is a message and part of a system of messages.
Pay attention to it!
Sending this message was important to us.
We considered ourselves to be a powerful culture.

— Expert Judgment on Markers to Deter Inadvertent Human Intrusion into the Waste Isolation Pilot Plant (gigantic PDF, excerpts) (via NTK)

Punch-Drunk Footnoting


I’m revising my paper on virtual worlds. In order to make the point that the rules of any game are in part constructed by the players, I decided to point out that most people play common household games with rules that deviate from the “official” rules. So I started to drop a footnote on Monopoly, and wound up with the following monster:

Most people play with money under Free Parking, dumping yet more money into an already highly inflationary game. One is led to wonder whether the use of the phrase �Monopoly money� as a term of derision stems in part from the powerlessness of the game�s central banker to tighten the money supply.

Yet Another Useful Discovery


My CD player works just fine with two CDs stacked on top of each other.

This feature comes in handy when I forget there’s already a CD in there.

Collapse, Boom


If we went into stores only when we needed to buy something, and if once there we bought only what we needed, the economy would collapse, boom.

— Paco Underhill

Paging Dr. Scrivello


Just got back from the dentist: that was probably the shortest cleaning I’ve ever had. It says something sad about my history of dentistry that my first reaction when the hygenist sat the chair back up and told me I was done was to wonder about her competence. But no, the dentist himself also gave me a clean bill of health.

I wonder if he’s losing it, too.

Kings of Kings


Poor man wanna be rich
Rich man wanna be king
And a king ain’t satisfied
Till he rules everything

— Bruce Springsteen

It’s the kind of place that makes a bum feel like a king.
And it makes a king feel like some nutty, cuckoo, super-king.

— The Simpsons

Universal Advice Column Letter


From Salon’s main page, this summary:

I was put on earth to be a writer but I’m struggling with a deep lack of motivation. How can I get over it?

Death’s-Head Demon


A well-formed young woman cavorts through a palazzo, wearing nothing but heels, lingerie, and a pair of outsized, feathery wings. At intervals, we cut to a shot of some sort of death’s-head demon, who looks poised to bite into the pretty youth’s skull, perhaps to suck on the marrow of her soul and prolong his undead half-life. Wait � stand by � I’m now being told that this creature is in fact Bob Dylan.

Seth Stephenson

Bathroom Wall Thoughts


Sticker: “Support AIDS vaccine research!”

Graffiti next to sticker: “Basic research saves lives!”

Only at a university, I suppose.

Self-Defeating Spam


Just got an email claiming to be from “Terrorism” whose subject line said, “have any trouble with health ? we may help you… more.”

Uh, no, I don’t think that would help, actually.

One for the Hive Mind


Mostly out of curiosity, I am trying to track down a computer game that I very vaguely remember from years and years ago. I don’t remember the name of the game. I’ve never played it. I saw it in a computer store once. Once.

For reasons I can’t remember, I had tons of time to inspect the game. Also for reasons I can’t remember, I was able to read the entire manual. My best guess is that it was a display copy (no floppy in the box) and that my parents were engaged in some other computer-related purchase that required extensive consultation with a salesdroid.

Anyway, I think it was set on a space station. Your character has been betrayed, maybe, and is currently in jail. Maybe. You have to run around the space station, evading security, gathering information, and doing, er, stuff. I believe that the game presented a side-on view: your character could run around, jump (or climb?) from floor to floor, talk to various characters, and, er, do stuff.

The distinguishing characteristic of the manual was that there were various classes of people and special locations, of which not all were good. Thus, there were three bartenders (maybe) on the station, of whom two could be trusted. “To find out which,” the manual would say, “turn to page XX,” where XX was some two-digit number. There were other such things — spaceships? merchants? I don’t remember — and in each case, the manual would say that page XX would tell you which were trustworthy. Page XX itself was blank.

I remember being intrigued by this setup, although the game itself looked like it wasn’t very much fun. The only other thing I can remember is that I was also looking at a copy of Infocom’s Suspended at the same time (I think), which suggests a rough timeframe: definitely not before 1983, and very probably not after 1989. (That’s the interval between when Infocom released Suspended and when Infocom went belly-up.)

I know this is a real long shot, but still: does anyone remember such a game?

Update: while searching through Home of the Underdogs, I did find Sub Mission, another game I never played, but whose box I remember. This was the one whose gimmick was that you could play as many times as you wanted in “practice” mode, but which, if you lost while playing for “real,” would delete one of the hostages you were trying to save from the disk. It was an early—and profoundly misguided—attempt at permadeath in computer games.

Professional Responsibility in a Nutshell


The basic premise of a professionalized legal system is that people need lawyers to represent them. The basic duty of a lawyer’s relationship to a client, then, is that the lawyer act in the client’s interest in bringing the client’s legal issues to a positive resolution. The basic term used to describe this duty is “zealousness.” There are other duties, such as confidentiality, but these are in some sense secondary: a lawyer who violates them may be a bad person, but not per se a bad advocate. The duty of zealous representation is the truly fundamental one.

My book on professionall responsibility spends a chapter talking about “Zealousness and its Limits,” but that name is something of a misnomer. In fact, the chapter is only about the “limits.” Lawyers must not represent their clients’ interests by bringing frivolous claims; lawyers must not represent their clients’ interests by buying off jurors; lawyers must not represent their clients’ interests by keeping secret information requested by the other side during discovery. And so on and so on. All that most discussions of “professional responsibility” seem to care about when zealousness is on the table are the times when zealous representation comes into conflict with other goals of the legal system.

But what of the other side of the coin? What of the lawyers who sleep while their clients are sentenced to death? What of the lawyers who bungle routine estate plans? What of the lawyers who misunderstand basic tort law and turn away potential clients with winning claims? These things happen every day; every day lawyers are sued for malpractice. They too are failures of zealousness—and its close cousins, competence and diligence—but they merit barely a page in my textbook.

Where failures of lawyers duties to their clients do arise is under the heading of “loyalty”—all those questions that give rise to conflicts of interest in one shape or another. But I think it says something quite striking about lawyers—and about those who think about the ethics of lawyers—that the only situation under which one sees sustained discussion of the failures of lawyers to work zealously for their clients is when there is someone else in the picture in whose interest the lawyer is working.

On Fallujah


What happened in Fallujah yesterday strikes me as a form of evil for which we have a name: lynching. The hanging and mutilation, the angry mob backing up a few direct murderers, the undercurrent of paranoia and rage—all feel disturbingly familiar. This is mob rule, this is hatred of the other, this is the same sort of symbolic violence with which the Deep South rumbled.

All of which makes discussion of the “reconstruction” of Iraq darkly ironic.

Copyright Depreciation


According to the IRS, copyrights are worthless after fifteen years. They’re included in the definition of “Section 197 intangible[s]” by clause 197(d)(1)(C)(iii) of the Internal Revenue Code. Such intangibles are depreciated over a fifteen-year period.

I don’t know how much depreciation of copyrights really matters for tax purposes, but wouldn’t it be more appropriate if the depreciation schedule were tied to the length of a copyright term? If the content industries really want to claim that their copyrights are valuable for umpty-skeezix years, why shouldn’t they be forced to live with that definition of “useful life” for tax purposes and space out their deductions over the full term?

While writing the above, I needed to look up the right name for a fifth-level subdivision (not even counting the fact that the full U.S. Code is divided into “titles,” of which the Internal Revenue Code is but one). The sequence, according to the House DTD, is:

  1. Section
  2. Subsection
  3. Paragraph
  4. Subparagraph
  5. Clause
  6. Subclause
  7. Item
  8. Subitem

The implication would appear to be that, as prolix as our laws may be, we have not yet broken through the subitem barrier of complexity.