Rich Man, Poor Man; Rich State, Poor State,,,

Marginal Revolution Continues to Bat 1000% This Weekend

Marginal Revolution: Rich Man, Poor Man; Rich State, Poor State: "Statistical Modeling, Causal Inference, and Social Science" is one of my favorite new blogs. It is primarily written by Andrew Gelman, a professor in the Departments of Statistics and Political Science at Columbia University.

A recent post looks at the difference between red and blue states and red and blue individuals. We all know that in the recent election poorer states tended to vote Republican while richer states tended to vote Democrat. On the basis of the famous maps many people jumped to the conclusion that poorer individuals were voting Republican (Nascar Republicans) while richer individuals were voting Democrat (trust fund Democrats). But the inference is a fallacy, the ecological fallacy. In fact, high-income individuals, as opposed to high-income states, vote Republican with greater likelihood than low-income individuals (the effect is not huge and it may be declining but it is significant).

It's even true that rich counties tend to vote Republican with greater likelihood than poorer counties. Gelman links to this graph which nicely illustrates the ecological fallacy. The three lines show that within each state higher-income counties are more likely to vote Republican but when you look between states the correlation between income and voting Republican is negative. (Click to enlarge)...

Comments

[Bernard Yomtov]

Nitpick:

You can't bat 1000%, or even 300%. If you get a hit every time, you bat 1.000, or "one thousand," or 100% if you insist on a percentage. A "three hundred" hitter hits .300.

[Glen Bowman]

Off topic, though at least in reference to (bad) batting averages, not necessarily entirely so.

This is in reference to the ubiquitous Donald Luskin, a former failed mutual fund manager (the Bob Eubanks of investing--BAD BATTING AVERAGE) who writes for the National Review online. Many of his writings on the economy are notoriously and hilariously usually wide off the mark. I know that this website (rightfully) picks on him every now and again, so I thought that this would be a good place to share his trading insights on how to manage a portfolio.

Luskin's recommendation, as per his MSN Money column at the close on Friday, is simple:

BET THE WHOLE KITTY--100% of his online portfolio--ON A RYDEX MUTUAL FUND THAT IN THEORY OFFERS TWICE THE RETURN OF THE NASDAQ 100. TWICE POTENTIAL REWARD, TWICE POTENTIAL RISK.

Now I agree with him that it is definitely better to buy after the worst market week in a while than to sell, and I will be buying tomorrow. But NOT all of my investment (risk) capital, and NOT in something roughly equivalent to the Nasdaq-100 on margin (minus margin interest). The market could go down (or up) Monday, but what if the market goes down two or three days in a row? With Luskin's system, a person could be down 10% before Wednesday.

People who tend to read MSN Money are not traders who know how to manage risk; they are working professionals who deserve more responsible advice than what Luskin provides. It is free advice, however, so I guess it is not entirely expected that it would be bad advice.

[Kaleberg]

While I realize that correlation does not imply causality, there is an implicit bias in stating that people in wealther states tend to vote Democratic. Why not say that states where people vote Democratic are wealthier?

There IS ample evidence that high tax rates, anti-business policies, intrusive regulation, union coddling, secular humanism and the like are associated with wealth creation because they result in a higher MEDIAN income which creates opportunities for investment.

While these views may be supported by data and theory, they are out of fashion, but it would be nice if they were dismissed out of hand.