I took a Computational Finance midterm over the weekend on Coursera. I’ve taken a few Coursera classes before — they had quizzes, problem sets, programming assignments, essays — but none of them had a midterm or final exam.

It’s the first academic exam I’ve taken in at least a couple of decades, and the first exam ever in which — because it was online — I was able to enjoy the company of my life partner, Wild Turkey.

Here’s my result:

I lost the one point on this question right here:

If you understand the question, it’s obvious which one of the four I missed, but it may not be obvious what the right answer is. It wasn’t to me, anyway.

My wife asks, “Did you see the grading curve?”

“No, but when you score 149 out of 150, you leave it to others to worry about the curve.”

One of the classes I’m taking on Coursera is Principles of Economics for Scientists, taught by Prof. Antonio Rangel at Cal Tech.

First of all, it’s a great class. Rangel has a real passion for the material and he’s provided extra resources to accomodate online students, many of whom probably don’t have the math background of the average Cal Tech student.

He’s from Madrid, so his pronunciations and mannerisms are different, like the gesture below, which I captured from one of the video lectures.

He was explaining how something or other would increase our understanding of economics and he punctuated the word “understanding” by pointing at his head with two fingers. I don’t know what this gesture means in Spain, or if it means anything at all. Probably he knows what it means in America, but as I said, he’s passionate about the material and I think he loses himself in what he’s saying.

He’s also one of the only two people I know who pronounce the word “subsequent” as sub-SEEK-went, the other being one of my work colleagues, who’s actually from this country and therefore has no excuse . . .

Health insurance companies across the country are seeking and winning double-digit increases in premiums for some customers, even though one of the biggest objectives of the Obama administration’s health care law was to stem the rapid rise in insurance costs for consumers.

— Despite New Health Law, Some See Sharp Rise in Premiums – NYTimes.com

That headline should not read “DESPITE new health law,” it should read “BECAUSE OF new health law.”

But we were going to get things for free! We were promised better things at a lower cost!

In my day, most of the citizens were farmers or merchants or tradesmen. They lived by their hands and their wits. They had horse sense and they knew when they were being sold a bill of goods.

Of course, that was before television.

Americans today are unfortunately rather stupid. Most of them don’t know anything about economics, science, history, government . . . as George Carlin says, “Think of how stupid the average person is, and realize half of them are stupider than that.” George is here in heaven now. He breaks me up, he really does.

Your president and Congress have decreed that every American will have health insurance whether they want it or not. They have further decreed that a lot of Americans will not have to pay for their own health insurance, which means that the cost of their health insurance has to be paid by the rest of you. That’s one reason why your health insurance premium is going up.

Another reason your premium is going up is the “guaranteed issue” provision. “Guaranteed issue” means that no one can be denied health insurance because of pre-existing conditions.

Funny story: My friend Paul Epps, his wife has an insurance agency in Southern California. It’s an area that’s susceptible to wildfires in the summer months. When a fire breaks out, people who live near the fire actually call this woman wanting to buy a homeowners policy.

Of course, she doesn’t sell it to them. Insurance companies are a little bit smarter than that.

Buying a homeowners policy when your house is already on fire is analogous to “guaranteed issue” health insurance: Hello, I’d like to buy some health insurance. Oh by the way, I have cancer, but the doctors think that with lengthy and expensive treatment, I have a chance to pull through.

This is not even insurance anymore. Insurance is something you pay for now to protect against the risk of having to pay a lot more later. In these cases, there IS no risk. The bad news has already happened. It’s a dead loss for the insurance company and they have to spread the cost of that loss to other policyholders. That’s another reason your premium is going up.

This isn’t even economics, folks, it’s just common sense.

Warren Buffett

In an op-ed for the New York Times, Warren Buffett argues that higher taxes won’t keep the super-rich from trying to make money:

Suppose that an investor you admire and trust comes to you with an investment idea. “This is a good one,” he says enthusiastically. “I’m in it, and I think you should be, too.”

Would your reply possibly be this? “Well, it all depends on what my tax rate will be on the gain you’re saying we’re going to make. If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent.” Only in Grover Norquist’s imagination does such a response exist.

— A Minimum Tax for the Wealthy – NYTimes.com

Really, Warren? It’s an investment, right? It’s not a sure thing. It’s not a giveaway. I’m being asked to put money at risk. That’s the difference between an investment and a savings account.

So the number one thing that I want to understand before making the investment is what kind of a net return can I expect — worst case, best case, most likely case. Then I can decide if I’m being adequately compensated for the risk that I’m taking on.

And by net return, I mean after taxes, after commissions, after everything. How much money will I actually get to keep? And if I don’t think I’m being adequately compensated for the risk, then yeah, I’ll leave the money in my savings account.

Assuming a tax rate of, say, 35 percent, why does it not make sense to say, “I would take that risk for an expected return of $X, but not for an expected return of 35 percent less than $X?”

Related Links

• Greg Mankiw’s Blog: A Master Of Tax Avoidance

Almost everything appertaining to the circumstances of a nation, has been absorbed and confounded under the general and mysterious word government. Though it avoids taking to its account the errors it commits, and the mischiefs it occasions, it fails not to arrogate to itself whatever has the appearance of prosperity. It robs industry of its honours, by pedantically making itself the cause of its effects; and purloins from the general character of man, the merits that appertain to him as a social being.

— Thomas Paine, Rights of Man (1792)

My fellow Americans –

You see how my friend Tom Paine, 220 years ago, perfectly anticipated — and rejected — your President Obama’s “You didn’t build that” quote.

Oh yes, we were aware of the “progressive” philosophy — that everything good comes from government — even then and we wanted no part of it.

By the way, I notice that liberals are now calling themselves “progressives.”

That’s good. The word “liberal” has lost its true meaning. Classical liberalism was based on “liberty” — from kings, churches and aristocracies.

Did you know that the great economist Milton Friedman did not call himself a conservative or a libertarian? He called himself a liberal, in the original sense of that word.

Progressives don’t believe in liberty. They believe in government as the new church and politicians as the new aristocracy.

What the market does is to reduce greatly the range of issues that must be decided through political means, and thereby to minimize the extent to which government need participate directly in the game. The characteristic feature of action through political channels is that it tends to require or enforce substantial conformity. The great advantage of the market, on the other hand, is that it permits wide diversity. It is, in political terms, a system of proportional representation. Each man can vote, as it were, for the color of tie he wants and get it; he does not have to see what color-the majority wants and then, if he is in the minority, submit.

It is this feature of the market that we refer to when we say that the market provides economic freedom. But this characteristic also has implications that go far beyond the narrowly economic. Political freedom means the absence of coercion of a man by his fellow men. The fundamental threat to freedom is power to coerce, be it in the hands of a monarch, a dictator, an oligarchy, or a momentary majority. The preservation of freedom requires the elimination of such concentration of power to the fullest possible extent and the dispersal and distribution of whatever power cannot be eliminated – a system of checks and balances. By removing the organization of economic activity from the control of political authority, the market eliminates this source of coercive power. It enables economic strength to be a check to political power rather than a reinforcement.

— Milton Friedman, Capitalism and Freedom

Via Cafe Hayek:

“If there is anybody at all who has a dream, then they can definitely make it happen,” she told WBTV. “There are no excuses. It depends on you and no one else.”

— Dawn Loggins: Homeless, Abandoned Teen Heads to Harvard – Yahoo! Shine

In his latest book, The Price of Inequality, Columbia Professor and Nobel laureate Joseph Stiglitz examines the causes of income inequality and offers some remedies. In between, he reaches some startling conclusions, including that America is “no longer the land of opportunity” and “the ‘American dream’ is a myth.”

— The ‘American Dream’ Is a Myth: Joseph Stiglitz on ‘The Price of Inequality’

I’m not a Nobel laureate (yet) but I can tell you that income correlates to things like education, skills and motivation. If you’re concerned about the inequality of your income, take the time you spend keeping up with fantasy football and reality television and invest it in learning and maintaining marketable skills, and see if your income doesn’t go up.

If you’re complaining about income inequality, and you have any idea who was voted off any reality television program in the last week, you need to pipe down and reexamine your priorities. Watch your programs if you want to, but keep in mind that you’re competing in the job market with people who are more serious than you are.

“It’s becoming conventional wisdom that the U.S. does not have as much [economic] mobility as most other advanced countries,” said Isabel V. Sawhill, an economist at the Brookings Institution. “I don’t think you’ll find too many people who will argue with that.”

— Harder for Americans to Rise From Lower Rungs – NYTimes.com

Jerry Buss

I’ll argue with it . . . the fact that people are not doing something doesn’t necessarily mean it’s a hard thing to do. Maybe people aren’t trying to do it. Maybe people don’t want to do it.

From Daniel Kahneman‘s Thinking, Fast and Slow:

A large-scale study of the impact of higher education . . . revealed striking evidence of the lifelong effects of the goals that young people set for themselves. The relevant data were drawn from questionnaires collected in 1995-1997 from approximately 12,000 people who had started their higher education in elite schools in 1976. When they were 17 or 18, the participants had filled out a questionnaire in which they rated the goal of “being very well-off financially” on a 4-point scale ranging from “not important” to “essential.” . . .

Goals make a large difference. Nineteen years after they stated their financial aspirations, many of the people who wanted a high income had achieved it. Among the 597 physicians and other medical professionals in the sample, for example, each additional point on the money-importance scale was associated with an increment of over $14,000 of job income in 1995 dollars!

In other words, one reason that people differ in their incomes is that some people care more about having a high income than others. People have different ambitions. Some people will gladly sacrifice things like family and leisure time for money and some people won’t.

Here’s an example of what it takes to be rich in America: Laker owner Jerry Buss spent so little time with his family when his kids were growing up that when he and his wife separated, they didn’t tell the kids, and it was five years before any of them noticed the difference.

True story.

Not everyone is willing to show a Jerry Buss level of ruthless disregard for their family in their pursuit of financial success.

I’ve spent a lot of time with my family. Jerry Buss owns a basketball team and I don’t. Good for him! I’ve lived my life a certain way and I could have lived it a different way if I’d wanted to.

A lot of Americans are self-absorbed morons whose principal activities are eating and watching television. The fact that these people are not shooting up the economic ladder doesn’t necessarily mean it’s a hard thing to do if you really want to do it.

Education not only increases the average income a person will earn, but it also changes the entire distribution of possible life outcomes. It does not guarantee that a person will end up in the top 1 percent, but it increases the likelihood. I have not seen any data on this, but I am willing to bet that the top 1 percent are more educated than the average American; while their education did not ensure their economic success, it played a role.

Let me give you a couple examples. I am comfortably in the top 1 percent. I believe that Paul [Krugman], with his Princeton professorship, regular Times column, speaking fees, and moderately successful textbook, is there as well. I suspect (although cannot prove) that if he and I had stopped our educations after finishing high school, we would not have been anywhere near where we are in the income distribution. If that is correct, might it be better to think of education as the key rather than focusing on the growing influence of oligarchs?

— Greg Mankiw

Here is a fact that you might not have heard from the Occupy Wall Street crowd: The incomes at the top of the income distribution have fallen substantially over the past few years.

According to the most recent IRS data, between 2007 and 2009, the 99th percentile income (AGI, not inflation-adjusted) fell from $410,096 to $343,927. The 99.9th percentile income fell from $2,155,365 to $1,432,890. During the same period, median income fell from $32,879 to $32,396.

These recent numbers illustrate the broader phenomenon, discussed in this paper, that high-income households have riskier-than-average incomes.

— Greg Mankiw’s Blog: The Rich Get Poorer

Our analysis paints a sobering picture of worsening public debt dynamics and a sharply rising debt burden in advanced economies (AEs). But perhaps the worst is yet to come. First, AEs as a group are experiencing little population growth. Second, they are facing rapidly aging populations. Third, their economies are likely to register slow growth . . . Fourth, entitlement spending on health care and pensions is likely to explode due to unfavorable demographics.

— The Rising Burden of Government Debt – Brookings Institution

Bill Clinton: “Do you know how many political and economic decisions are made in this world by people who dont know what in the living daylights they are talking about?”

The social fabric is fraying. Human capital is being squandered. Society is segmenting. The labor markets are ill. Wages are lagging. Inequality is increasing. The nation is overconsuming and underinnovating. China and India are surging.

—David Brooks, New York Times

Point taken. But other than that, things are going okay, right?