Membership Has Its Privileges

The gang over at Marginal Revolution reports that

In February we reported on a new study showing that the stock picks of Senators, as revealed in their financial disclosure forms, outperformed the market by a whopping 12 percent. Insider trading anyone? Although it’s not clear whether any laws have been broken, Alan Ziobrowski, one of the study’s authors says “there is cheating going on, at a 99 percent level of confidence.”

The study is forthcoming in the Journal of Financial and Quantiative Analysis. There are a number of potentially exculpatory pieces of evidence, however. First, to what extent is this driven by a few outliers who did exceptionally well (think John Corzine)? I’d like to see median regression, in addition to the typical mean regressions (median regressions are less driven by outliers — Bill Gates standing in a room will have an extremely large effect on the mean income in the room, but a much smaller effect on the median income in the room.)

Second, is “outperforming the market” the right criterion? Specifically, do the wealthy in general do better than the median or average investor? I think a fair comparison group for the Senate is a randomly drawn set of individuals with similar levels of wealth. As they say, it takes money to make money.

Third, Marginal Revolution’s first post on the subject, from February, indicates that the sample is the “five years to 1998.” This was the early heyday of the dot-com boom, and it’s entirely possible that excess stock returns caused Senate membership, rather than the reverse. For example, Maria Cantwell and the aforementioned Corzine both ran basically as a form of consumption. Each had (or thought they had) more money than they needed and were looking for something else to do in life.

So I won’t condemn the Senate without reading the full paper, but on the other hand, Occam’s Razor supports Marginal Revolution’s more cynical take:

The SEC looked at the study but, surprise, surprise, it seems that they are too busy going after Martha Stewart to have the time to look into evidence that our leaders are using their political power and influence for personal gain.


P.S. The Marginal Revolution economists are basically libertarian (they might prefer Austrian or Hayakian), so you might be surprised by this compelling argument against Social Security privatization by Tyler Cowen. In a nutshell, all seniors know that society will not let them starve. Therefore, they will take excessive risks with their mandatory savings and seek spend the funds too quickly. Any solution to those twin problems will require more government interference and worse outcomes than leaving things basically as they are: welfare for the elderly. I agree.