The Five Dumbest Things on Wall Street This Week - TheStreet

1. I Dream of the Gini Index

We at the Five Dumbest Things Research Lab hate to go all antiacademic on you, but here's a little advice: The next time you see a statistic in the newspaper, don't believe it. It's wrong.

OK, OK. That's overstating our case a little. It's not necessarily wrong. But it's not right, either.

Exhibit A: The 2002 household income figures released last Friday by the U.S. Census Bureau.

The takeaway from the report, as you may have read in

The Wall Street Journal's

Monday account, was that the poverty level rose, but income inequality didn't, because rich folk's income took a beating, too.

But something further down in the write-up caught our eye. "Difficulties in recording seven-figure incomes," reported the

Journal

, might have resulted in underreported income among the wealthiest Americans.

In other words, the rich may be richer.

That's odd, we thought. People pay a lot of attention to these annual income-disparity figures. How come no one's getting worked up about inaccurate data from such a key segment of the surveyed population? This can't be true.

We called up Edward Welniak, chief of the Census Bureau's income survey, to check.

What's Mine Is Mine

Indeed, there are difficulties with high-income data, Welniak told us.

Here's why: Starting with the 1993 numbers, the bureau's staff -- which interviews a sample of 78,000 households for the income survey either in person or over the phone -- has been entering people's responses directly into portable or desktop PCs. As part of the survey, respondents are asked to report how much money they made the previous year from numerous sources -- stuff like the job held the longest, interest and dividends.

And here's the catch: In each category, the highest dollar amount one can enter is $999,999.

So let's say a Census employee had dropped by the $15,000-umbrella-stand-festooned apartment of ousted

Tyco

(TYC)

Chairman Dennis Kozlowski in 2001. And let's say the then-executive wanted to report the $50 million or so in undisclosed compensation the

Securities and Exchange Commission

says he received in 2000.

Well, Kozlowski couldn't have done it. The Census would have recorded his salary at a mere million bucks.

"The fact that we're not recording the full dollar value is going to understate the share of income controlled by households at the highest levels," says Welniak.

But, says Welniak, there's a good reason for capping monetary entries at six digits: It limits the potential for error. One extra digit at the high end, and you're talking about, say, a $9 million paycheck instead of a $900,000 payout. Errors at the high end of the income scale have a much larger impact than errors at the bottom. The increased accuracy introduced by more possible digits, says Welniak, would be more than offset by the decreased accuracy from newly enabled errors.

Welniak has even investigated the exact effect of rounding all multimillion-dollar income sources down to a megabuck. According to his analysis of numbers from 1999 -- a year for which 26 respondents reported employment compensation of at least $1 million in at least one category -- data-entry limitations effectively understated income inequality by 1%, using a standard measure of income distribution known as the Gini Index.

But, given that the error appears to be constant year after year, says Welniak, "Measuring changes in income inequality from one year to the next is not going to be affected." In other words, ignore the absolute number and look at the trend.

Mindful of that, we point out that over the past decade, the Census Bureau's Gini Index has been creeping upward -- implying increased income inequality. Starting at 45.4 in 1993, it peaked at 46.6 in 2001 but retreated to 46.2 last year. (For purposes of comparison, the United Nations Development Program -- which puts the U.S. at 40.8 -- says Japan is a 24.9 and Brazil is a 60.7.)

In fact, someone has gotten worked up about the low-balled high incomes: the Center on Budget and Policy Priorities, a D.C.-based research group. The CBPP has been complaining about the Census data for years, griping not only about the $999,999 cap but also about the Bureau's exclusion of capital gains from household income.

"The census data has useful information," says Isaac Shapiro, a CBPP senior fellow. "But at the high end, it's not useful."

Based on Congressional Budget Office data, the CBPP says the average household after-tax income in the top 1% of the population tripled from $286,000 in 1979 to $863,000 in 2000, while the lowest fifth of the population saw household income rise a mere $1,100 to $13,700 over the same time period.

Put that in your Gini Index and smoke it.

2. Might as Well Face It, You're Addicted to Money

So much going on this week. Former Credit Suisse First Boston banker Frank Quattrone goes on trial. John Reed takes charge at the

New York Stock Exchange

. Rock star Robert Palmer dies. Ex-Tyco chief Dennis Kozlowski goes on trial. It's too much for one person to follow.

Yes, as this screen shot from

Yahoo!

(YHOO)

News indicates, it's hard to keep all the stories straight.

You Like to Think That You're Immune to the Stuff
It's closer to the truth to say you can't get enough

But this multimedia convergence of Robert Palmer and Dennis Kozlowski does make us wonder. Given the choice, would you rather have a grand and glorious time as a rock star in a cool suit, and then die at the age of 54? Or would you rather have a grand and glorious time as an allegedly larcenous CEO of a multinational corporation, and then go to jail at the age of 56, your legacy sealed as one of the most notorious greedheads of the turn of the century?

As Palmer once sang, "You can't sleep. You can't eat. There's no doubt. You're in deep."

Napster Nation

3. Research and Destroy

But back to the foggy landscape of scientific studies.

This time around, the subject is the Recording Industry Association of America's decision to start suing individuals for unlawfully sharing copyrighted music over the Internet. The trade organization filed 261 separate lawsuits against alleged pirates on Sept. 8, and promised it was just getting started.

Does the RIAA bask in the glow of a supportive public? Or are its assertions of intellectual-property rights being ignored?

Yes, and yes, apparently. Of course, it depends whom you talk to. And when.

Let's start with the RIAA. Only two days after its first round of lawsuits, the RIAA issued data that it characterized as "belying speculation that the recording industry's aggressive legal strategy might result in a consumer backlash."

According to a survey conducted for the RIAA by Peter D. Hart Research Associates, 52% of Americans were supportive and understanding of the RIAA's courtroom tactics, while 21% were unsupportive and negative.

The research lab -- which the RIAA supplied with detailed information about the relevant question and its answers -- has a few observations to make here.

First, if you look at all the different ways the RIAA slices the data -- age, race, education and Internet usage, for example -- you find that the least supportive demographic group by far is people from the Northeast. Which, we suppose, confirms the rest of the nation's suspicions about the low moral character of city folk Back East. Or Up North, as the case may be.

Second, as you'd expect, teens and young adults are less supportive of the RIAA than are their elders aged 30 to 64. But, we were surprised to see, support plummeted back to teen-age levels if respondents were 65 or older. So it's true: People do mellow in their old age. Or maybe the RIAA just ended up talking to a bunch of doting grandparents.

Finally, we note that the RIAA's survey was conducted

before

it filed its 261 lawsuits -- and before newspapers started sensationalistic stories about defendants like Brianna LaHara, a sympathy-inducing seventh grader from New York who settled the RIAA's suit for $2,000.

It's one thing to be supportive and understanding when a pollster asks you how you feel about the RIAA "gathering evidence and preparing lawsuits against individual computer users who are illegally sharing substantial amounts of copyrighted music online." (That's a quote from the RIAA poll's script.)

But it's a whole different matter when you're asking people to applaud more vividly described, explicit actions by the RIAA, such as its lawsuit -- subsequently dropped -- against a retired schoolteacher who says the RIAA erroneously accused her of sharing Snoop Dogg files.

We suspect that the postlawsuit news flow has had some sort of effect on public support, but the RIAA doesn't have any postlawsuit research yet, says a spokesman.

Fast-forward to the recent Gallup Poll Tuesday Briefing data, which, like the RIAA's research, was gathered in prelawsuit days. Earlier this year, Gallup found that roughly the same percentage of teen-agers admitted to cheating on a test or exam (48%) as said they downloaded music from the Internet (47%) -- presumably illegally, given the limited legal options at the time.

Yet when asked about the morality of these activities in August, teen-agers saw a huge divergence. "Next, I'm going to read you a list of issues," went the script. "Regardless of whether or not you think it should be legal, for each one, please tell me whether you personally believe that in general it is morally acceptable or morally wrong." Only 18% said cheating on tests was morally acceptable. But "downloading music from the Internet for free"? Eighty-three percent said it was OK. In fact, teens found free downloads more morally acceptable than they did divorce, gambling or nonmarital sex between a man and a woman.

So will there indeed be a consumer backlash against the litigious record industry? Our speculation is not yet belied.

4. Precursors. Foiled Again.

And this week's puzzling name change award goes to the folks formerly known as The Precursor Group -- a Washington, D.C.-based independent investment research firm.

According to an announcement issued late last month, The Precursor Group has changed its name to Precursor.

Which leads the research lab to ask, where did everyone else go? Is there only one of you guys left?

Absolutely not, responds Precursor Chief Executive Scott Cleland. In fact, he says, Precursor has grown from seven analysts when it was launched three years ago to about 17 today.

So if the team is getting bigger, why make it sound smaller by dropping the Group?

"It increases simplicity and clarity of our brand," says Cleland. "Just like no one says

Delta Air Lines Inc.

(DAL) - Get Report

. They're referred to as Delta.

United Airlines

is United."

Avoiding snide remarks about airlines being grateful that anyone calls them at all, we asked Cleland what he was precursing these days.

"We're questioning the growth expectations for

Cisco

(CSCO) - Get Report

," he says. And, he adds, "We do not believe telecom is anywhere near bottoming."

Which reminds us: We at the Five Dumbest Things Research Lab are changing our name. But we still haven't decided between Dumbest and Things.

Pray for Those Short
Deliver us from triple witching

5. Stock and Awe

Finally, someone out there wants you to pray for your stockbroker.

No, it's not your stockbroker.

The U.K.-based Industrial Christian Fellowship,

Reuters

reported last week, is distributing prayers for people in the financial world, posting them on its Web site under the headline, "When did you last pray for your stockbroker?"

Initially, the whole thing struck us as a hoax, especially because we couldn't find any corroboration to the story on the ICF's Web site -- no prayer there, nor mention of any John Raymond, the ICF "executive member" quoted in the

Reuters

story.

Eventually, though, we managed to find online traces of a John Raymond who ran a workplace outreach program for the Church of England's Diocese of Peterborough. Back in early 2001, Raymond published one such financial market prayer. We quote in part:

Father God:

We ask your blessing

on our economic world:

Bless those in government and banks

especially those affecting poorer countries

Give them an understanding of economic forces

and the mechanics of wealth creation;

that they may produce

laws, regulations and practices

which give freedom for people

to create wealth,

but benefit all

especially the poor.

Amen.

From your mouth to John Reed's ears.