Friday, October 31, 2008

Taleb and Mandelbrot on chain reactions in financial markets

The video of their interview on The News Hour is here, although I don't highly recommend it, there are probably better ways to spend a precious 10 minutes. I mainly listened to it to get a sense of how Taleb behaves in real life after just reading his book Fooled By Randomness. He talks abhorrently slowly, is dressed casually enough to play a game of stick ball, and his points are remarkably intelligent.

Both Mandelbrot (the founder of fractal theory) are Taleb are persistent in pointing out that they don't know what will happen, because they don't have enough information. This is not a sexy talking point and it does not sell newspapers or attract click-through readers. But it is a refreshing point in a world striken with hindsight bias.

My prediction is that ten years from now the WSJ will be filled with in-depth articulations of why the investment banks crashed and why banking consolidation turned out to be so risky. It will all seem so simple then. A note to my future self: it wasn't.

Thursday, October 30, 2008

Lackluster Sashi McEntee search results--is google bombing to blame?

When voting on my absentee ballot, I came to the choice between Sashi McEntee and Mark Leno for state assembly, and I was hopelessly uninformed. So I did what any internet-literate citizen in the 21st century would do, and googled both of their names.

The results for Mark Leno were fairly impressive. He has a well-designed website and even a Wikipedia page of his own. Sashi McEntee's first result is her Facebook page and the second result is her LinkedIn profile. That is embarassing. Is she planning to post status updates on the bills she authors?

But then a more sinister explanation came into my head. Had she been google bombed? Google bombing is where individuals aggresively cross-link to a certain site in order to increase it's SEO for a very specific term. You can read up on funny some examples of it here. What if search terms for "Sacha McEntee" had been googled bombed to turn up her Facebook page?

Most political google bombs lead to somewhat partisan op-eds, so linking to her Facebook page would be a more subtle tactic. It doesn't blatantly discredit your opponent, it just makes them look unprofessional.

Anyways, kudos to Leno supporters if this is the case, it certainly worked on me. And if this isn't the case, then you should be ashamed of yourself, Ms. McEntee.

Wednesday, October 29, 2008

The failed blog post series continues

Ben wrote yesterday about the process of creativity and how you must shut down your self-censorship and churn out lots of bad ideas in order to achieve a few good ones. With that in mind I am going to continue my failed blog post series from last year. As always, these are the ideas that never made it off the drawing board.

Failed Blog Post: "The Virtue of a Bad Halloween Costume." The idea was that if you have a bad costume, you make your friend's costumes look better and thus they feel better about themselves. Since we are all competitive, it is an altruistic act to place yourself below the average. Then I realized I was formulating an intricate argument in favor of socialism and almost threw up on my keyboard.

Failed Blog Post: "Having Heroes." This was supposed to be about how many of my friends have "heroes", but I do not. Yet before I posted it I read One Hundred Years of Solitude, and now I want to be Gabriel Garcia Marquez. I don't even know why, really.

Failed Blog Post: "The Double Major Fallacy." Many people who are double majoring act like it's such a big deal, emphasizing the and between listing their majors and often rolling their eyes slightly. But why is this such a good thing? Sure, you have slightly more specialization, but you give up a lot in terms of diversity, and you still need the same number of credits to graduate. But then I realized that this might only be the case at Vassar and probably doesn't translate well to other colleges.

Failed Blog Post: "The Flaming Lips." I was going to start with the Osama Bin Laden quote that "music is the flute of the devil," and then segue into discussing why The Flaming Lips are my favorite band. But I've consciously decided to not post too much about music--I don't want to go down that road.

Monday, October 27, 2008

Non-Great Depression parallels to the current financial crisis

The tenacious Barry Ritholtz recently linked to a NYT article (careful it's a PDF) from 1911, analyzing the Great Panic of 1873. The article is written by Roger Babson, the "well-known statistician," and if nothing else the language is enthralling. Sadly, people just don't use words like "herewith" and "promptitude" anymore. His general argument is compelling too,
In fact, a study of history shows me that the public always forgets that our business epochs are as natural as the tides of the ocean, and they continually endeavor to change conditions by tinkering with the tariff or legislating against the railroads, or making some similar unintelligent move... Throughout the country's history, this has always been practiced, although such legislation has almost invariably resulted in making the situation worse than it was before.
The obsession over comparing the current crisis to the Great Depression troubles me. While it is no doubt an important case study, it's foolish to draw so many lines through this one data point. This is especially true because so many of them lead us somewhere grafted from the book of Revelations.

There's nothing wrong with incorrect predictions, but if overinflated expectations lead us to rash action it could spell trouble. History does not favor those who do something merely for the sake of doing something.

Sunday, October 26, 2008

Two theories of laughter

The first is by author Robert Heinlein in his 1961 sci-fi novel A Stranger in a Strange Land,
I've found out why humans laugh so much. They laugh becuase it hurts so much... because it's the only thing that'll make it stop hurting.... I looked at a cageful of monkeys and suddenly I saw all the mean and cruel and utterly unexplainable things I've seen and heard and read about in the time I've been with my own people--and suddenly it hurt so much I found myself laughing.
The next comes from neurologist V.S. Ramachandran's A Brief Tour of Human Consciousness,
I would argue that laughter is nature's way of signaling that "it's a false alarm." Why is this useful from an evolutionary standpoint? I suggest that the rhythmic staccato sound of laughter evolved to inform our kin who share our genes: don't waste your precious resources on this situation; it's a false alarm. Laughter is nature's OK signal.
Every armchair philosopher and his mother has a unifying theory that will explain all laughter. Heinlein and Ramachandran are by no means armchair philosophers, but I think they may be falling victim to the same syndrome.

These two particular theories are irreconcilable because they both claim to be the sole cause of why we laugh. Laughter may indeed have arisen evolutionarily for one particular reason, but it's highly likely that laughter was subsequently co-opted evolutionarily and culturally for other purposes. Why do we insist on rampant reductionism for every phenomenon? Can't we all just get along?

Saturday, October 25, 2008

Spending our time in worlds that don't exist

Paul Bloom has a fascinating article in the most recent issue of The Atlantic that touches on libertarian paternalism, behavioral economics, pigeons, Walt Whitman, and gambling addiction. One of the most interesting sections is where he discusses how much time we spend in existences we know to be not real,
... The most common leisure activity is not sex, eating, drinking, drug use, socializing, sports, or being with the ones we love. It is, by a long shot, participating in experiences we know are not real—reading novels, watching movies and TV, daydreaming, and so forth. Enjoying fiction requires a shift in selfhood. You give up your own identity and try on the identities of other people, adopting their perspectives so as to share their experiences.
There are currently more ways to live in unreal worlds than at any other point in history. This doesn't mean that modern man necessarily spends more time unreal worlds than in previous eras. Indeed, it'd be hard to measure how much people in the 1700s daydreamed without a time machine that doubles as a giant fMRI. But I'd expect that yes, our society currently spends more time in unreal worlds than previous generations.

Should we as a society attempt to reverse this trend? That's where the libertarian paternalism comes into play. How can we do so without invading people's private lives? That's where the behavioral economics comes into play. What a curious world we live in.

Friday, October 24, 2008

A prototypical "rational" man in 1950's Sci-Fi

The Day the Earth Stood Still probably has the most stereotypically "rational" man of all-time in its main character Klaatu. Let's go through the checklist:

1) Rudimentary social skills, replete with the inability to complete a coherent sentence. (Check)
2) Exceptionally proficient at mathematics. (Check)
3) A strange lack of any kind of emotion even when displaying some emotion would be highly beneficial to what he is attempting to accomplish. (Check)
4) Attributing poor collective decision-making to the individual stupidity of all persons involved. This is a common error, and it fails to take into account basic principles of the real world, like game theory. (Check)
5) A poor grasp of the market system. (Check--He traded a handful of perfect diamonds for two dollars!)

I don't know why so-called rational people in fiction are so often boring, lifeless, and stupid. The reality is that you don't have to fit any of these stereotypes to be rational. Indeed, all of them except #2 would probably be harmful to your success in the real world.

I will add the caveat that technically he is not a man but instead an alien who looks exactly like a man. And don't get me started on the odds of this happening through convergent evolution.

Wednesday, October 22, 2008

Bastiat on intellectual arrogance

Frederik Bastiat is one of the underrated thinkers of the 20th century. In his most famous essay The Law he points out a discrepancy in government planning:

This must be said: There are too many "great" men in the world—legislators, organizers, do-gooders, leaders of the people, fathers of nations, and so on, and so on. Too many persons place themselves above mankind; they make a career of organizing it, patronizing it, and ruling it.

Now someone will say: "You yourself are doing this very thing." True. But it must be admitted that I act in an entirely different sense; if I have joined the ranks of the reformers, it is solely for the purpose of persuading them to leave people alone.
I think part of people's opposition to collective rating systems is that they inherently believe that their tastes are more refined or somehow better than the mass majority of people's. They believe that their tastes are special.

I just finished Anna Karenina, and I never fell in love with it. If pressed, I would give it a 6 out of 10. That said, I'd still recommend that you read it, because 125 top authors recently rated it the greatest book ever.

I'm still grappling with the concept of respecting the majority opinion over my own--it's difficult to do and it is oddly Bayesian. I think the key may lie in Bastiat's analysis that there are too many people trying to lead and not enough people respecting the rights and opinions of others.

Tuesday, October 21, 2008

Focal foul calls in biased refereeing

It is naive to assume that referees only want to make the correct calls. What they really want is for all players and spectators to think that they are unbiased. The typical optimization strategy is to appear unbiased, not to actually be unbiased. This explains why in so many games two teams will have the same number of fouls called although it is highly likely that one team is objectively fouling more.

Once you accept this model, one surprising prediction arises: it is actually beneficial in the long run if your team has a bad, focal call made against them. One horrible call probably won't mean much in terms of the overall score, but the referee will have to "make up" for that call for some time. The more focal the call, the more the referee will "make up" for in order to appear unbiased.

For example, last week I was playing a competitive 3 on 3 game of basketball and one of my opponents made an awful call (it was self-refereed but the same principle applies). He claimed that I had traveled when in fact I had clearly not moved my pivot foot. My teammates and some spectators went wild with indignation, but I was enthused about the call. When my opponent offered to reverse it, I insisted that the call stand, ostensibly out of honor but really because I knew it would help my team's cause.

Since that one focal call had been made against me, I was able to get away with a litany of small calls or noncalls in my favor. The very next play I drove to the basket and probably took one extra step as I scooped in the layup. No call. Buckets.

Monday, October 20, 2008

Why only a libertarian could engineer the bailout

Richard Nixon visited Communist China in 1972, which was a turning point in US-Chinese relations because previously the two countries had been highly estranged. This was a controversial act but Nixon was able to get away with it because he had always been viewed as tough on Communism. Authors Tyler Cowen and Daniel Sutter summarize this theory in their IDEAS paper, explaining that "only a right wing president can credibly signal the desirability of a left-wing course of action."

Today, Tyler Cowen writes that Ben Bernanke is well-known for libertarian tendencies, which at first glace is odd because the bailout is not in line with libertarian philosophy. However, once we apply the Nixon Paradox to the situation, it makes perfect sense. Indeed, only a libertarian could engineer the bailout and nationalize parts of these banks.

Perhaps if you are very scared of a certain policy you should support proponents of the policy, not opponents. At the very least the proponents will have to go through all of the usual constitutional checks and balances.

Sunday, October 19, 2008

Counter examples in real life

Counter examples are so crucial to the study of statistics. With the backing of much long-winded epistemology, the consensus is that although you cannot prove something to be true, you can prove the opposite of it to not be true.

In every day life, we often discuss individuals that we would like to emulate. Indeed, we speak of our heroes and inspirations incessantly. But we discuss much less often our "anti-heroes," people that we strive to be unlike from in some specific way. Note that I am not saying that this is never done, just that it is comparably done much less.

Why is this? Perhaps it stems from a desire to be polite, which may be admirable. But the world we live in is so confusing and there are so many people telling us what we "should" do. It seems that society would benefit if the question was more often reversed and we were told what we should not do, which people we should not emulate.

Friday, October 17, 2008

Will a trickle down effect from foreign governments force the US hand on drug policy?

More and more countries in Latin America are decriminalizing certain quantities of specific drugs. As Juan Carlos Hidalgo of Cato reports, there are three key factors for this change. One, many countries are not on good terms with Washington anyways, so they are less worried about upsetting it. Two, drug-related violence and corruption are reaching unheard-of levels, especially in Mexico and other parts of Central America. And three, free trade agreements have actually made these countries less susceptible to unfavorable US trade sanctions.

As a peace-loving libertarian, the possibility of a trickle down effect comes as welcome news. It seems that there is a widespread consensus that drug policy in America is off-track, so why hasn't it been changed?

If you're looking for specific policy measures to hold future US leaders--whoever they may be--accountable for, you can start with the war on drugs. The world is waiting.

Thursday, October 16, 2008

Who voted for Hitler?

It is highly paradoxical that a democratic voting process led to such an undemocratic governing party, which is why this subject has long been of such interest to scholars. King et al. just published a new paper finding that voter actions in the Weimar elections can be largely explained through economic self interest:
Those who were unemployed or at high risk of becoming unemployed gave disproportionate support to the Communists or, to a lesser extent, the Social Democrats (in Protestant precints), for good reason, whereas those who were hurt by the economy but were at little risk of unemployment--such as self-employed shopkeepers and professionals, domestic employees, and helping family members--constituted the groups that gave the most disproportionate support to the Nazis.
It's amazing that people are able to rationalize (and support) obviously racist and antisemitic social policies if they believe that it best serves their economic interests. Of course, economically things ended up badly with the Nazis in power after WWII left Germany in ruins, so it's not as if the decision was rational in that regard either.

Wednesday, October 15, 2008

The top 11 poems of all time

I came across the list in Malcolm Gladwell's excellent new article in the New Yorker about creativity and how it is foolhardy to assume that it always comes from the young. Even if you are not a particular fan of poetry, the best of any genre is bound to be excellent.

1) Prufrock, T.S. Elliot.
2) Skunk Hour, Robert Lowell.
3) Stopping by Woods on a Snowy Evening, Robert Frost.
4) Red Wheelbarrow, William Carlos Williams.
5) The Fish, Elizabeth Bishop
6) The River Merchant's Wife, Ezra Pound.
7) Daddy, Sylvia Plath
8) In a Station of the Metro, Ezra Pound.
9) Mending Wall, Robert Frost.
10) The Snow Man, Wallace Stevens
11) The Dance, William Carlos Williams.

This list was compiled by economist David Galenson, by looking through 47 major poetry anthologies and counting which poems appeared most often. This is a nice, objective way of determining whether a poem has stood the test of time, but it is possible that some poems have stayed around just because of status--Carlos Williams, I'm looking at you. Not that it matters, but my favorite poem for some time now has been Stevie Smith's "Not Waving but Drowning."

Tuesday, October 14, 2008

Will a recession cause undergrads to study harder?

That is one question that I am currently pondering, especially since it would directly affect me and my hopes of landing anything interesting post-college. I have heard anecdotes that students go back to school for JDs and MBAs at higher rates in a recession, but would undergrads take greater advantage of their current education?

There is some reason to expect a trend a priori. If Johnny's parents are facing a recession, Johnny might not be allowed to throw as many killer house parties on the weekends after he graduates. Additionally, there is some evidence that simply being primed to think about money (via monopoly money!) makes students more competitive and individualistic.

However, all my initial informal data gathering by interviewing friends has left me empty handed. Of course, if it is subconscious people not even know why they are trying harder: perhaps they will rationalize their behavior in some other way. Can any of you all recommend anecdotes? Perhaps we could analyze G.R.E. scores? Or are all of my readers too busy studying now?

Monday, October 13, 2008

Paul Krugman on silly research

Krugman just won the Nobel prize today (or maybe yesterday) for something called "New Trade Theory" that I understand only on the surface. But while browsing the Bible I came across an essay of his where he discusses his "life philosophy."

I love these random articles where influential intellectuals discuss their professional histories and outlooks on life. I'm not sure why--it's probably a mix of envy and post-modern irony. One particularly poignant paragraph is when he discusses the usefullness of what colleagues might call "silly models,"
What seems terribly hard for many economists to accept is that all our models involve silly assumptions. Given what we know about cognitive psychology, utility maximization is a lidicrous concept; equilibrium pretty foolish outside of financial markets; perfect competition a howler for most industries. The reason for making these assumptions is not that they are reasonable but that they seem to help us produce models that are helpful metaphors for things that we think happen in the real world.
In industry, it doesn't matter whether the topic is silly, it only matters if it produces results. In academia, you must paint your interest as non-silly, otherwise it will not be published. So it is heartening to see more academics (besides Robin Hanson) come forward as pro-silly research. When you read the word silly a lot, it starts to look silly itself.

Friday, October 10, 2008

Medical treatment for name forgetting

Like most people, I'm often troubled when I can't remember somebody's name that I knew from long ago. It especially irks me when others state my full name and I can't even remember their first one.

Out of kindness, I am usually forced to say "what's up man?" or, "how you doing girl?." My dad always says "kiddo," apparently that works too. Game theory posits that eventually people would catch up to the fact you only use these greetings when you don't remember their name, but luckily there is generally no repeated play in the form of multiple meetings.

Luckily, I have a modest proposal. I want to start a service that treats people for this specific diseases--forgetting people's names. I am sure that there is a literature of some sort on the subject and that it could be swindled into some sort of diagnosis. Perhaps there is even some hope for treatment in the form of behavioral therapy.

But ultimately this business would not be actually about the treatment. It would be purely so that people could say, "I am sorry, but I forget your name. I have a disease, and I'm undergoing treatment for it at [my company]." Do you guys think that this might work, or is it not as big of a deal as I'm claiming it to be?

Wednesday, October 8, 2008

Wake me up when November ends

If you thought last night's debate was awful, you have to read Will Wilkinson's hilarious live blog. I'll post some of the highlights here, but peruse it yourself--I laughed out loud three times and I am alone with just my computer so there was no social stimulus.
McCain: Let’s do it all. Straight talk! Can’t afford entitlements. I know how to reach across the aisle. Jobs with Nukes! Earth, Wind, Fire! You’re complicit in terrorism by driving your kid to soccer practice. Everything is a national security objective!

Obama: Perhaps you have heard of something called 9/11?... Holy god there is nothing more important than not trading with foreigners for energy. Double the Peace Corps, so we can renew America, because there is no non-state way to do that.

Should health care be a commodity?... Obama: Moral imperative that we do something. Here’s my plan. I’ll make it cheaper for you. More free lunches. No insurance? You got it! McCain hates sick people, because his plan makes sense.

How does all the economic stress affect our ability to wage war? McCain: America is greatest force for good in history of universe forever. We shed our blood everywhere. The question of when to kill people needs to be left to soldiers like me. Our wars are awesome because we’re a nation of good. Obama wrong about surge. Wrong about Russia and Georgia. He doesn’t know his ass from his elbow.
I'm voting for Gene Amondson, nominee of the Prohibition party. That "more free lunches" line is a killer. Wake me up when November ends.

Monday, October 6, 2008

State level voting

Andrew Gelman has a fascinating series of charts that show the trend in voting patterns from state to state. Poor voters are much more likely to vote Democratic in a given state than rich voters, except in the absolute core regions of Republicans such as Texas.

I grew up in California, and went to school in New York, the only two states in the US that are blue for all three of the income levels. Sometimes I am secretly proud of myself for rejecting parts of my liberal roots, and then I worry that an irrational desire to be contrarian was part of the shift. But after seeing a Democratic dominated congress rush this horrible bailout plan, I become less worried for myself. I would say that the events of the last four months have made me less dogmatic about politics overall.

Sunday, October 5, 2008

The ethical implications of a perfect lie detector

Despite their rampant use in popular culture, polygraph tests are highly unreliable, producing an accuracy rate barely better than chance. And the fMRI attempts are probably doomed too; we just don't currently have enough knowledge about which brain regions would "light up" when somebody was not telling the truth.

But what if? I think the applications of such a device could be wide reaching. Premeditated crime and academic cheating would probably be the first victims. Would everyone have to undergo a test once a year, to test solely for whether or not they had committed a serious crime in the past year? This would be an invasion of privacy, yes, but it would also help serve the most important role of the government--upholding the laws and protecting the life and property of its citizens.

Of course, the errors on such a device would have to be abnormally low to make it worthwhile. But if you are looking for major shifts that may occur within the next 50 years, you should consider the implications of a nearly perfect lie detector.