Why I Don't Read the Financial Press Much

Pity low-level financial journalists.

The big names get to write important opinion pieces on the financial crisis and the banking system.

The low-level guys, on the other hand, every day they have to write garbage about financial markets. Prices went down today? Hmm, what could explain that? How about 'fears of a weakening economy'? Sure, that sounds plausible. Prices went up today? Investors were bargain hunting after yesterday's price decline. Etc.

Realistically, they should just be reporting 'today, the coin landed on heads!', because at a daily level, stock returns are pretty damn random. Over long horizons there's more predictability, but on a daily basis, it's just noise.

Making up this kind of junk tends to erode the intellect (and the spirit). And sometimes this spills over into further sloppy thinking.

The Greek passed on this gem from CNN Money:

At $400 billion, Apple is worth more than Greece

Apple's market cap is higher than the gross domestic product of Greece, Austria, Argentina, or South Africa.

Yeeeeaah...

So it's clear this guy doesn't understand the difference between a stock and a flow. Market Cap is a stock measure - not in terms of the 'stock' market, but meaning that it captures the total amount of something. GDP is a flow measure - it represents an amount that occurs each period.

In other words, GDP is analogous to your income for this year and market cap is analogous to your total net wealth. (It's an imprecise analogy, because net wealth represents income you've already earned, whereas market cap represents the estimate of the money you'll earn in the future).

But the point is that comparing these two numbers and saying that 'Apple is worth more than Greece' is absurd. It's like saying that the guy who works in a factory and owns a $600,000 house is richer than the guy who worked at an investment bank, because the investment banker's income this year was only $500,000. The comparison is meaningless.

Not only that, but the whole thing is a non-story.What even happened to justify writing this junk? Apple's market cap increased slightly? Quick, better write a puff piece of meaningless comparisons, because the rubes just love reading stories about Apple!

Remember kids - these are the people telling you why the market moved yesterday.

Pass the salt, please.

Why Do Toilets Explode?

I remember GS used to complain to me about Yank toilets, and how when you flushed them, often they would have such a violent flushing mechanism that you'd end up with water on the seat. I never understood why they didn't design them so that they didn't explode everywhere. Surely this is something that toilet designers think about? I can't imagine there's an active demand from customers along the lines of 'No, unless it just goes KABOOM I can't be certain that it will never block'.

Anyways, I had reason recently to reflect on the hubris of this in the context of Chesterton's Fence. As Megan McArdle described it:

In the matter of reforming things, as distinct from deforming them, there is one plain and simple principle; a principle which will probably be called a paradox. There exists in such a case a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, "I don't see the use of this; let us clear it away." To which the more intelligent type of reformer will do well to answer: "If you don't see the use of it, I certainly won't let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it."

This paradox rests on the most elementary common sense. The gate or fence did not grow there. It was not set up by somnambulists who built it in their sleep. It is highly improbable that it was put there by escaped lunatics who were for some reason loose in the street. Some person had some reason for thinking it would be a good thing for somebody. And until we know what the reason was, we really cannot judge whether the reason was reasonable. It is extremely probable that we have overlooked some whole aspect of the question, if something set up by human beings like ourselves seems to be entirely meaningless and mysterious. There are reformers who get over this difficulty by assuming that all their fathers were fools; but if that be so, we can only say that folly appears to be a hereditary disease. But the truth is that nobody has any business to destroy a social institution until he has really seen it as an historical institution. If he knows how it arose, and what purposes it was supposed to serve, he may really be able to say that they were bad purposes, that they have since become bad purposes, or that they are purposes which are no longer served. But if he simply stares at the thing as a senseless monstrosity that has somehow sprung up in his path, it is he and not the traditionalist who is suffering from an illusion.

(Her article is about the so-called tax loophole for hedge fund managers that Democrats wanted to close, and is well worth reading, but that's another story).

Anyway, I wish I could tell you that I had reflected unprompted on possible reasons that toilets might be so violent and figured it out, but this is not the case.

Instead, I had observed a semi-exploding toilet on the fifth floor of a building one day. For some reason I had cause later in the day to be on the eighth floor of the same building, and the toilet was considerably more quiet. Same building, same toilet, different effect.

And suddenly it was obvious - water pressure! I imagine that it probably is quite an engineering challenge to have exactly the same water pressure at every floor of an eight-storey building, particularly if the pipe system is somewhat old. In order to get acceptable pressure everywhere, the simplest setup is just to have pressure that's slightly too high on the lower floors and slightly too low on the higher floors. Hence the fifth floor toilet explodes a bit, and the eighth is less powerful.

I made a mental note to check this - when there's a toilet with a violent flushing mechanism, I'm going to take note of what floor I'm on, and how many floors the building has. We'll see how well this hypothesis holds up.

But in the mean time, until you understand why toilets explode, you may want to hold off on demanding that they be fixed.

Paging Dunning and Kruger...

There are few things more irritating than popular journalists who try to take on an academic orthodoxy by pretending to be soooo much smarter than those ivory tower pinheads, and try to mask their poor understanding of the subject with bluster and scorn. Many academic ideas are wrong, but it's odd that a whole profession is comprised of morons.

Over at Forbes, Steve Denning has an article entitled "The Dumbest Idea In The World: Maximizing Shareholder Value". Right off the bat, you can tell from the title that it's going to be a howler. (I know titles are sometimes chosen by sub editors, but it's not unrepresentative). Maximizing shareholder value is the dumbest idea in the world? Dumber than witch burning, or the modern flat-earth movement, or communism, or astrology, or... okay, so nobody with half a brain can actually believe that, they're just being provocative.

The author is positing an underlying argument that's actually quite reasonable, namely that CEOs should focus on improving earnings, rather than focussing on exceeding market expectations. Personally, I tend to agree. But it's not enough to just make this point, Denning has to pretend that anyone who ever said anything to the contrary is a disingenuous fool.

Take this hilarious quote from the article:

Martin says that the trouble began in 1976 when finance professor Michael Jensen and Dean William Meckling of the Simon School of Business at the University of Rochester published a seemingly innocuous paper in the Journal of Financial Economics entitled “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.”

The article performed the old academic trick of creating a problem and then proposing a solution to the supposed problem that the article itself had created. The article identified the principal-agent problem as being that the shareholders are the principals of the firm—i.e., they own it and benefit from its prosperity, while the executives are agents who are hired by the principals to work on their behalf.

Yes, read that again. This imbecile is actually claiming that Jensen and Meckling (1976) created the principle/agent problem! Because until they pointed it out, no manager in history had ever thought to further their own interests instead of those of the shareholders. This article was like the poison apple in the Garden of Eden, and once managers were finally told 'hey, you know you can jack up your pay at the expense of shareholders?', then the age of the philosopher-king managers was over.

Honestly, I'm just baffled by this claim. The principal agent problem in J&M relies on the following assumptions:
1. Shareholders are the owners of the company, and they appoint the board, who hire managers on the shareholders behalf.
2. Shareholders will seek to maximise the value of their shares.
3. Managers, once appointed, will seek to act in their own self-interest.
4. The interests of shareholders and managers will sometimes be in conflict.

Seriously, which of these four assumptions wasn't true before 1976? It's just bizzarre. Denning wants to claim that managers never tried to maximise shareholder value before 1976. Well call me crazy, but I'm pretty sure that managers who weren't at least trying to do that got fired pretty quickly, and this had nothing to do with Michael Jensen. The author may not like the J&M solution of paying managers in equity, but that's completely different from smugly saying that J&M "created" the principal agent problem.

Let's just say that not only is maximizing shareholder value not the dumbest idea in the world, it's not even the dumbest idea in the article. And if Jack Welch and Roger Martin (Dean of the Rotman School of Management at the University of Toronto) feel differently, then so much the worse for them.

Steve Denning, you are an arrogant, pontificating fool.

Better Late Than Never

Fancy that, another 200-odd people drowned off the cost of Indonesia while trying to reach Australia. *Yawn*. What's on TV?

And finally, at long last, a couple of the more intellectually honest among Australia's left are starting to admit the obvious truth: having more lenient policies towards asylum-seekers encourages more asylum seekers to journey to Australia in leaky boats, which leads to more deaths.

Tim Blair points out that lefty Australian academic Robert Manne has finally woken up and smelt the coffee:

For its part, the left has been unwilling to concede that the Pacific Solution succeeded in deterring the boats. Between 1999 and late 2001, 12,176 asylum seekers arrived by boat. In the years of the Pacific Solution - 2002 to 2008 - 449 arrived. Since its abandonment, 14,008 asylum seekers have reached Australian shores.

The left's unwillingness to acknowledge the obvious has been of great political significance. Following Kevin Rudd's election in 2007 a wise asylum seeker policy would have involved leaving the Pacific Solution intact but humanising policy by increasing the annual quota of refugees and ending mandatory detention. The internment camps on Nauru were virtually empty. The undeniable cruelty of the policy had reached its natural end.

No one on the left with an interest in asylum seeker policy - and I include myself - was far-sighted or independent or courageous enough to offer the incoming Rudd government such advice.

Well, I'm certainly not of the political left, but I've pointed this out on multiple occasions. Good to have you on board, Robert (no pun intended).

There is only one way to solve this problem. Let's take as given the number of asylum-seekers we're willing to accept. The problem is that the current system incentivises people to attempt risky crossings because once they reach Australia, their application has a vastly higher chance of success.

And that's what you have to end. The only way the boats, and the senseless deaths, will stop is if you actually disincentivise attempting the crossing. Here's the Shylock policy - absolutely no applications for asylum will be accepted from anyone making a ocean crossing and arriving in Australia illegally. Every such person will be summarily deported. Applications for asylum will only be accepted at Australian embassies in foreign countries.

And that is literally all you'd have to do. Visibly enforce that a few times, and you don't need to worry about the cruel detention centres that Robert Manne dislikes as a matter of compassion (and not unjustifiably).

But even past this point, there are two large objections to the whole enterprise.

The first is this - Indonesia is a pretty tolerant place. If you've made it that far, it's highly unlikely you're still at risk of any kind of political repression. So why should Australia accept you as a refugee on the basis that you were persecuted in Afghanistan, notwithstanding that you've already escaped such persecution?

And the second even less politically discussed point is made quite convincingly by Tim Blair

Survivors of the latest doomed voyage claim that everyone aboard each paid between $2500 and $5000. Individually, those amounts would easily cover air fares to Australia. Collective amounts – Saturday’s vessel carried around 250 passengers – would be sufficient to purchase several vessels of greater seaworthiness than that which sank.

Refugee advocates don’t like to discuss why these safer options are not explored. The reasons are to do with identity and culpability. Those arriving in Australia by air require passports, which makes easier the task of disproving the legitimacy of asylum claims. Those arriving from Indonesia on boats commonly carry no identification at all, allowing certain freedoms with their stories.:

In other words, it is quite reasonable to have a presumption that a lot of the people arriving by boat probably have bogus stories.

This doesn't mean that we shouldn't care about their drowning deaths or them being locked up in detention. But for the people who really are economic migrants, there is a quite justified revulsion at rewarding their desire to bypass the normal (long) queues to get into Australia. And if the policy of detaining illegal economic migrants on Nauru has deterrent effects but is harsh on the illegal economic migrant themselves, I can't get too saddened by that.

Harry Reid - Imbecile

Listen to this choice quote from the Senate Majority Leader:

'Millionaire job creators are like unicorns - they're impossible to find, and don't exist.'

Hand that socialist fool control of the economy!

Okay, okay, surely a quote this stupid has some additional context that somehow makes it coherent, right?

See the whole clip and decide for yourself.

If you (quite sensibly) don't want to spend 3 minutes of your life watching Harry Reid, let me summarise the context, : apparently nearly everyone with over a million dollars 'is lawyer or a hedge fund manager', and we know that there aren't any millionaire job creators, because NPR went around looking to try to interview one and said they couldn't find any. So them someone (at this point in his ramble, it's unclear whether it's still NPR doing the searching) started looking through Facebook (no, really), and found some guy who claimed to be a millionaire who was hiring, and he supported the Reid tax on millionaires.

Yes, that is the larger context in which this is meant to make sense.

Apparently according to this buffoon, individuals and small business owners create jobs, but only when their net worth is less than $1 million.

Because $1m is that lucky number where people just decide to coast, and develop a hatred of hiring anybody. Aggressive hiring expansions only take place by those with less net worth to pay their new employees, don'tcha know? No wait, the boss is paying for hundreds of jobs only out of the massive company earnings instead, even though these earnings somehow aren't translating into him having a net worth above six figures.

Next comes the second great plank in this Jenga Tower of Stupid, the claim that you can only be a job creator if you're a small business owner. Because it's not like a corporation ever hired anybody! Small business may be important, but it employs around half of private employees. Were you hired by Microsoft? Bad luck, because we couldn't get Steve Ballmer on the phone to claim to be a 'millionaire job creator', your job just came out of the ether!

Maybe it's because senior executives in large corporations don't have the hubris to claim that 'I created jobs'. Doesn't mean that they're not contributing. And maybe, just maybe, when your net worth starts to get higher, you're running a sufficiently large and complicated company that you're no longer arrogant enough to claim that every job there is created by you, and you alone.

But what about all those evil lawyers and hedge fund managers? They're not hiring anybody?

Well how do you think corporations fund themselves? The lawyers don't just bathe in a vault of money like Scrooge McDuck. They tend to invest it in ... bonds and stocks! Which are issued by the corporations, and the capital from which is used to expand.

The clip itself was posted by the Democrats, who liked this speech so much that they advertise it.

As Ace of Spades said about this incident:

I am actually moving away from the question of "Can America survive?" to "Should America survive?" 

Indeed.

Update: I also forgot to mention the other distinct possibility for explaining why NPR can't find any millionaire job creators - people who have a million dollars may find it in poor taste to publicly boast about that fact, and the only exceptions are people who are doing so as a way of ostentatiously flouting their socialist bona fides. I can just imagine the phone call now - "Hi, this Jim Jones from NPR, and we were wondering whether you, John Smith, would like to be the public face of 'millionaires who oppose tax hikes'." Yeah, who could possibly refuse that interview?

Psychologists Getting Statistics Wrong

Ace of Spades links to a study that claims to show that people view atheists as being less trustworthy. This was also covered in the National Post. The headline claim is attention-grabbing:

Atheists cannot be trusted: Religious people rank non-believers alongside rapists, study

Controversial stuff. As in all this stuff, you should always read the original study before rubbishing it. The author, Will Gervais, kindly has a version on his webpage, which you can read here. And I'm sorry to say that nearly the whole study appears to be done wrong.

So how exactly does Mr Gervais establish that atheists are as untrustworthy as rapists? Let the study tell the story - this is Study 2 of 6, but 5 out of the 6 studies have the same problem:

One hundred five UBC undergraduates (age range 18 –25 years, M 19.95; 71% female) participated for extra credit. Participants read the following description of an untrustworthy man who is willing to behave selfishly (and criminally) when other people will not find out:

Richard is 31 years old. On his way to work one day, he accidentally backed his car into a parked van. Because pedestrians were watching, he got out of his car. He pretended to write down his insurance information. He then tucked the blank note into the van’s window before getting back into his car and driving away. Later the same day, Richard found a wallet on the sidewalk. Nobody was looking, so he took all of the money out of the wallet. He then threw the wallet in a trash can.

Next, participants chose whether they thought it more probable that Richard was either (a) a teacher or (b) a teacher and XXXX. We manipulated XXXX between subjects. XXXX was either “a Christian” (n 26), “a Muslim” (n 26), “a rapist” (n 26), or “an atheist (someone who does not believe in God)” (n 27).

So the authors are relying on the conjunction fallacy of Tversky and Kahnemann (1983) - logically, the probability of being a teacher and [Y] is less than or equal to the unconditional probability of being a teacher, for all values of [Y]. People sometimes get this the wrong way around if the behaviour is associated with the trait. That is what the authors are trying to test (I think). They report that the proportion of people who answered (wrongly) that the person was more likely to be a teacher and an atheist was higher than the proportion who answered (wrongly) that the person was more likely to be a teacher and a Christian.

The first thing that should make alarm bells start ringing in your head is the way the question is phrased. To say 'are atheists untrustworthy?' is to ask the probability of being untrustworthy given you're an atheist. But the question implicitly being asked in the survey is something different, namely the probability of being an atheist given you're untrustworthy. These are not the same thing!!!! And this is really going to screw up the inferences.

If statistics bore you, let me skip to the punchline - the authors screw it up because they're not taking into account that there's tons of atheists and very few rapists. This means that the probability of being an atheist given you're untrustworthy is always going to be much higher than the probability of being a rapist given you're untrustworthy. But this says nothing at all about trustworthiness, and everything about how rare it is that a person is a rapist! And this makes the whole study flawed.

For stats people, what is actually being asked is whether people erroneously believe that:
P(teacher | Untrustworthy actions)  <  P(teacher AND atheist | Untrustworthy actions).

This answer is then compared to answers to the question as to whether:
P(teacher | Untrustworthy actions)  <  P(teacher AND rapist | Untrustworthy actions).

Since the left hand side is the same in each inequality, let's think about what could drive differences in the right hand side (even if people are screwing it up via the conjunction fallacy, this is still the implicit comparison). Using Bayes Rule:



(where A1 = Teacher and Atheist, A2 = Teacher and Rapist, and B = Untrustworthy).

Let's ignore the teacher bit for simplicity (it doesn't change the logic). What the author really wants to know is the second ratio - are people viewed as more likely to be untrustworthy given they're an atheist, relative to being untrustworthy given they're a rapist.

What they're actually measuring is the first ratio: the probability of being an atheist given you're untrustworthy versus the probability of being a rapist given you're untrustworthy.

But the difference between the two ratios is also driven by the third ratio -  the overall probability of being a rapist versus an atheist, regardless of whether you're untrustworthy.

And this ratio is huge! The study was done at the University of British Columbia. According to Wikipedia, 42.2% of Vancouver is atheist. What's the probability of being a rapist?  The overall rate of rape crimes in Canada is 0.016 per 1000 people. As long as each rape is only committed by one rapist, this will overstate the probability of being a rapist (i.e. if a rapist has multiple victims, the probability of being a rapist will be lower. If a victim is raped by multiple people in a single rape, the number will be higher, however)

So the third term is equal to 42.2/0.0016 = 26,375! In other words, suppose that people thought that you were 1000 times more likely to be untrustworthy if you were a rapist than an atheist (i.e. the second ratio equals 1/1000). The left hand side will be equal to 26375/1000 = 26.375. In other words, P(atheist | untrustworthy) will always be much higher than P(rapist | untrustworthy), even if rapists are considered far less trustworthy than atheists.

The authors only report the proportion of respondents who made the conjunction error - in other words, they report the number who state that P(teacher | Untrustworthy actions)  <  P(teacher AND Y | Untrustworthy actions), which is clearly wrong, and compare this for different values of Y. Sadly, this doesn't allow us to say anything about the real ratio, which is P(Untrustworthy | Atheist) versus P(Untrustworthy | Rapist).

In other words, the study is unsalvageable if you're trying to answer the question you're hoping to ask. Which is a shame, because it's actually an interesting question.

File this under 'unpersuasive'

To put it mildly.

Robert Frank wrote an op-ed claiming that there was an arms race in thanksgiving store opening hours which, of course, needed regulation. Tyler Cowen wrote about it, and Frank sent Cowen an email with some additional details. Included was the following anecdote about the recent allowing of Sunday trading hours in liquor stores in New York State :

I had a recent conversation about this issue with a friend in Ithaca who owns a wine store. Traditionally, New York State wine merchants were not allowed to do business on Sundays. But last year that restriction was repealed, and I asked my friend how the change had affected him.

His overall sales were about the same, he told me. The change had thus been a clear negative from his perspective, since it meant that he and his wife were no longer able to spend Sundays together with their children. The upside was that customers who lacked the foresight to shop in advance for their Sunday wine needs could now be accommodated. If we’re willing to discount the cost of an inconvenience suffered by those who could easily have avoided it, the costs in this case seem clearly to outweigh the benefits.

You don't say! If you're willing to discount the main cost of a given action, the benefits will frequently outweigh the costs. Feel free to try this with a range of meddling economic proposals:

-If you're willing to discount the millions in unrecoverable funds, the benefits of the government guarantee of Solyndra seem to clearly outweigh the costs.

-If you're willing to discount the cost of reduced competition and higher prices, the benefits of mandatory licensing of interior decorators clearly outweigh the costs.

 etc.

But there's an easier way to tell that this proposal doesn't make sense. What's so special about Sundays? Why not restrict Mondays as well? Or only allow trading one day a week? After all, if we're willing to discount the inconvenience suffered by those who could easily have avoided it, these would clearly make sense too!

Eventually, the Robert Franks of the world would look at this and say, yes, but there's a limit, customers need some convenience.

But this implicitly acknowledges that his argument, as phrased, is a crock. It's not that you can actually 'discount the cost of an inconvenience suffered by those who could easily have avoided it', but instead that Robert Frank thinks that the inconvenience they suffer is less valuable than the benefit to the liquor store owners.

To which I ask, how exactly are you arriving at that conclusion? Because it sounds a lot like you're just pulling that conclusion out of your @**, and you'd have no idea what the actual inconvenience to customers is, nor how many of them there are, nor how to value it.

Personally, I cannot fathom a theory of government that says if I want to open my store at 9am, 4pm or 2am to sell you a computer, a suit, or a bottle of whisky, why it is any business whatsoever of the government's. A government that is willing to intrude in this is willing to intrude in absolutely anything.

The Difference Between Game Theory and Decision Theory

Game Theory assumes (at least) two things: common knowledge of the structure of the game, and mutual best responses by all players.

Decision Theory assumes neither.



The classical decision theorist would look at this picture and reflect that the lesson is that sometimes people do things that are TOTALLY CRAZY.

The more nuanced decision theorist would look at this picture and reflect that the lesson is that sometimes the other party isn't actually playing the game that you think they're playing.

Personally, I side with the latter as the one that you've really got to be worried about.

Either way though, caveat emptor.

Filling in the relevant details of the game is, of course, left as an exercise for the reader.

That's just super!

Back during the debt ceiling debate, one of the key components of the compromise agreement between Democrats and Republicans was that a fabulous new "supercommittee" was to be formed to figure out how to reduce the deficit. No, not the Bowles-Simpson commission, which had been formed to investigate just that question and came to some quite reasonable-sounding conclusions, but a great new one! Made of the same quality politicians that steered the country right to the brink of voluntary default!

So how exactly is that working out? Well, here's the answer, according to The Hill:

It's a move that's been dismissed as a budget gimmick, but it's also one that could make the supercommittee's job a whole lot easier: counting the savings of withdrawing troops from Iraq and Afghanistan.

The White House says $1.1 trillion will be saved by drawing down those troops from Afghanistan and making the U.S. presence in Iraq a civilian, not a military, one.

Given that the supercommittee must track down at least $1.2 trillion in cuts to avoid the triggering of automatic cuts, simply accounting for those savings would nearly get the panel there all by itself.

Yes, that's definitely the kind of tough political decisions that S&P was hankering after when they downgraded the US credit rating! I'm intrigued by the first sentence - is there anyone who wants to seriously take the counter-position that this is not, in fact, simply a budget gimmick? Anyone at all?

But not only that, apparently Democrats on the committee have already proposed that these miraculous 'savings' should now be spent on a second stimulus instead of used for deficit reduction. Yes, that's right! They found new funny money, and can't wait to spend it on real commitments! Which will, in the grand tradition of Washington, be advertised as one-off extraordinary spending, but somehow will make it into future budgets as the baseline of spending, from which any cuts will be demagogued as harsh and cruel.

Mark Steyn heaps well-deserved scorn on this whole exercise:

But, aside from that, in what sense are these “savings”? The Iraq war is ended – or, at any rate, “ended,” at least as far as U.S. participation in it is concerned. How then can congressional accountants claim to be able to measure “savings” in 2021 from a war that ended a decade earlier? And why stop there? Why not estimate around $2 trillion in savings by 2031? After all, that would free up even more money for a bigger stimulus package, wouldn’t it? And it wouldn’t cost us anything because it would all be “savings.”

Come to think of it, didn’t the Second World War end in 1945? Could we have the CBO score the estimated two-thirds of a century of “budget savings” we’ve saved since ending that war? We could use the money to fund free Master’s degrees in Complacency and Self-Esteem Studies for everyone, and that would totally stimulate the economy. The Spanish-American War ended 103 years ago, so imagine how much cash has already piled up! Like they say at Publishers’ Clearing House, you may already have won!

It is becoming clearer and clearer that the US deficit will not be seriously dealt with until the country is in the same position as Greece is now. And given how well that's working in Greece, that may well mean that it's not dealt with at all. Unless you count 'default and being frozen out of credit markets' as a form of dealing with the problem. Which it is, after a fashion.

Reality will eventually deal with unsustainable spending one way or another. As Herbert Stein noted, if something cannot go on forever, it will stop. But you ought to care which way it happens. A car can stop by slowly pulling up to a red light, or it can stop by colliding with a brick wall. At this stage, I'm betting on the latter.

Phrases that I challenge ANYONE to explain the logic behind

(After the plane has landed):

"You may now use your cell phones but all other electronic devices must remain off."

Gotcha. Now we've reached the seventh circle of anti-scientific hell - my iPod might cause the plane to crash into the hangar, but when they installed a cell phone receiver to make it an iPhone, this somehow fixed the problem.

Ugh.

Spam Comment of the Day

From a spam site commenter calling itself 'Wastewater Training' (no link for the spam site):

"A lot of water is wasted in those taps. But that doesn't end there. There are still a lot of things we should look into if we really want to save water like for instance in the garden. We should use the conventional water container to water the plants rather than using a hose or a sprinkler."

Yeeaaah. I'm not so sure that that was really the original point of the post:

So here's the bottom line. I refuse to feel the slightest bit guilty about taking long showers as long as the water department are blowing taxpayer dollars on ridiculous ads. If you want people to use less water, raise the damn price.

But sure, why not! Those free-market types will be rushing to take your online environmental compliance and safety training class after reading how insightful your remarks were.

Morons.

Market-Clearing is Overrated

In Australia, today they voted in the Senate to pass a tax on carbon dioxide.

Now, there are some reasonable argument for having a world-wide price of carbon, assuming countries could somehow be arm-twisted into doing so.

There are bugger-all reasonable arguments for imposing carbon tax when very few other countries are doing so. All that will happen is that carbon-intensive industries will be exported overseas.

But (as Tim Blair notes) to add to the hilarity, the tax comes in at a specific amount - in this case $23 a tonne. The trouble is that the current carbon price in Europe is about half that. You can see the progress for yourselves.

But that's alright, we've got Climate Change Minister (yes, really, Australia actually has one of those) Greg Combet to point out the answer:

But Climate Change Minister Greg Combet is not convinced the difference demands a change in the local price, saying a few months ago the European cost was “there or thereabouts” of $23 a tonne.

“We’ve just got to take a bit of a longer term view of this,” he told ABC Radio

Hmm. Any particular reason you think that the current price is unrepresentative, but the old price is clearly accurate? Any reason at all? I mean, if you're willing to admit that the market is inefficient today, why is 'a few months ago' the gold standard for the halcyon days of price efficiency?

Don't hold your breath waiting for a good answer to that one. But even this is beside the point - efficient or not, the European price of carbon right now is a lot less than it will be in Australia. (Not to mention that the Chinese price is forecast to be $0 for quite some time now, with an R-Squared of about 100% on that regression). As long as there's going to be a price, it ought to be the market price. Unless you think the relevant market is the US and China, in which case we're back to the earlier Shylock regression.

In Australia, the price will be at $23 a tonne, which some days will be less than Europe, and other days will be more.

In other words, the price will definitely not be a market-clearing price. This gives Australian firms a fluctuating competitive position relative to Europe, and a permanent disadvantage relative to just about everywhere else. Heckuva Job, (Bob) Brownie!

One prediction I can make with some confidence - expect the market for Australian-produced Aluminium to start clearing very rapidly at an equilibrium quantity supplied of zero.

Your Proud Feelings vs. Drowned Boat People

Ho hum, another six asylum seekers drowned while on the way to Australia.

I wrote about this at some length last year when another bunch of boat people drowned near Christmas Island.

Here's a summary of the main point from last year. :



I don't know what the updated graph looks like, but if anyone would like to wager over the direction of the line, do let me know.

That's what compassion will get you. Look how self-righteous the Labor Party and the Greens were! No more wicked off-shore detention of asylum-seekers. No more housing people in those cruel, cruel detention centres! How virtuous we feel, now that we've finally gotten rid of those evil and nasty laws that John Howard put in place.

In an inconvenient turn, hundreds of people are estimated to have drowned since Labor scrapped the previous laws, based on the inexorable logic that 'more people attempting the crossing = more people dying in the attempt'. But who cares about such a trifle as that!

The phrase 'tough love' is one of those expressions that lefties hate, as it's one of those cliches that gets thrown around a lot in support of many policies, some of which really are tough love, and others of which are just tough.

But doubt not this: people respond to incentives. When people tried to point out to Julia Gillard that her policy was indirectly leading to hundreds of deaths by drowning, she responded that this was a “vile slur”, and among the most “dangerous”, “irresponsible” and “despicable” she’d heard in politics.

So here's a question. Let's put our 'correlation!=causation' caps on, and say that the straightforward incentives and persuasive time-series evidence is not conclusive. I'll take that. But even then, what the hell is Julia Gillard's alternative explanation for this trend? So you saying you're not killing people, huh? Then what exactly is the contention? Is it that more people aren't actually drowning, or that the increase in people coming and drowning has nothing to do with the fact that they are more likely to be processed in Australia and given asylum? Is it driven by the supply and demand of leaky vessels? Is it driven by these asylum seekers expecting to hop off the boat and get a job in Australia's booming mining industry? What?

In fairness to the Labor Government, since last year they've been trying to get offshore processing going again. Whether this attempt can be construed as a tacit admission that the previous policy was in fact killing lots of people is a different question, and one which I would love a reporter to ask her. But the policy hasn't been passed, mainly because they continue to operate under the ridiculous self-imposed constraint that  they won't use the single most logical place for it, namely Nauru.

Because then they'd have to admit that Howard was right. And nothing is more important that that. Certainly not a couple more drowned asylum seekers.

Andrew Bolt is right in skewering the worst delusional culprit - Bob Brown, leader of the Greens. But then again Bob Brown has never, in his entire political life, given even the vaguest indication that he grasps how incentives work. This imbecile is a walking monument to the Dunning-Kruger effect - the more he screws up policy, the more sure he is of his idiotic beliefs. You'd have more luck trying to get your dog to understand Fermat's Last Theorem.

Ostentatious moral vanity is unpleasant enough to watch at the best of times. Ostentatious moral vanity that is simultaneously leading to hundreds of preventable deaths, on the other hand, is sickening.

Faulty Logic on the Soccer Pitch

Let me explain briefly some logic that may seem superficially appealing, but is in fact catastrophically wrong:

Nobody wants to play goalie on our team. I have good hand-eye co-ordination, but I'm not that accurate at kicking. I'm probably going to be the worst player on the field if I play a normal position, whereas I'm probably at least decent at just catching the ball. I'll give goalie a go.

Yeeeaah. Let's call this 'Shylock logic, circa last Sunday at 11:50am'. At about 12:10pm, after getting scored on multiple times by a team that was clearly better than us, let me enlighten you on just how much you can learn in ten scant minutes about where your thinking went astray.

1. When you're crap at some team endeavour, it is less important to actually be good at something than it is to not be blamed for actively being bad at something in a way that is harming the whole team. Goalie is the worst possible position for this. Every screwup is directly attributable to you and you alone. In addition, there's going to be lots of people that remember your screwups and have it in for you.

2. Being goalie is like writing put options, in that your payoffs have crazy negative skewness. When you stop a ball that you should stop, you get a small amount of praise. But should you miss a ball that you should have been able to stop, you just went broke. You know who should be writing put options? Really highly rated financial institutions with deep pockets and lots of experience. You know who shouldn't? Mum and Pop.

3. You know how you can tell that a team is likely to be crap and full of amateurs? When nobody wants to volunteer to be goalie. You know when is the worst possible time to be goalie? When your defence is crap and full of amateurs. Because that's when you're going to get lots of shots on goal, and when you inevitably let some in, people will still blame you more than the crap defence. Talk about a winner's curse problem.

The only good news of the day was that when I subbed out, the goals kept coming, albiet at a slightly slower rate. I am quite certain I was the only person on our whole team to be significantly pleased by this development.

Save Water, Comrade! The Glorious People's Republic of Australia Demands Your Sacrifice!

Politicians are, for the most part, suspicious of decentralised controls of any sort. Instinctively they tend to reach for technocratic solutions to problems, where a bunch of smart people can come up with clever solutions to problems and then boss around the reluctant citizenry, for their own good of course.

One example that always amused me was the absurd way that Australian governments approached questions of water shortages. If you believe what the government tells you, Australia is permanently short of water.

Part of this shortage is due to deliberate government mismanagement of supply. Namely, they refuse to increase it by adding more dams. As Andrew Bolt has pointed out:

No, the real cause of our shortage has been as I’ve warned since 2001 - that Melbourne has added a million more people since we built our last big dam, the Thomson, and never bothered to find more water for the newcomers’ extra showers, toilets, washing and gardens.

So there's a lot of environmental hysteria that effectively makes it impossible to build another dam, the one technocratic solution that might actually solve the problem.

But let's forget about that, and just take the supply as being fixed. People keep using a lot of water, and the dam levels are getting low. How can we solve the problem?

If you're from an Australian state government, the answer is clear - we need a public advertising campaign hassling people to use less water. "Target Every Drop", we'll call it! Are you taking a 10 minute shower? Shame on you! You should feel guilty for enjoying that water for more than 4 minutes at a time! We'll guilt the plebs into better behaviour!

That's Plan A. To the astonishment of absolutely nobody, this plan seems to work as well as the laughable 'Whip Inflation Now' campaign of the seventies (memorably described by Alan Greenspan as 'unbelievably stupid').

Okay, so what's Plan B?

Forced water restrictions! Firstly you can only water two days a week in the early morning or late evening, and we'll encourage your neighbours to dob you in if you exceed this. Failing that, we'll restrict you to only using a hand-held hose! "Deadweight loss", you say? Never heard of it! It'll be good for the proles to get the exercise of walking back and forth. And if that doesn't work, we'll restrict them to using buckets!

I haven't seen the next step of restricting the public to water their gardens only using teaspoons, but surely it can't be far away.

As this happens, millions of dollars in property damage pile up as lawns and gardens turn brown and die. Never mind! We all must sacrifice!

Wait a second - here comes the pesky Australian Bureau of Statistics to point out that in New South Wales, agriculture comprises 46% of water use, while all households combined only account for 12%. Hmmm, so we could eliminate the households altogether and it might not save that much water?

Here's what's staggering about all this: at absolutely no point does it seem to occur to do the one thing that would really stop the problem of excess water use - raise the bloody price of water! They're growing rice in New South Wales, for crying out loud! Do you think this kind of economic activity makes the slightest bit of sense in a semi-arid climate with a market-clearing price for water? Of course not.

If there's one thing markets are really, really good at, it's solving shortages. If you just raise the price, people will save water all by themselves. You won't need to hector them. You won't need to make them waste hours watering their lawns with a thimble. You won't need to spend millions of dollars on advertising campaigns in order to not reduce water consumption.

And even better, they'll reduce consumption without you having to do anything or spend any money. They'll put in more water efficient plants. They'll take shorter showers. They'll replant their rice fields with wheat or something better suited to the climate. And a thousand other things that the bureaucrats never thought of.

And the ones that don't? Well, that's their way of telling you that they value the water at the market-clearing price. They really, truly are getting a lot of utility out of that 10 minute shower.

So here's the bottom line. I refuse to feel the slightest bit guilty about taking long showers as long as the water department are blowing taxpayer dollars on ridiculous ads. If you want people to use less water, raise the damn price.

Algorithms that need improving

There’s nothing worse than being at the mercy of a poorly designed algorithm. You’ll be sitting there, knowing that if you were just given half an hour with their source code and maybe a programmer of theirs to explain the basic design, you could improve it

One of the classic examples is the ‘estimated arrival time’ on my GPS. A well-calibrated estimate should be too fast about half the time, and too slow about half the time. In the GPS case, however, their estimate is an understatement of your true travel time in about 95% of cases. The only, only time you’ll get there earlier than the GPS estimate is if you’re speeding for a significant fraction of the journey.

As near as I can tell, their estimate of speed is to take the total distance travelled and divide by the speed limit for each of the roads you’re travelling on.

For a company that makes GPS devices for a living, this is shockingly lazy. The big problem is that it seems to make zero adjustment for stop signs and traffic lights, meaning that it always takes too long. Traffic is another one that would be useful, but that’s probably harder to do. Still, it wouldn’t be hard to get a rough estimate – find major arterial roads, and increase the estimate by 50% if it’s between 7:30 and 9:30 or 5 and 7 on a weekday. I am highly confident that even something this simple would reduce the mean squared error in estimated travel times. That’s even without taking historical traffic data.

One that was even more infuriating was the one for the lifts in an old apartment of mine. The building was about 40 stories tall, and had about 4 elevators. During the interminable minutes spent waiting there every day, I deduced tha the algorithm would only send an elevator to the lobby if a) someone had pressed the down button, and b) the elevator in question was the lowest of the four. So what would happen is that you’d have elevators sitting there at floors 28, 35 and 39, and another one going up from floor 5. You’d sit there, watching the floor 5 elevator slowly make it’s way up each of its stops, and the other three would sit there doing nothing until the elevator that started at floor 5 reached floor 28. Only then would the floor 28 elevator start going down to the lobby.

This, as you can imagine, drove me absolutely batty. Talk about pure deadweight loss because some moron can’t add in a line saying:

‘If {No Elevator in Lobby} then send {lowest floor elevator with no buttons pressed} to lobby’.

Hundreds and hundreds of man hours were wasted in my building every year because the elevator company didn’t know what they were doing.

This is the kind of thing that almost nobody takes into account when choosing a building to live in – how quickly do the elevators seem to arrive? As my grandmother used to say, act in haste, repent at leisure. Or in this case, repent in slow minutes of agitation every day.

What's Italian for 'Incentives'?

From Boston.com, comes this absurd story from Italy:

Seven scientists and other experts went on trial on manslaughter charges Tuesday for allegedly failing to sufficiently warn residents before a devastating earthquake that killed more than 300 people in central Italy in 2009.

Hindsight bias! Get yer hindsight bias, piping hot and fresh from Italia! Cheaper when purchased by the gallon!

Let's put aside for a minute any question of actual moral culpability, and whether it's fair to hold people criminally liable for scientific predictions. Instead, let's assume that we're just interested in saving as many lives as possible and increasing the accuracy of earthquake forecasts (although astute readers will note that even this phrasing involves tradeoffs between the two goals). Does arresting seismologists who fail to predict earthquakes sound like good policy?

The trouble with incentives is that you need to think very carefully about whether you're actually creating the incentives you think you're creating.

I imagine the Italian authorities have the following mental model:

1. Massively increase the penalties for wrong predictions
2. Lazy and corrupt seismologists put more effort into getting the right predictions
3. Save lives!

But this is assuming the continued existence of seismologists making predictions in the first place. If you don't do this, then you have the following:

1. Massively increase the penalties for wrong predictions, while not increasing the payoff from correct predictions
2. Result is massively reduced payoffs from making any seismological predictions at all.
3. Seismologists quit en masse, or refuse to provide any guidance.
4. No more predictions.
5. Earthquake deaths.

Not quite the same thing, is it?

Okay, let's put Mussolini in charge! He'll chain those lazy seismologists to their desks and force them to keep making forecasts! Surely we'll be okay then, right?

Or maybe you've then set up the following incentives:

1. Massively increase the penalties for type II errors (i.e. false negatives: saying there won't be an earthquake when there will be one), but not increasing the penalties for type I errors (i.e. false positives: saying there will be an earthquake when there won't be one).
2. Seismologists predict an earthquake every single day of the year
3. People quickly learn to ignore all the warnings
4. Signal to noise ratio in earthquake predictions goes to zero, meaning that there are effectively no more meaningful earthquake predictions
5. Earthquake deaths.

Bureaucrats seem to think that ramping up penalties will create scientific knowledge where there was none. But it won't. All it will do is shift around the incentives and behaviour of agents in ways that are completely predictable, even if they are almost certainly not predicted by the bureaucrats.

In the mean time, you can expect displays of righteous indignation by prosecutors, giddy with hindsight bias, exactly sure that they knew there was going to be an earthquake, so why didn't those lazy seismologists? What you won't be able to get from them is any useful guidance on when the next earthquake is actually going to happen, notwithstanding their amazing hindsight powers.

Before and After

Weight loss products are addicted to before-and-after testimonials. They show some fat, unhappy person, then, after only 8 weeks, miraculously they've lost over 15 kg, all thanks to the Holmes Ab-tastic DVD box set! Order yours today!

For some reason, the people in the photos never seem to be holding up, say, date-stamped copies of the Wall Street Journal in the before and after photos. Even assuming it's the same person, you have no way of knowing if they lost the weight over 2 weeks or 40 weeks. Which led me to thinking about how I'd set up a bogus weight loss program. I'd find women who were planning on getting pregnant, and pay them 100 bucks to take photos of them in workout gear and record their testimonials about the Holmes Ab-tastic system (TM). Then wait 10 months until they've given birth and still have the baby-weight, and get them to look sad for a photo. 30-something women just like you, able to get in incredible shape, all thanks to Shylock '8-Pack' Holmes! And all from 8 minutes of working out, twice a week for 3 weeks! The rubes would never know the difference.

Sometimes I think I missed my calling as a marketing con-man.

Zero Emissions!*

I was driving behind a Nissan Leaf, the fancy new electric only car. On the back, the badge said 'Zero Emissions'.

Man, talk about marketing yourself to gullible fools who don't understand fixed costs or hidden variable costs.

This claim is just monstrously stupid. The power in your car is coming from somewhere! The chances that it will be produced from zero emission unicorns is pretty damn low. Even if it comes from something renewable like Hydro, there were big fixed emissions costs in building that dam. And if everyone started using Leafs running on hydro power, we'd probably have to build more dams, at a cost of, you guessed it, lots of emissions.

It's like giving your friend money to buy you weed, and then claiming that your conscience is clear because you never buy drugs. Zero dollars on marijuana!

Idiots.

Asian Marriage Rates: Who? Whom?

The worst assumptions are those that you don't even realise you're making.

The Economist recently had an article discussing how marriage rates in Asia are dropping. The sub-heading tells you pretty much all you need to know:

Women are rejecting marriage in Asia. The social implications are serious

That would be serious.

But the first sentence actually hides two claims, not one. These are:

1. Marriage rates are dropping, and

2. This is primarily the result of women actively deciding to avoid marriage.

So what is the evidence the article marshals in favour of each of its claims?

The first one seems on fairly solid ground:

Marriage rates are falling partly because people are postponing getting hitched.The mean age of marriage in the richest places—Japan, Taiwan, South Korea and Hong Kong—has risen sharply in the past few decades, to reach 29-30 for women and 31-33 for men.

Almost a third of Japanese women in their early 30s are unmarried; probably half of those will always be. Over one-fifth of Taiwanese women in their late 30s are single; most will never marry.

Okay, this probably doesn't surprise too many people - it's happening everywhere. But how about the second claim? How do we know this is a choice by women?

That’s partly because, for a woman, being both employed and married is tough in Asia. Japanese women, who typically work 40 hours a week in the office, then do, on average, another 30 hours of housework. Their husbands, on average, do three hours.

I'd want to see where these numbers came from - are the women who are working also doing the housework, or are they disjoint sets ( i.e. the average woman does both work and housework, but this is made up of some who only work and some who only do housework). But I'll give them the benefit of the doubt - let's assume married Asian women who also work still do a lot of housework. Anything else?

Not surprisingly, Asian women have an unusually pessimistic view of marriage. According to a survey carried out this year, many fewer Japanese women felt positive about their marriage than did Japanese men, or American women or men.

Okay, so women who are married report being unsatisfied. From this the author concludes that women who aren't married are avoiding marriage based on anticipating the same feelings. Let me translate this into a metaphor in a different context to see if any alternative hypotheses might more readily present themselves:

My friend Timmy got a new bicycle for his fifth birthday, but now he doesn't play on it much. I don't have a bicycle, but seeing that Timmy doesn't use his much any more, I stopped wanting one.

See the problem? How about buyer's remorse as an alternative? In other words, it's entirely plausible that a lot of women desire marriage beforehand, but only once they get there do they realise it's not all it's cracked up to be. Does this sound like human nature to you?

Now, I'm not claiming massive evidence in favour of this proposition either. But let's be clear - the article doesn't even countenance the possibility that marriage rates in Asia are dropping because of choices by men, not women. 

Let's go out on a TOTALLY CRAZY LIMB HERE, and propose the following meth-and-LSD-induced alternative hypotheses, purely to play devil's advocate:

-Women are more attractive in their 20s than in their 30s. The decision to pursue education and careers in their 20s makes them seek out marriage later only when they are less physically attractive, at which point men are no longer interested. Such women who miss out on marriage are filled with regret.

-Men in Asia are avoiding marriage because divorce law favours women too much, and thus they see marriage as a raw deal for them.

Are these right? Who the hell knows?! But ask yourself the following - do we really have strong reasons to prefer the author's 'every trend is the result of informed and rational choices by women'  hypothesis over either of the above? The unstated assumption, which the author probably doesn't even realise they're making, is that women are always the who, and men the whom, in Lenin's famous formulation.

If you wanted to tell the hypotheses apart, wouldn't you start by surveying men and women who aren't married, and asking them if they're actually looking for marriage? Or asking them if they're actively avoiding marriage, and if so, why?

Given how flimsy the evidence, let's evaluate the article's conclusion:

Relaxing divorce laws might, paradoxically, boost marriage. Women who now steer clear of wedlock might be more willing to tie the knot if they know it can be untied—not just because they can get out of the marriage if it doesn’t work, but also because their freedom to leave might keep their husbands on their toes. Family law should give divorced women a more generous share of the couple’s assets. Governments should also legislate to get employers to offer both maternal and paternal leave, and provide or subsidise child care.

If this trend is all the result of women's time-consistent choices to avoid marriage, then yes, you would need to make marriage more attractive to women to reverse this trend, and these policies might accomplish this.

If this trend is the result of women's time-inconsistent choices to inadvertently avoid marriage, then most of these policies would do very little. The only one that might work (and highly ironically) is forcing unsubsidised maternity leave and child care on employers  - the most immediate effect would be businesses avoiding hiring women of child-bearing age. The resulting female unemployment may end up pushing women away from education and jobs and into marriage. I don't think this is what the author had in mind though.

If this trend is the result of men's time-consistent (or time-inconsistent) choices to avoid marriage because they think it's a raw deal, then these policies (especially giving more assets to women in divorce) would be disastrous.

Repeat this type of article dozens of times, and you start to realise why the endorsement of a particular policy position by The Economist does not fill me with reverence and awe.