Tuesday, October 21, 2014

The Various Ironies of Gough Whitlam

Former Australian Prime Minister Gough Whitlam died recently, at age 98. Predictable hagiographies followed, with cringe-inducing link titles like 'Gough Whitlam a Martyr and a Hero'. This causes right-thinking people to be torn between the polite and worthy tradition of not speaking ill of the recently-deceased, and a mildly grating feeling that the hagiographers write the narratives when this happens. Obituaries are hard to do well, that's for sure, and most don't even really try.

Say whatever else you will about Gough Whitlam, but he was a transformative Prime Minister. Unfortunately, the balance of this transformation was decidedly negative. To his credit, Whitlam enacted some truly good policies, most notably getting rid of the draft, and cutting tarriffs. He also brought in some others that were probably inevitable, like no-fault divorce and recognition of China. He also had some disastrous ones. The Racial Discrimination Act was probably his most poisonous legacy, most recently in the news for being part of the trashing of free speech in the prosecution of Andrew Bolt. Getting rid of university fees almost certainly contributed to the permanent underfunding and subsequent underperformance of Australian universities to this day. He also cut off Rhodesia (leading it to the brilliant sunlit uplands it's in today), and rewarded the buffoonish Lionel Murphy for his bizarre raids on ASIO offices (which tarnished Australia's reputation as a serious state in intelligence matters) by appointing him to the High Court (where he was predictably and comically awful).

But the big irony of the Whitlam years involves the Liberal Party. They struggled so mightily to unseat him, including blocking the funding of government to provoke a constitutional crisis. Blocking supply, I might add, was something that the Libs attract an oddly small amount of criticism for, given its role in the whole affair. Whitlam was famously dismissed by Governor-General John Kerr (who became the boogie-man to the Labor party faithful ever since). Whitlam was also then subsequently voted out by a huge margin in the ensuing elections (a fact that Whitlam fans never seem to discuss very much, since it doesn't fit the narrative very well).

So the Liberals finally won their big victory over Whitlam! And what was their big reward?

Eight years of Malcolm Bloody Fraser, the most disappointing Liberal Prime Minister ever, and one of the worst overall (giving Gough a red hot go for that title).

If the election is between Fraser and Whitlam, honestly, why even bother? It's like the David Cameron v Gordon Brown election - as Simon and Garfunkel said, every way you look at it, you lose.

Thankfully, conservatives eventually had something to cheer for when Fraser was kicked out and Australia finally got some sensible and important economic reforms, coming from... Labor Prime Ministers Bob Hawke and Paul Keating! The former was excellent, the latter was pretty decent too (and superb as Hawke's treasurer). Ex-post, is there a single member of the Liberal Party today (excluding the braindead and the hyper-partisan) who, if sent back in time to 1983 but knowing what they do now, would actually vote for Fraser over Hawke?

And yet Whitlam is the 'hero and the martyr'. Hawke plays second fiddle in Labor Party folklore, despite being excellent in ways that were of mostly bipartisan benefit (floating the dollar, cutting inflation, and other instances of important micro-economic reform).

Yeah, I don't get it either.

Monday, October 20, 2014

More Gold

It always warms my heart when the mere title of an essay makes me laugh. Herein, the estimable Theodore Dalrymple, with 'Your Dad is Not Hitler'. His other recent essay, 'A Sense of Others' is also fantastic.

Honestly, if Taki's Magazine had Moldbug and Heartiste writing for it, one would scarcely need to go anywhere else.

Sunday, October 19, 2014

Yes, we are still on for the thing tonight, just like we said, god dammit.

Continuing my descent into old fogey-ness, I seem to have encountered another shift in the zeitgeist that marks off my age. The first one was the enormous increase in the number of text messages sent by the average teenager. But this was something that one mostly would only see if one actually has a teenager around the house. Since this doesn't apply to me, I only find out about it in odd magazine articles.

But there is another trend that I have had cause to experience firsthand - the proliferation in confirmatory text messages over every social arrangement.

Up until recently, my general presumption was that things worked as follows:

-You and person X would agree to do activity Y at time Z.
-If one of you couldn't make it, you would inform the other ahead of time.
-Absent that, it is assumed that the arrangements stand and you both turn up at time Z.

You, like me, might presume that this is how things still work, yes?

You, like me, might end up being rather surprised.

These days, a lot of people, particularly young people, seem to have decided collectively that they're switching from an opt-out system of arrangements to an opt-in one. In other words, plans to do things in two days time are merely a suggestion, a vague agreement-in-principle. If you actually intend to follow through, you have to confirm this.

I found this when I'd start getting messages asking if we were still on for what I considered agreed-upon plans. I used to respond with 'of course' or something like that, wondering vaguely why this was now the thing that people did, but dismissing it as evidence of their neediness or insecurity. Confirming to them would seem pointless, but not a big deal.

I remember complaining to a friend, and saying that it was refreshing to find people who didn't need this. I was meeting someone new for coffee that evening, and was glad that we hadn't done the obligatory text message dance, which seemed like a good sign. That is, until she didn't actually turn up. Apparently she had decided that not receiving a confirmation was an indication that things were canceled, so much so that she apparently hadn't bothered to message me to check.

To paraphrase Frank Costanza, as I rained abusive text messages on her, I realized there had to be another way. After my rage subsided, it became pretty clear that my attempts to fight a rearguard action against the culture were as doomed as the 50's protests against rock and roll. So I now suck it up and send confirmatory messages. Sometimes one still isn't enough - I've sent a confirmation the night before, only to get another query confirming things an hour before. Who are these people, and what on earth is wrong with them?

I think the reality is that people have become so flaky that this is actually the more efficient social arrangement. When enough people become sufficiently inconsiderate that they just cancel all the time at the last minute, confirmations are actually time-saving. They're only a net drain when the probability of last minute cancellations is politely low, at which point they're a nuisance. This was what I assumed was the case, but apparently not. The real shift will have arrived when cancelling is so common that it's not even considered that impolite. Once again, I'm pretty sure this is a generational thing.

If narcissism and self-centredness are the psychological traits of our age, then flakiness is merely the natural result. Everyone else's time is less valuable than mine (one reasons), so what difference does it make if I change plans on someone at the last minute? Actually, it's probably worse than that - the median reasoning (such as it is) is probably closer to 'I have something better on, or can't be bothered. Ergo, I won't go'. To that extent, expecting confirmatory text messages at least indicates an ability to escape from pure solipsism and anticipate everyone else's self-centredness too. Which, at the margin, I guess is a good thing, even if the need for such anticipation is ultimately depressing.

Plus I just hate sending zillions of text messages, which annoys me too. Why? Same underlying reason.

Monday, October 6, 2014

Crazy is not a hypothesis

One of the criticisms I sometimes hear of behavioral finance, mostly from the rational crowd, is that one is just showing that 'people are crazy' or 'people are stupid'. This is always said dismissively, as if such an observation were trivially true and thus unworthy of observation or elaboration.

The first indication that this is a vastly overblown criticism is given by the fact that, despite the claimed triviality and obviousness of people's stupidity and craziness, these traits don't seem to find their way into that many models - the agents in those models are all rational, you see.

Well, actually, it's a bit subtler than that. Stupid agents have actually been in models for quite a while now, most notably in models that include noise traders, trading on false beliefs or for wholly idiosyncratic reasons.

But agents who could be described as 'crazy' are harder to find - acting in completely counterproductive or irrational ways given a set of preferences and information. So why is that?

The reason, ultimately, is that 'crazy' is usually not a useful hypothesis. It's a blanket name given to a set of behaviors that falls outside of what could be considered rational behavior, or even partially rational (such as kludgy rules of thumb or naive reinforcement learning).

And the reason you know that crazy isn't a useful hypothesis is that it tells you very little about how someone will act, other than to specify what they won't do. How would you go about modeling the behavior of someone who was truly crazy? Maybe you could say they act at random (in which case things look like the noise traders that we labelled as stupid). But are you really sure that their behavior is random? How sure are you that it's not actually predictable in ways you haven't figured out? It seems pretty unlikely that there are large fractions of traders who are in a bona fide need of institutionalisation in a sanitorium, if for no other reason than someone who was really bonkers would (hopefully) struggle to get a job at the JP Morgan trading desk or acquire enough millions of dollars to move financial markets.

The whole point of behavioral economics (and abnormal psychology before it) is to figure out how people are crazy. When someone is doing something you don't understand, you can either view it as mysterious and just say that they went mad, or you can try to figure out what's driving the behavior. But madness is an abdication of explanation.

Good psychiatry reduces the mystery of madness to specific pathologies - bipolar disorder, psychopathy, depression, autism, what have you. 'Madness' functions as the residual claimant, thankfully getting smaller each year.

Good behavioral finance ultimately strives at similar ends - maybe people are overconfident, maybe they use mental accounting, maybe they exhibit the disposition effect. These are things we can model. These things we can understand, and finally cleave the positive from the normative - if rational finance is a great description of what people should do but a lousy description of what they do do, then let's also try to figure out what people are actually doing, while still preaching the lessons we formulated from the rational models.

To say that behavioral finance is just 'people acting crazy' is somewhat like saying that all of economics can be reduced to the statement 'people respond to incentives'.  In a trivial sense, it may not be far from the truth. But that statement alone doesn't tell you very much about what to expect, as the whole science is understanding the how and the why of incentives in different situations - all the hard work is still to be done, in other words.

It's also worth remembering this in real life situations - when someone you know seems to be acting crazily, it's possible they have an unusual form of mental illness as yet unknown to you, but it's also possible that you simply have inadequate models of their preferences and decision-making processes. Usually, I'd bet on the latter.