Monday, November 30, 2009

The Black Swan

I recently read "The Black Swan" by Nassim Nicholas Taleb. I found this to be an entertaining and thought provoking book that was worth reading. However it has definite flaws which others may find more off putting than I did.

The thesis of "The Black Swan" is that the course of events is greatly affected by rare, difficult to predict events, with large consequences. An example would be the 911 attacks. The title refers to the unexpected discovery of black swans in Australia surprising ornithologists who had come to believe from prior observations that all swans are white. Taleb calls unexpected events with large consequences "Black Swans".

Taleb develops this rather simple idea at great (300+ pages) length. Along the way he discusses some of the reasons the importance of rare events is underestimated. A particular target is statistical methods based on the normal (Gaussian) distribution which Taleb believes are routinely used in inappropriate ways.

Taleb has a provocative writing style. He clearly does not subscribe to the academic convention which requires you to carefully hedge and qualify your work and at least pretend to respect your opponents and their work. So Taleb routinely makes sweeping claims while dismissing contrary views as nonsense in the process casually insulting a wide range of people. I found this more entertaining than irritating even when I was in the line of fire (as on p. 204-205, "Furthermore, this trade-off between volatility and risk can show up in careers that give the appearance of being stable, like jobs at IBM until the 1990s. When laid off, the employee faces a total void: he is no longer fit for anything else. ..."). Still the academic convention exists for a reason.

One major flaw in the book is Taleb is prone to overstatement. The fact that forecasting is imperfect does not mean it is useless (as Taleb often seems to feel). For example on page 129-130 Taleb discusses risk management at a casino. They worried about and took measures to limit losses from lucky gamblers and cheaters only to be hit by among other things a large loss when a star performer was almost killed by a tiger something they had never considered as a possibility. Taleb concluded:

... The casino spent hundreds of millions of dollars on gambling theory and high-tech surveillance while the bulk of their risks came from outside their models.

But this is seriously misleading. It is quite likely the bulk of their risks would have come from within their models if they had not taken measures to reduce the risks they could foresee. This is like the claim that 40% of heat loss is through you head which is true when your head is the only uncovered part of your body.

So in summary lots of what Taleb says is true and often overlooked but things are not as one-sided as he claims.

Confirmation bias

Confirmation bias is the tendency to unjustifiably assign greater weight to evidence that confirms your existing beliefs than to evidence that contradicts your existing beliefs. A particularly blatant form occurs when weight is given to confirming evidence that is in fact false. An example being the hoax which claimed states which voted for Bush in 2000 (or 2004) ranked low in average IQ which took in some liberals predisposed to believe Bush voters were stupid. Taleb in his book "The Black Swan" similarly defines (p. 308) confirmation error:

You look for instances that confirm your beliefs, your construction (or model) -- and find them.

Taleb claims this error causes people to underweight the possibility of unforeseen events, Black Swans. This is plausible, still it is a bit amusing to see Taleb apparently make the same error when he claims (p. 221):

Consider the following sobering statistic. Of the five hundred largest U.S. companies in 1957, only seventy-four were still part of that select group, the Standard and Poor's 500, forty years later. Only a few had disappeared in mergers; the rest either shrank or went bust.

The 74 out of 500 claim apparently comes from a book, Creative Destruction, by Foster and Kaplan. This work was criticized by Siegel and Schwartz who report 94 survivors as of year end 2003. And Standard and Poors reported 86 survivors after 50 years. So the 74 number appears to be low. Perhaps more seriously the claim that only a few had disappeared in mergers is wrong. Mergers are the most common reason for removal from the index and another reason (other than shrinking or going bust) is being taken private. Companies do go bust but it is not nearly as common as Taleb is implying.

Saturday, November 28, 2009

The General Theory

Recently I reread the "The General Theory of Employment, Interest and Money" by John Maynard Keynes. This 1936 book is historically important and perhaps newly relevant given our recent economic problems. Unfortunately it is not very accessible to the lay reader. Keynes states in the first sentence of the preface that "This book is chiefly addressed to my fellow economists." and indeed much of it consists of detailed technical analysis and criticism of the writings of other economists such as Marshall and Pigou. Additionally it was written about a different time and place which while not totally different from modern America often seems a bit foreign.

So this book isn't really a good introduction to Keynesian economics. I would hope and expect that there are more recent books which provide a clearer explication of his economic ideas. However I can't give a specific recommendation. Perhaps I should try reading some recent college textbooks.

"The General Theory" is written in a somewhat rambling style and mixed in among 384 pages of technical economic arguments are some general observations by Keynes about how capitalism functions in practice. These reveal Keynes to be an intelligent and perceptive observer and make him hard to discount entirely even by those unsympathetic to his leftist political views. Some of these observations have been widely quoted and are well known. However they are not the bulk of the book.

As for our recent economic problems it does not appear that Keynes would have been much help. On page 322 he suggests regarding boom/bust cycles:

Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest!<1> For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump: but in abolishing slumps and thus keeping us permanently in a quasi-boom.

This was basically Greenspan's policy and it eventually blew up as low interest rates and easy credit enabled the housing bubble, the inevitable collapse of which triggered the crisis. Keynes doesn't discuss asset price bubbles (although he recognizes speculative excitement as a distorting factor in investment decisions) and thus seems unduly complacent about the risks of low interest rates he advocates. He does acknowledge in the footnote in the above paragraph that there are arguments against his remedy:

See below (p. 327) for some arguments which can be urged on the other side. For, if we are precluded from making large changes in our present methods, I should agree that to raise the rate of interest during a boom may be, in conceivable circumstances, the lesser evil.

It appears to me the other side has the better case.

While I am unconvinced by Keynes's policy recommendations I do think he had a point that the classical economic theory of the time was inadequate and I suspect it remains unsatisfactory when it comes to macroeconomics. While it seems clear as Keynes points out that capitalist systems are not highly unstable as else they could not function at all it also seems clear that they are not highly stable either as they seem prone to certain instabilities that sometimes grow to damaging levels. So economic models that don't allow for the possibility of such destructive instabilities aren't going to be a satisfactory guide to the actual economy.

In summary my take on this book is that while the big picture issues it considers are still relevant and Keynes often makes acute observations for the most part the book is too dated and technical to be worth close study by the lay reader. It might be worth skimming particularly if the reader already knows some economics.

Friday, November 27, 2009

Overtime auction

Last Sunday I posed a problem concerning when a NFL coach should play for a win in regulation. The solution suggested the Atlanta coach may not have maximized his team's winning chances. This is plausible as coaches appear somewhat reluctant to take short term risks even when this would maximize their team's chances. This is reinforced by the amount of criticism a coach will receive when a gamble fails. Consider the criticism Belichick received for his recent defensible decision to go for a fourth down conversion.

However the problem calculation is only as good as the assumptions. One key assumption was the chances in overtime would have been equal. The Atlanta coach may have felt the Giants would have been demoralized by blowing a late lead giving his team the edge in overtime. As it turned out the Giants won the coin flip and immediately drove for the winning field goal. When this happens the losing team generally feels the coin flip is overly important. In fact the coin flip winner seems to win about 60% of the time. Suggestions are periodically made to change the rules to diminish the importance of winning the toss in overtime but they haven't attracted much support. Perhaps because the most common proposal giving each team a possession has obvious problems of its own.

A very simple change would be to move the kickoff spot forward to the 35 yard line for the overtime kickoff. Before the 1994 rule change moving the spot from the 35 to the 30 the overtime winning percentage was about 50% regardless of which team won the toss. I am fond of making the coaches bid for field position. The coach bidding closest to his end zone would get the ball. If nothing else this would provide ample fodder for second guessers.

I came up with the auction idea myself but others have proposed similar schemes. See here and here .

Thursday, November 26, 2009

Lottery tickets

Another comment on "The Black Swan". In the glossary on pages 308-309 Taleb defines:

Lottery-ticket fallacy: the naive analogy equating an investment in collecting positive Black Swans to the accumulation of lottery tickets. Lottery tickets are not scalable.

By scalable Taleb means having unlimited upside.

The analogy to lottery tickets is unwelcome to Taleb because he advocates a strategy of betting on long shots which you are hoping will pay off because of unexpected events ("Black Swans" in his terminology). This looks something like buying lottery tickets but buying lottery tickets is generally a stupid strategy. The reason is not because they don't have unlimited upside (the millionfold gains available in typical state lotteries are greater than are plausibly possible in most other venues) but because the tickets cost too much. The New York State lottery seems to return about 40% of the amount bet which I think is fairly typical. So if you could buy lottery tickets for 10 cents on the dollar they would be a fine investment.

Taleb believes markets don't properly price in the possibility of extreme events, Black Swans. This is plausible but there is a problem in trying to take advantage of such mispricing. Namely, as the example of lotteries shows, people like making long shot bets. So any particular long shot bet may be overpriced (as lottery tickets are). So you can't just blindly bet on long shots (lest you violate another of Taleb's precepts which is don't be the sucker) you have to locate good long shot bets. But Taleb doesn't offer much help in that regard.

Wednesday, November 25, 2009

Forecast spread

I have been reading "The Black Swan" by Nassim Nicholas Taleb. It is written in a kind of arrogant style. I don't find it all that annoying perhaps because I largely agree with the book (at least so far). However it does encourage my natural inclination to nitpick.

On page 150-151 Taleb claims:

... Worse yet, the forecaster's errors were significantly larger than the average difference between individual forecasts, which indicates herding. Normally, forecasts should be as far from one another as they are from the predicted number. ...

This claim which I believe I have seen elsewhere is just not true. There is no reason to expect even independent unbiased predictions to behave in this way. Suppose for example we ask for forecasters to predict how many heads will be observed in 100 flips of a fair coin. Naturally they will all predict 50 but that doesn't mean we can expect exactly 50 heads. This is an artificial example but you will see the same clustering whenever there is a large random component in the variable being forecast. This variable could be for example the number of homicides in New York in 2010 or the size of the corn harvest in Iowa. Forecasters will be in effect estimating the mean of an underlying random distribution and there is no reason to expect these estimates to be as widely spread as the distribution itself.

Tuesday, November 24, 2009

Triumph of the Will

Last week I watched "Triumph of the Will" , the notorious Nazi propaganda film directed by Leni Riefenstahl , which recently became available on DVD via netflix. It depicts the 1934 Nazi Party Congress in Nuremberg with excerpts of speeches by numerous Nazi leaders including Hitler interwoven with scenes from spectacular mass rallies. This film is of course historically important both as a movie and for the view it provides of the Nazi party. However I wasn't all that impressed. The film may have been technically innovative at the time but is nothing special by current standards. Some of the Nazi mass rallies were quite impressive but this may be more a tribute to the stage management skills of the Nazi organizers than to Riefenstahl's talent as a film maker. Close students of internal Nazi politics may also be interested in things like the fervent declarations of loyalty and subordination to Hitler by SA leader Viktor Lutze who had recently replaced Ernst Rohm who was removed and killed in the Night of the Long Knives . However like Roger Ebert I found the film a bit tedious and overrated (although perhaps not as bad as Ebert claims). What power it does have seems to derive in large part from the viewer's knowledge of the terrible destiny of the Nazi movement. Perhaps foreshadowed in this film by the opening text commentary which declares the World War to have begun 20 years earlier but implies that Germany's suffering only began with her defeat, a rather bizarre point of view to say the least.

Monday, November 23, 2009

License plate madness

It looks like New York State is going to abandon an ill-conceived plan to raise money by increasing the charge for license plates. This was objectionable not so much for the increase in the plate charge itself but because the state was going require everyone to replace their plates even when there was nothing wrong with their old plates. This is an all too common form of government stupidity. The cost to the residents of the state in terms of additional expense and hassle to get their plates switched would far exceed the plate fee itself. And some of the additional fee revenue would be offset by the expense to the state to manufacture and distribute the new plates. All in all a very inefficient way for the state to raise money. Much more efficient would be to just raise the income tax rates a little which would involve minimal additional costs. But of course if the state routinely paid attention to efficiency they might not need more money.

Sunday, November 22, 2009

Going for two

Sunday I was listening to the Giants-Falcons game on the radio when the Falcons, trailing by 14, scored a touchdown with about six minutes left in the game. Playing for overtime the Falcons kicked the extra point. They scored another touchdown but then lost in overtime. There was a case for playing to win in regulation by going for the two point conversion after the first touchdown. Suppose we assume the Falcons will score another touchdown and the Giants will not score again in regulation. Suppose the chance of converting a two point conversion try is p and the chance of making an extra point try is q and that if the game goes into overtime each team has a 50% chance to win. Then what is the relationship between p and q that determines whether it is better for the Falcons to go for the two point conversion or try to kick the extra point after their first touchdown?

Saturday, November 21, 2009

North County Trailway again

Last Monday I walked on a section of the North County Trailway I had never been on before. This is the section from Pleasantville Road south to North Bedford Road (117) which is about a mile and one half long.

I started from the Briarcliff Library which is just north of Pleasantville Road. I parked in the library parking lot. There are some library parking only signs but I figured the rest of the lot was ok. This lists the Briarcliff Library lot so I guess I was right. The parking lot was enlarged when they added on to the library so there is plenty of space.

This section of the trailway is not very good for communing with nature. Going south Route 100 (aka Saw Mill River Road, aka New York 9A) is nearby on the left and the Taconic State Parkway comes in to parallel Route 100 a bit further away. On the right are mostly the back yards of houses and South State Road. It is better than the section north of the library which runs on the shoulder of Route 100 for a while.

The photo shows a straight stretch just south of Pleasantville Road where the afternoon sun displayed the last of the fall color to advantage. Route 100 is just off to the left.

Friday, November 20, 2009

Golden Rule

My KSM post prompted some discussion of the Golden Rule in the comments. I have never found the Golden Rule (in the traditional "do unto others as you would have them do unto you" formulation) all that useful. As pointed out in the comments if your natural inclination is unduly selfish then following the Golden Rule will be unduly generous to others (and vice versa). But I think what most people actually mean by the Golden Rule is something like "when interacting with another give their interests equal weight with yours". This will produce more sensible results but may adversely affect third parties. Also it still depends on your possibly weird preferences. So my preferred version is "do unto others as the community as a whole would want you to".

This has the advantage of providing a reasonably objective decision procedure. It is open to the objection that it will perform poorly when the community as a whole is (for example) a collection of bloodthirsty maniacs. Some might prefer "do unto others what is in the interest of the community as a whole". But this assumes the actor's moral judgement is superior to that of the community as a whole which is impossible as a general rule and will tend to encourage the actor to rationalize his selfish preferences.

In any case I don't see much comfort for KSM in such community based rules. Even granting that KSM is a member of the community which I am unwilling to do.

Thursday, November 19, 2009

Blowing bubbles

Today's NYT has another infuriating article about how the administration is bankrupting the FHA in a desperate attempt to prop up housing prices. As the article points out this sort of artificial support is pointless unless it is continued indefinitely in which case it will be a enormous fiscal drain on the government and cause vast over investment in housing. Kind of like European agriculture policy. Naturally Barney Frank who appears a complete captive of the housing industry is in favor.

Wednesday, November 18, 2009

Security clearance update

Back in March I applied for the security clearance needed for a potential job and I took the required polygraph examination in June. I had thought this meant the clearance review was almost complete but I hadn't heard anything since. However on Wednesday morning I received a call that my clearance had come through which was nice to hear. So in my case, which I would think was pretty straightforward, the clearance process took over 8 months.

In the meantime my potential employer seems to have mislaid my employment application so there remain things to be done. Still it feels like progress.

Tuesday, November 17, 2009

New York mini-COBRA update

As I noted here New York has expanded their state COBRA law to grant 36 months of coverage in some cases. Unfortunately it appears this does not apply to me but not for the reason I was worried about. As the FAQ explains the law does not apply to self-funded (as opposed to fully insured) plans. The difference is explained here which notes in part:

Self-insured plans are subject to federal regulations, while fully-insured plans are regulated by the state in which the plan operates. This exempts MSU from providing for state-mandated benefits in our plans (which can be costly) and from paying state-mandated taxes on health care premiums (an additional expense for the plans).

I expect IBM's thinking is the same as MSU's and all their plans are self-insured. The benefits person on the phone said the law didn't apply to IBM and this seems like the most likely reason. And I really can't complain, New York's legislature is basically completely owned by the health care provider lobby and state regulated plans are likely much more expensive. Prices in the individual market seem to be ridiculous. Fortunately IBM has retiree plans that I can go into as an alternative which are more expensive than the employee plans but still better than the New York individual plans.

Monday, November 16, 2009

Deducting interest

Felix Salmon argues here and here for not allowing corporations to deduct interest paid as an expense when calculating their income for tax purposes. Matthew Yglesias offers support here .

Salmon is usually interesting but sometimes he runs completely off the rails as here. The idea of the corporate income tax is to tax profits. It is completely clear that interest paid is an expense not profit. There is no loophole as interest received is income.

There is currently an issue in that dividends are double taxed, they are not deductible to the payer but are taxable to the recipient. This does encourage debt financing as compared to equity financing. This could be changed by making dividends paid deductible or dividends received tax free (currently dividends received are taxed at a preferential rate which is roughly equivalent to only taxing half of them). Double taxing interest as well is a fix which is far worse than the disease. It would be difficult to implement as lots of transactions incorporate an interest component implicitly. And it would cause severe dislocations in existing arrangements for no good reason.

There are numerous ways of discouraging excessive leverage that do not involve completely fouling up the existing system of income taxation.

As for Yglesias he claims:

Our political culture is highly biased in favor of tax cuts, which leads to a lot of subsidies being doled out that nobody would take seriously. If I said “every time a business makes $1 in interest payments, we should give them a quarter and pay for it with higher overall corporate tax rates” nobody would think that made sense. ...

Thus demonstrating his ignorance as this in fact makes excellent sense to anyone familiar with the principles of the corporate income tax.

Sunday, November 15, 2009

Edge of Darkness

I just finished watching the 1985 British 6 episode miniseries "Edge of Darkness" which was recently released on DVD. I have liked other British miniseries like "State of Play" but I found this one ultimately disappointing. It had its good points but the cumulative effect of the ridiculous plot eventually became too much for me. I thought the final episode particularly weak although to some extent this just reflects problems latent in the earlier episodes. According to one of the special features on the DVD numerous alternative endings were written suggesting some awareness of a problem but not one which I think was solved satisfactorily.

Another minor irritant was the special features on the first DVD of the 2 DVD set contain footage from the final three episodes on the second DVD of the set. This also happens with TV series on DVD sometimes. Season 2 (for instance) special features will talk about things that happen in season 4. The assumption seems to be you have already seen the whole series but I generally haven't and I don't like spoilers however minor.

Anyway although "Edge of Darkness" received considerable acclaim, it isn't that great in my opinion. Like "State of Play" it is being remade as a movie. Perhaps this time I will like the movie better.

Saturday, November 14, 2009

Trying KSM

The Obama administration recently announced that it would try Khalid Shaikh Mohammmed (and four others) in federal court for plotting the 911 attacks. I think this is a mistake. In my view there is no reason to grant these people the legal protections we give American citizens accused of ordinary crimes.

I see this as a political decision and would have Obama personally ultimately decide the fate of these prisoners. If he doesn't want all the responsibility let Congress ratify his decisions. Of course this is unlikely as politicians hate taking responsibility and routinely let the courts take the heat. But in my view this is no more the proper domain of the civilian courts than was the decision to bomb Hiroshima and Nagasaki.

Friday, November 13, 2009


I recently read "Freakonomics" the 2005 bestseller by economist Steven Levitt and Stephen Dubner . Dubner wrote a very favorable profile of Levitt for the New York Times magazine. This book is a greatly expanded version of the profile. Recently the authors have written a sequel "SuperFreakonomics" which I have not read.

Freakonomics was easy and entertaining to read. It is not surprising that it was a success. However I have doubts about how reliable it is.

The most controversial claim in the book is the assertion that the drop in crime in the 1990s was in large part a delayed result of the legalization on abortion in the 70s. The idea being that legal abortion reduces the number of unwanted children who are more likely to become criminals. The claim comes from this academic paper by Donohue and Levitt. This claim has not been generally accepted. I have serious doubts just based on this homicide data . Looking at the graph for black males homicide rates for the 14-17 age groups and the 18-24 age groups rise together, peak in the early 90s and then fall. If legal abortion were causing the fall it should have showed up first in 14-17 group. The data seems much more consistent with an epidemic of violence (plausibly caused by the invention of crack cocaine) which affected both age groups similarly and then burned out. Foote and Goetz found errors in the Donohue and Levitt paper which appear to invalidate the results. Donohue and Levitt admit errors but claim a somewhat different analysis produces similar results to their original claim. Without getting too deep in the weeds here, I consider this pattern of coming up with a new argument that produces the same results as an earlier refuted argument to be a bit of a red flag as it suggests the method of analysis may have been chosen to produce the desired results. It is more objective of course to choose the method of analysis first and then accept whatever results it produces.

The same pattern was seen with the claims in the book about more police reducing crime. They are based on this 1997 Levitt paper. Justin McCrary found Levitt had made a serious programming error which when corrected invalidated his results. Levitt admits error but claims the results were correct anyway.

Levitt admits in the NYT profile that "... I'm not good at math, ...". This is a problem when you are doing complicated statistical analysis where it is easy to go wrong. Perhaps Levitt needs a coauthor who is good at math to keep him from error. Incidentally McCrary acknowledged that "Steven Levitt provided both data and computer code.". This is greatly to Levitt's credit and unfortunately far from universal among academics.

There are other claims in the book which have prompted criticism. One is the claim that a swimming pool in your home is more dangerous to a small child than a gun. However this seems correct to me although saying more that swimming pools are dangerous than that guns are safe. Another is an unsourced throwaway assertion that the average prostitute earns more than the average architect which seems dubious.

In general Levitt's work is interesting although somewhat peripheral to the main concerns of economics. This doesn't mean the issues are unimportant, the causes of crime are certainly important. But you won't learn much standard economics from Freakonomics. And as Daniel Davies says in this review Levitt has a bad habit of presenting his way of viewing complicated issues as only way (although unlike Davies I didn't find the pool gun comparison particularly objectionable).

So in summary if you want an entertaining look at some interesting and provocative topics Freakonomics is a good choice. But don't take it as the final word.

Thursday, November 12, 2009

The Audacity of Hope

I have finished reading Obama's second book, the 2006 "The Audacity of Hope". For the most part this book just presents standard liberal arguments in a not very interesting way. Perhaps this is to be expected from someone who must already have been at least seriously contemplating a Presidential run. I complained here about some points I found particularly grating. There were a few additional things I found of note.

There is very little if anything relevant to the recent financial crisis. Obama just doesn't seem very interested in how the economy works or how the government might help it work better. So I don't think prospects for major financial reforms are very good.

His chapter on international affairs comes across as quite liberal interventionist and is little comfort to those of us like me who would prefer fewer wars.

I found the chapter on family a little strange. While Obama said all the politically correct things about how his wife was right to ask him to spend more time with his children and generally helping out around the house I was nevertheless left with the distinct impression that Obama was a bit resentful and wouldn't mind at all if his wife was more like Nancy Reagan. And I was a bit dismayed to learn from Obama's discussion of his schedule that the Senate functions on a Tuesday to Thursday schedule so the members can spend Friday through Monday at home. Perhaps Republican obstructionism isn't the only reason the Senate isn't getting anything done.

Obama does make some rhetorical gestures towards conservatives as for example (p. 60):

... (I am convinced--although I have no statistical evidence to back it up--that antitax, antigovernment, antiunion sentiments grow anytime people find themselves standing in line at a government office with only one window open and three or four workers chatting among themselves in full view)

but doesn't really offer anything concrete.

All in all I don't think this book will be of much interest to anyone who isn't fanatic about politics.

Wednesday, November 11, 2009

Financial complexity

Felix Salmon promotes rent-to-buy residential real estate transactions concluding:

... Right now, when a lot of motivated sellers are looking to any possible way to move their properties, might be a very good time for these ideas to gain traction.

In my view this is seriously misguided. The more complex and idiosyncratic a commercial transaction is the greater the likelihood that one party is being taken advantage of. The simplest and easiest way to move your property is to reduce the cash price. Complicated schemes like rent-to-buy or even just taking back a mortgage in order to sell property generally amount to price cuts in disguise. A naive seller is likely to underestimate the size and risks of this implicit price cut and end up being worse off than if they had just straightforwardly reduced the price.

A naive renter can also be taken advantage of by overpaying via a rent surcharge for an option to buy. Correctly pricing these deals is a complicated problem which the average person is apt to get seriously wrong.

And this isn't even a zero-sum proposition. Transaction costs will increase because such deals are non-standard. And they are more likely to end up in court if something goes wrong. This is to the disadvantage of both parties.

The average person is better off sticking to transactions on traditional terms. These are easier to understand and less likely to encounter unforeseen pitfalls. A policy that even the supposedly sophisticated buyers of complex mortgage backed securities would have been wise to follow.

Tuesday, November 10, 2009

Convenient falsehoods

I have been reading Obama's other book "The Audacity of Hope". It is pretty heavy going and I haven't finished yet. However I have completed chapter 5 "Opportunity" which contains some policy discussion. I disagree with much of it which doesn't mean too much as Obama and I have different priorities. What is more disturbing is that Obama seems to have difficulty critically evaluating proposals which appeal to liberal prejudices but won't actually work.

Obama uncritically supports ethanol on pages 169-170. Corn based ethanol is a good example of something which is superficially appealing but doesn't actually advance environmental priorities.

On page 161 Obama claims "... Recent studies show that the single most important factor in determining a student's achievement isn't the color of his skin or where he comes from, but who the child's teacher is. ...". Obama doesn't cite these studies so I can't specifically address them but this statement is contrary to numerous other studies that show the most important factor achievement in student achievement is the characteristics of the student and the next most important is the characteristics of his classmates. The quality of his teacher (within the range commonly found in American schools) hardly matters.

Finally on page 177 in discussing health insurance Obama claims "... The bigger the pool of insured, the more the risk is spread, the more coverage provided, and the lower the cost. ...". This misunderstands how insurance works. Pooling costs spreads them more equally but it doesn't reduce them. Pooling a bunch of high risks doesn't make them low risk or low cost.

This inability to recognize well intentioned nonsense won't matter too much if Obama appoints good advisers to handle the details. And Obama would hardly be the first President to be a big picture guy. Still Obama is the President we have at the moment and I would prefer a President with a better BS detector.

Monday, November 9, 2009

Teatown Lake Reservation

Teatown Lake Reservation is another park near my former place of employment which I never bothered to really explore while I was working. It has lots of trails and recently I have been trying them out.

Monday I was a little put off by an USG Air Quality Alert (for particulates) which I eventually decided to ignore. I parked in the Lakeside Lot which has a billboard with a large more readable version of this trail map . I decided to take the back forty loop trail (which is at the bottom center).

At times the air did seem rather oppressive, hot and humid, as I made my way up a long slope as the trail followed a power line cut. The view from the top was nice. Normally around here the views even from the tops of hills are obstructed by trees but in power line cuts the trees have been cleared providing longer sight lines.

On the backside of the loop I took the waterfall trail which connects to the Briarcliff Peekskill trail. The waterfall along the way is more like a cataract but nice enough in a Japanese Garden sort of way. I returned to the loop trail and then diverted again on a shortcut trail which follows the power line cut to Spring Valley Road. Strangely although this trail is clearly marked at Spring Valley Road the entrance is plastered with Con Ed no trespassing signs.

I then took the Lakeside trail to return to my car. The picture was taken as the sun was setting over Wildflower Island.

Sunday, November 8, 2009


My former employer has announced that it is dropping co-pays for visits to primary care physicians. Since I am still in the plans under COBRA I expect this will apply to me as well. The stated reason is to reduce health care costs which makes no sense to me. I really doubt the co-pays were causing a significant number of employees to turn minor problems into major problems because they were too cheap to go to a doctor when needed. Eliminating co-pays for colonoscopies might make more sense but even there the ick factor is probably a bigger deterrent than the cost.

The move does make sense as a way to reduce taxes as co-pays are paid with after tax dollars while employer paid benefits are not taxed. Perhaps presenting it as a measure to improve care is better PR.

Saturday, November 7, 2009

Deep waters

Matthew Yglesias writes :

I would say that another message is that progressive politics is badly disadvantaged by a situation in which the overwhelming majorities of political leaders and prominent media figures are white men. There are plenty of white men with progressive views, but in general the majority of white men are not progressive and the majority of progressives are not white men. Drawing from the relatively small pool of white male progressives means drawing from a shallow talent pool.

As regards media figures this is wrong. The traditional media is so hostile and defensive regarding bloggers because it has become apparent the skills required to be a pundit are not rare at all. And that most established media figures owe their prominence to some variety of connections or luck not extraordinary talent. The absolute number of white male liberals is not small and will contain plenty of talented people as Yglesias himself shows.

The problem with drawing media figures just from white men is not that you will give up a lot in terms of talent since you won't. The problem is a lack of diversity. Many of the purported advantages of diversity are politically correct nonsense but in the case of bloggers and the like there really is an advantage to reading people writing from a wide range of personal experience. Which is why I read bloggers like Ta-nehisi Coates or Clayton Cramer .

However I suspect Yglesias's real problem with progressive media figures isn't that they are the wrong color but that there aren't enough of them. Not sharing Yglesias's politics I am not particularly sympathetic. And of course it is to be expected that the media will tend to reflect the preferences of its audience.

Friday, November 6, 2009

Home Savings RIP

I grew up in Livermore California and at some point established a bank account with a local branch of Home Savings . If Wikipedia is to be believed Home Savings maintained conservative lending standards enabling it to survive the 80s savings and loan crisis. In 1998 Home Savings was taken over by Washington Mutual (WaMu). WaMu apparently thought that only lending money to people who could pay it back was limiting their growth. Their innovative new strategy of lending to anybody didn't work out too well long term and in September 2008 WaMu became the largest bank failure in US history. FDIC seized the bank and sold it to JP Morgan Chase .

Through all this I maintained an account. But as it happens I also have accounts with Chase. Chase recently finished integrating the WaMu operations with their own converting the WaMu accounts to Chase accounts in the process. I didn't need the extra account so when I was in my Chase branch Friday I had them close it thereby bringing my long term relationship with Home Savings to an inglorious conclusion. Hopefully Chase will have better survival instincts.

Thursday, November 5, 2009

Standard Oil of Indiana

It sometimes seems like you can find anything you could possibly want to know on the internet. This is not the case as I discovered a few days ago when I tried to find the stock trading symbol for Standard Oil of Indiana. Perhaps this information is actually on the internet somewhere but I was unable to find it.

On a related note this site allows you to easily look up stock prices going back to January 1, 1970. But only if the company is still in existence. If you want historical prices for a company like Standard Oil of Indiana which first changed its name to Amoco and then was bought by British Petroleum you are apparently out of luck.

This sort of memory loss can cause something called survivorship bias . If you compute average returns over a period of time only for stocks (or mutual funds) still in existence at the end of the period you may obtain a misleadingly high result as you will omit the results for all the companies that disappeared (often wiping out their shareholders in the process) during the period.

Wednesday, November 4, 2009

A Failure of Capitalism

As I mentioned earlier I recently read Richard Posner's book, "A Failure of Capitalism", about the financial crisis. Richard Posner is a federal judge on the Seventh Circuit Court of Appeals. He is a famously prolific and often cited jurist. Still he has somehow found time to write many books of which this is the latest.

It would be nice to be able to recommend this book but I can not. One problem is the book is not very lively. Based on this book Posner seems to be a mediocre writer. Another problem is I don't think Posner is especially qualified to be writing about the financial crisis. Posner may be more knowledgeable about economics than the average federal judge but he isn't a professional economist. Finally I don't think Posner had much of interest to say. The book is 330 pages long and a few days after finishing it I don't remember much of it.

I mostly remember points of disagreement. Posner seems heavily invested in the idea that the bankers and banks involved were acting intelligently and rationally taking reasonable risks that unluckily led to collective disaster. This is somewhat defensible in the case of individuals but I don't think it is defensible for many of the institutions. Collectively they made some very dumb decisions. There was a complete collapse of underwriting standards for home mortgages leading to among other things widespread fraud. This was not a reasonable risk that unluckily went bad. I am not sure why this is important to Posner as it doesn't affect his conclusion that more regulation is needed. This is true whether banks are intelligently or stupidly taking the risks that are collectively unacceptable for society as a whole. Either way their freedom of action needs to be restricted.

There is an unattractive tendency among some economists, overly invested in the virtues of markets, to come up with elaborate rationalizations for why obvious market failings are really for the best. Perhaps Posner is similarly over invested in economic models based on rational actors. But if such models are useful it is because they are a reasonable approximation to reality not because humans individually and collectively really are invariably rational actors.

Posner thinks most of the mistakes leading to the crisis were excusable but that the failure of the government to have contingency plans was not. This doesn't make a lot of sense to me. As Posner correctly states we don't have a good idea of how to best recover from this sort of crisis. Which makes contingency planning for recovery of very limited usefulness. Better to worry about how to stay out of trouble in the first place.

I don't want to claim this book is completely worthless but I don't think the value to length ratio is very favorable. I expect there will be better books about the financial crisis.

Astorino beats Spano

In a bit of a surprise Astorino defeated Spano (a three term incumbent) for Westchester County Executive in Tuesday's elections . The margin of victory was substantial about 58-42 which is a reversal of the results with the same candidates four years ago. I guess people thought three terms were enough.

DiFiore won easily for district attorney aided by having two opponents.

Tuesday, November 3, 2009

Sunny Ridge Preserve

Sunday I went walking in Sunny Ridge Preserve . This area was opened last year after some delays. It lies between Route 134 and Hawke's Avenue/Spring Valley Road. There is a small parking lot on the west side of Route 134 just north of Grace Lane. The eastern part of the preserve is relatively flat with a couple of ponds to the south. In the western part the trails climb a ridge with views of the Hudson from the far side.

It was cloudy Sunday and the fall color is past peak. Still the soft pastel colors were very pretty in spots. My new digital camera seems to handle this sort of lighting better than my film cameras which liked bright sunshine.

Monday, November 2, 2009

Westchester elections

Westchester has elections for local offices Tuesday so I was getting robocalls Monday. I suppose I will vote although I have little knowledge of or interest in local politics. Which means for many of the races I will be choosing between a bunch of people I have never heard of.

For county executive I am voting for Astorino over Spano. Spano has been in office for 12 years already which I figure means this mess is his fault.

For county district attorney I am voting for the incumbent, DiFiore. She seems to be doing a better job than her predecessor, Pirro . DiFiore authorized the DNA test which freed Jeffrey Mark Deskovic , a weird local kid who was convicted of a murder he did not commit and spent 16 years in prison.

I was in the same room as DiFiore when she briefly came by to glad hand while I was serving on a grand jury earlier this year. I was a bit surprised by how old she looked in person although she is actually slightly younger than I am.

Sunday, November 1, 2009

Double vision

Friday I received two copies of the same DVD from Netflix. Apparently this happens from time to time. Mistakes happen of course but it is interesting to speculate about what is causing this error. Is their software buggy or is there a design decision to accept an occasional duplicate mailing or is some hardware like a barcode reader malfunctioning or is it just the proverbial human error? However I don't really know enough about this sort of thing to figure out what is the likeliest explanation.