Economics and similar, for the sleep-deprived

A subtle change has been made to the comments links, so they no longer pop up. Does this in any way help with the problem about comments not appearing on permalinked posts, readers?

Update: seemingly not

Update: Oh yeah!

Friday, May 28, 2010

Extra Thursday music link, on a Friday

Just realised I should have picked this one yesterday:

It is a state of emergency, government call in the military. Dedicated to Christopher "Dudus" Coke, another person who doesn't think it's fair for him to be extradited to the US justice system.

I joke, but it's absolutely horrible. Jamaica has, of course, an amazingly high murder rate at the best of times (58/100k), but so far there have been 71 civilian casualties, plus however many of the Shower Posse gunmen and police officers who died (who aren't exactly noncombatants, but I doubt that any of them had particularly anticipated or expected something like this to happen to them). I don't know what to say. Here's a ludicrously hagiographic article detailing the political (Jamaica Labour Party) half of the atrociously dysfunctional political-criminal synthesis in Tivoli Gardens.
3 comments this item posted by the management 5/28/2010 08:02:00 AM
Basis points - an admonition

Quite why I am telling people things that any decent financial journalists' stylebook ought to have I don't know, but I have seen so much grievious abuse of the humble basis point over the last month or so ...

1) A basis point is a measure of differences between two interest rates (that's what a "basis" is; also futures and forward rates but those are basically the same thing). It is not merely a posh-sounding way of saying a hundredth of a per cent. Talking about unemployment rates, GDP growth or whatever in basis points doesn't make you look cool, it makes you look like you don't know what you are talking about (I once saw someone write that the rate of income tax was 4000 basis points. Puke.) There is a partial and occasional exception for inflation rates, as of course the inflation rate is the basis between an indexed gilt and an ordinary gilt, but usually it is not correct to talk about inflation in bp either.

2) A basis point is a measure of differences between interest rates. The current 3m dollar LIBOR is 0.54%, it's not 54bp.

3) Given that the basis point has been invented, use it. If one interest rate is 0.6% and another is 0.48%, the spread between them is 12bp. It is not "a 25% difference".

It's not difficult. The phrase "basis points" really just means "and now, since I am talking about interest rates, I am warning you that I propose to talk about adding and subtracting them rather than multiplying and compounding them, and also I am multiplying the quantities by 100 to make them easier to deal with". Bloomberg, Reuters, the FT and WSJ are all regular offenders with respect to this poor little unit.
10 comments this item posted by the management 5/28/2010 02:51:00 AM

Thursday, May 27, 2010

From farts to farts in three generations

Via Jamie, the general subject of giving up on Private Eye. I also have more or less given up, basically for the reason that the darn thing isn't funny any more. Hasn't been for some time. Hislop's glory years were the 80s and early 90s, when "Have I Got News For You" was in its early days and when he finally drove Punch into the ground and gained the monopoly on British satirical news. Now ... well, now he is Punch, isn't he? Lots of tired in-jokes, the same bunch of cronies editing the thing, imperceptibly shifting into a bunch of old blokes harrumphing at each other in a saloon bar. Basically, Top Gear for people who can't drive.

There's a story arc here and it's not necessarily one that Hislop might like. Once upon a time, a bunch of sharp young men launched a magazine. Then they gradually turned into old farts, but in the meantime, they had attracted a surrounding gang of sharp young sycophants. But time moves on, and the second generation are well into farthood, and the diminishing number of young bloods aren't attracted to the tradition of Peter Cook and Paul Foot - they're HIGNFY fans, sycophants of the second degree.

Part of turning into an old fart surrounded by yes-men is that you become arrogant. That's why Tim Ireland isn't getting his apology. Ian Hislop has finally achieved his ambition of turning into Richard Ingrams; now that's what I call irony.
14 comments this item posted by the management 5/27/2010 02:44:00 PM
Thursday Music Link

I've said in the past that the greatest publishing industry triumph of the last ten years was to take womens' magazines, change the pictures around but retain all of the design elements, obsession with meretricious trivia, ungodly ad load for branded goods, etc etc, and sell them to men. That's what Nuts and Zoo are, and when you see them in the supermarket stacked up against a load of equally worthless womens mags, you really do begin to question the value of mass literacy[1].

All of which is by way of introduction to the definite truth that, however much one might malign Sex and the City, you damn well know that the next few years will see a male version, where an ill-assorted bunch of "mates" are always meeting up at the pub (because they are "lads" and that's what lads do) and talking about sport and waving their expensive consumer goods around and having unfortunate relationships with absurdly thinly characterised and usually rather repulsive women and in general being christ-awful. I would put this in the category "Idea for a sitcom", but I really can't see myself pitching this one; frankly, the Abu Ghraib shredder repairman[2] would have more cause for pride in his work than the eventual writers and producers of this inevitability.

Update: Oh my god I've just realised. Three or four men of indeterminate age, standing around yakking about expensive consumer durables with lashings of laddish banter. I'm talking about Top Gear aren't I? Shiver. TG is actually really quite popular in America and on the internet, too. And think of the number of ways in which the format could metastatize if a) it escaped from BBC public service broadcasting principles b) the remit was broadened to include other sorts of consumer goods c) the soap-opera angle of the relationships between Clarkson and the other presenters was emphasised d) of course, they decided to sex it up a bit. Makes my blood run cold. In general, the British media industry is a kind of Porton Down petri dish of unpleasant creations, waiting to run riot over the rest of the world (Alex did a bit on this subject once but I can't find it).

The Model. Basically a poshed up version of Depeche Mode meets Boston Pops, but not necessarily the worse for that.

[1] Fundamental cultural differences between the US and UK, probably reflecting priorities in childhood education: in the US, morons are usually able to speak in coherent sentences but don't read. In the UK, morons typically shut up or grunt in monosyllables, but they do read newspapers and magazines. With various, probably not very important consequences, that aren't true anyway.

[2] Bad taste I know, but not really such bad taste given that even now, nearly ten years later, there is basically no evidence of such a thing having existed.


8 comments this item posted by the management 5/27/2010 03:46:00 AM

Tuesday, May 25, 2010

What they teach you and what you learn ...

Via Jamie, an Oxford PPEist writes:

Let’s be clear: Oxbridge accepts, roughly, the same proportion of state school applicants as apply. The problem therefore is that not enough bright state school kids are applying, not that they are being discriminated against once the UCAS forms are in

Per the University of Oxford[1] website, we discover that "roughly" covers a multitude of sins. Taking the "UK domiciled applications" (note that the non-UK acceptances which make up 15% of the total are going to be socially a lot more similar to UK independent than UK state school applicants).

"Maintained sector" accounted for 6485 applications and 1456 acceptances - an acceptance rate of 22.5%.

"Independent" accounted for 4173 applications and 1244 acceptances, an acceptance rate of 29.8%

How important is this? Well, eyeballing it suggests that it's the difference between just over 1 in 5 and just under 1 in 3, which makes a practical difference. And of course the smaller number is applied to a bigger applicant base. The overall acceptance rate ex "others" was (1456+1244)/(6485+4173)=25.3%. If the acceptance rates were actually the same, then there would have been 187 more state and fewer private school acceptances. Or alternatively, 15% of independent school acceptances are the result of differential acceptance rates. The figures for Cambridge are a bit less user friendly to deal with, but broadly comparable - state schools 23.3% acceptance versus independent schools 32.5%; I calculated 225 excess independent school pupils at Cambridge in 2009.

To be honest, I don't think this can actually be fairly considered to be with in the bounds of the phrase "broadly the same", particularly if you're then going to base whole other steps of your argument on having completely ruled out admissions bias as a possibility. This is before you get into the obvious point that applications are going to be endogenous with respect to acceptance rates.

Is this what they teach you on PPE courses? Yep it is. Specifically a) you don't learn statistics, econometrics or many quantitative skills at all unless you specifically search them out (this is why the Bank of England, among others, didn't count PPE graduates as "economists"). And b) the way the course is set up absolutely teaches you to make broad brush statements, preferably in a loud and confident tone of voice, about things that you haven't checked up on but have sort of picked up are reasonably there or thereabouts, in the sense that you might be badly wrong but are probably not so wrong that it's gonna be awfully embarrassing if you're picked up.

When I say "the course teaches you" to do these things, I don't mean that PPE has a paper on applied bullshitting, or that you're instructed to do it, of course. I just mean that the workload involved means that there's a constant temptation to cut corners, and the assessment method (involving weekly tutorials with people who aren't always experts on the specific area involved and who are typically on friendly terms with you) is practically designed to not pick up this sort of corner-cutting. What you learn in the lessons is always a very small subset of what you learn on the course.

This is true of MBA-school too. Lots of the things for which MBAs are widely reviled are things that they learnt at business school, but not in the classrooms. I never did the MBA track, of course but I watched them and as far as I could see, the two year MBA was almost entirely an exercise in workload management. Pushing off responsibility onto other people and dropping them in it wasn't on the syllabus, but it was more or less an essential survival tactic. And lessons learned, of course, are carried on into future life.

[1] If anyone knows why not "Oxford University", they are politely requested by mgmnt to keep it to themselves.
18 comments this item posted by the management 5/25/2010 01:52:00 AM

Friday, May 21, 2010

Opera news

Like many economists of the Keynesian persuasion, I am not a fan of Benjamin Britten. If forced to sit through one of his tuneless, boring religious-themed pieces, I would at any given moment be tempted to get out of it by setting off the sprinkler system.

I realise, of course, that this is tantamount to shouting "Fire! Fire!" during Noye's Fludde.
10 comments this item posted by the management 5/21/2010 10:44:00 AM
On "business-friendliness"

Of course, all variety of Louisiana politicians are correct to oppose any and all legal moves to increase the liability of oil producers for cleanup costs related to their rig explosions. After all, if you tax and regulate these people too hard, they will just pack up their drilling rigs, pipelines and all, and move their oil exploration and production businesses to Bangalore, where taxes are lower, wages are cheaper, and mineral extraction rights hardly cost anything at all.

(I am not sure I've actually seen anyone make this argument in exactly so many words, but during the Liverpool dockers' strike, I definitely recall hearing one of the managers trying to claim that Liverpool had to maintain its competitiveness or it would lose market share to places like Hamburg).
8 comments this item posted by the management 5/21/2010 08:17:00 AM
The strange case of Gary McKinnon

Obviously, one has to feel a lot of sympathy for someone who is apparently scared and depressed, facing a really very nasty future. But I really do find myself getting a bit David Aaronovitch here and asking 1) How the hell did it come to this? and 2) Why are campaigners against the US/UK extradition treaty seemingly incapable of finding any remotely attractive test cases?

You would have thought that the best way to demonstrate the unfairness of an extradition treaty would be to look for people who were quite possibly innocent, or where there were doubts about them recieving a fair trial - sort of Michael Shields figures. But in fact, the two high-profile cases with respect to the US/UK treaty have been McKinnon, and the NatWest Three. In both cases, the people involved were really quite clearly guilty, in that nobody was seriously questioning that they had done what they were accused of, that what they were accused of was a serious crime, or that this crime had been committed against the USA. In both cases, the nature of the case against extradition was simply that, having committed a crime, the defendants wanted to get a more lenient sentence than the US courts were likely to hand out. Fair enough, but I really do think it's hard to turn this into a genuine civil liberties issue. We would all like to be tried in front of a jury that identified more with us than with the victims of our crimes, and to do our time in a local jail rather than an overseas one, but I don't see how this can be claimed to be a human right.

McKinnon is a particularly troubling case to me because it seems to me that he's been really badly advised by people who have an agenda with respect to the US/UK treaty, has been given the impression that his case for fighting extradition was much stronger than it really was, and as a result has ignored a number of plea bargain opportunities that he really should have taken (because he is, as I say, guilty). The original offer made to him was a 36 month jail term, the majority of which could have been served in the UK[1]. But this deal was rejected (I do not know on whose advice), and according to media reports, it was rejected out of a belief that to agree to a foreign plea bargain would involve "giving up his legal rights". This certainly looks to me like an argument premised on a piece of wishful thinking - ie, that there was something wrong with the US/UK treaty which would mean that it was not upheld in the courts. I don't think that view has ever been realistic.

If the original plea bargain had been accepted, Gary McKinnon would have been out of jail for a couple of years now. Instead, he's fighting a series of appeals, and his current judicial review is based on the fact that his mental health has been destroyed (in my opinion, largely by the case), and that therefore it would be a breach of his human rights to send him overseas and worsen his condition. Recall that in 2002 he was able to sustain an independent life and job and hadn't even been diagnosed with his autism-spectrum illness, whereas now he's suicidally depressed and dependent on his family. That's an absolutely awful thing to happen, and I don't think it can all be blamed on the horrible Americans.

Even if he wins, what he will win is the right to be tried for this offence in a British court. If he is found guilty (quite likely, as he did actually do the thing), a custodial sentence is definitely on the cards, as it's a serious offence and the UK judicial system needs to maintain its credibility with its US counterparts; what can't be got round here is that unauthorised access to and defacement of CIA computers is not apple-scrumping or funny UFO practical jokes, it's a real grown-up crime.

His main way out of jail, as far as I can see, rests on some form of diminished responsibility - in other words, on the fact that his life has been destroyed by having been turned into a largely pointless test case against the US/UK extradition treaty. This really is not a great state of affairs.
10 comments this item posted by the management 5/21/2010 03:13:00 AM

Thursday, May 20, 2010

Thursday Music Link

You know you've found a kindred spirit when you're in church and the vicar's sermon describes the Parable Of The Talents as being fundamentally a risk-adjusted performance measurement problem.

Season Of The Fair. Beautiful. I can physically feel my blood pressure falling back down to normal levels.
0 comments this item posted by the management 5/20/2010 01:47:00 AM

Friday, May 14, 2010

Money talks and bullshit walks, an occasional series

Hoisted from Matthew's comments, this idea of voting yourself an extra 32 seats really is a disaster, isn't it?

Raising the threshold to 55% for confidence votes is all very well, but what about budget votes? A government which can't pass its budget surely has to be considered to have fallen. And I don't think anyone has got the brass balls to propose a similar reform suggesting that a Finance Bill can be deemed to have passed if it has 45% support. So what this proposal achieves is to give the Opposition an incentive to make explicit use of the previously implicit fact that every budget is a de facto confidence vote. Doesn't that just scream "stability and viability" to you?


12 comments this item posted by the management 5/14/2010 01:03:00 AM

Thursday, May 13, 2010

Correlations and finger exercises

Yglesias finds a working paper with a perfectly sensible little finger exercise demonstrating how CDO tranching creates safe-looking but highly fragile structures:

"Suppose we have 100 mortgages that pay $1 or $0. The probability of default is 0.05. We pool the mortgages and then prioritize them into tranches such that tranche 1 pays out $1 if no mortgage defaults and $0 otherwise, tranche 2 pays out $1 if 1 or fewer mortgages defaults, $0 otherwise. Tranche 10 then pays out $1 if 9 or fewer mortgages default and $0 otherwise. Tranche 10 has a probability of defaulting of 2.82 percent. A fortiori tranches 11 and higher all have lower probabilities of defaulting. Thus, we have transformed 100 securities each with a default of 5% into 9 with probabilities of default greater than 5% and 91 with probabilities of default less than 5%.

Now let’s try this trick again. Suppose we take 100 of these type-10 tranches and suppose we now pool and prioritize these into tranches creating 100 new securities. Now tranche 10 of what is in effect a CDO will have a probability of default of just 0.05 percent, i.e. p=.000543895 to be exact. We have now created some “super safe,” securities which can be very profitable if there are a lot of investors demanding triple AAA.


Suppose that we misspecified the underlying probability of mortgage default and we later discover the true probability is not .05 but .06. In terms of our original mortgages the true default rate is 20 percent higher than we thought–not good but not deadly either. However, with this small error, the probability of default in the 10 tranche jumps from p=.0282 to p=.0775, a 175% increase. Moreover, the probability of default of the CDO jumps from p=.0005 to p=.247, a 45,000% increase!

This is actually very good. But the comments, dear God, the comments! About a dozen people (including, I chuckle to note, Robert Waldmann, who would certainly have got this right if he'd been concentrating) step in to lambast the authors for oversimplification. A sample:

It’s not just misestimating the probability of default as .05 rather than .06. It’s also assuming that the probability of a mortgage defaulting is independent of the probability of every other mortgage defaulting. If there are economic developments that affect many borrowers at once, then the probability of borrower A defaulting *and* borrower B defaulting is not simply the prob(A defaults) * prob(B defaults). This is indeed what happened in 2008.

Moreover, the very act of A defaulting can alter the probability of B defaulting. If A defaults, and lives near B, then the rate of foreclosures in B’s neighborhood increases, which decreases B’s property value, which could push B underwater, and lead to B defaulting, which leads to C, D, and E defaulting, etc.

You know all of this, but I wanted to point out that the independence assumption is perhaps even more fundamental than using a mistaken probability. You can at least see what happens when you change .05 to .06, but non-independence can be a lot more complicated and make your model wrong not just by changing a single parameter.

Thanks for the sermon vicar, but ...

There is no assumption of independence in the original finger example, is there? In the first case, there's an expectation of the default rate. In the second case, there's some noise around this expectation, and that noise is perfectly correlated, isn't it? It's a realisation that is 0.01 higher in every single pool. The finger example is specifically and definitely one in which the entire sting is delivered by the fact that variables which were assumed to be independent turn out to be perfectly correlated.

I think that the problem here is that people tend to think of "correlation" as something measured by a Pearson coefficient, and so if they don't see one explicitly mentioned (or a copula structure specified or something), they just progress straight to the sermon and miss the big picture. Something to remember.

(Update, five seconds after posting: Actually I think the problem is more about imprecise use of the word "probability" in the original example. The number .05 doesn't refer to "the probability of default", it refers to the expected default rate, that's the only way the example makes sense. Expected default rates can't be correlated (because they're not random variables - they're expectations of random variables) which is why there's no correlation structure specified. Then "the probability moves to 0.06" in the second paragraph has to mean that the experienced default rate is 0.06 - ie, that the random variables concerned are actually perfectly correlated. The mapping from the default rates to the probability of default of the tranches makes sense though, because different loans are allocated to different pools at random).

(Update, half an hour after that. I suppose that in calculating the expectations in the first paragraph, there's an implicit assumption of independence. But that assumption is immediately relaxed and shown to be wrong! The real driver of this toy model is the fact that when the true default rate is discovered to be .06, this is true in every single pool.)
14 comments this item posted by the management 5/13/2010 11:38:00 PM
Thursday (or is it Friday) Music link

What a week - I swear to you, on Monday evening I turned off my computer after crunching numbers on the bailout, said to myself "right, time to go out and get pissed" and was half way to the Tube before realising it wasn't Friday.

For all my workaholics out there. The trick is to slow down when you have more than two Excel-themed dreams in a week.
3 comments this item posted by the management 5/13/2010 08:44:00 AM

Monday, May 10, 2010

An observation on recent events

The fact that Labour and the LibDems were involved in negotiations all weekend seems to have come as a total surprise to political journalists. Shouldn't this be the occasion for some serious carpetings by their editors? People like Nick Robinson, Adam Boulton and Andrew Rawnsley don't cover stories and they don't have specialist analytical skills. Their entire value-add is meant to be that they are "in the loop" and connected to all the big important players. If something as important as this can be happening without them knowing about it, that's actually very embarrassing.
13 comments this item posted by the management 5/10/2010 11:09:00 PM

Friday, May 07, 2010

Late Thursday Music Link

As I say, Michael Gove might be Minister for the Olympics

Also - I had been genuinely worried that the fourth series of "The Thick Of It" was going to be really weak and laboured, what with Cameron being in and all. Instead, the thought of Malcolm Tucker going at it in the context of a weak coalition is positively toothsome.

In unrelated philosophical news, scientists have apparently found that people who don't sleep much don't live as long. Surely to hell, though, this analysis only works if you count sleeping as living.
7 comments this item posted by the management 5/07/2010 02:46:00 PM
All yours, my friend

A random note on politics the only truly sincere smile I saw throughout last night's coverage was the one gradually creeping across the face of Tessa Jowell (Minister for the Olympics), as she realised that very few people indeed remember that the Millennium Dome was not Peter Mandelson's idea; it was a project which had been designed (and largely fucked up) long before he took over. The original architect of the fiasco was Michael Heseltine, a fact only known to political obsessives and pub quiz afficionados. To the rest of the world, it's "Mandelson's Dome".

I wonder who will get the job of Minister for the Olympics in the first Cameron cabinet? I do hope it's Gove.
3 comments this item posted by the management 5/07/2010 11:41:00 AM

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