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, October 23, 2009

Being Freakonomical With The Truth

It's a real curse being better at coming up with titles than posts, I tell you.
10 comments this item posted by the management 10/23/2009 08:01:00 AM

Thursday, October 22, 2009

Straw poll

Am I just having a bilious day, or is this an unusually toolish Friedman column?
27 comments this item posted by the management 10/22/2009 01:16:00 AM

Tuesday, October 20, 2009

Getting your Companies House return and accounts filed on time - it's not just a good idea, it's the law

This week's offender: The Quilliam Foundation, company limited by guarantee, number 06432342, accounts due 20 Sept - no accounts have yet been filed ever by the QF which was founded in November 2007, although they have produced an Annual Report for 2008/9.

Up and coming: Policy Exchange (Companies House return) and Henry Jackson Society (accounts for y/e Dec 31 2008, Charities Commission), both due at the end of this month.

Well done to the Centre for Social Cohesion and Muslim Association of Britain who are both completely up to date on their filings.
0 comments this item posted by the management 10/20/2009 05:03:00 AM

Friday, October 16, 2009

Superfreakonomics review!

This is going to be a lot shorter than the Freakonomics one, and it is basically going to consist of this link, via the Paul Krugman blog, and the observation that if you find yourself writing, in all seriousness, as a practical proposal, the phrase "pumping large quantities of sulphur dioxide into the Earth’s stratosphere through an 18-mile-long hose, held up by helium balloons", it is probably time to take a step back and ask yourself if something has gone a little bit wrong with your life.
10 comments this item posted by the management 10/16/2009 02:47:00 PM
In Which, I disagree with Professor Krugman, but not about anything important

Warning: contains extensive digressive footnote

Via, I would submit that this is not really an awesome takedown - it's a pretty good polemic and thoroughly researched, but it's actually promoting what I consider to be a common but fairly unrealistic and naive view of the purpose of what forecasts are for.

In summary, my argument can be taken from the text of my Easter Sermon on the subject of hedge fund performance measurement:

"Obviously [evidence of genuine forecasting ability -dd] would be ideal, but a short lag would also be worth knowing about - while the man who can tell you when a big change is coming is a gem of great price to be treasured, the man who can spot when something's going wrong and stop losing, is also a highly useful lad to have around, and perhaps a bit more realistic to hope for"[1]

I think we can all agree that it's useful to know whether the economy is currently in an expansion or a recession. There are different forms of economic behaviour appropriate to the two cases. We should also be able to agree that it's actually rather difficult to know whether the economy is currently in an expansion or a recession. Or rather (because even the dullest person can spot the way the wind's blowing at the height of a speculative mania or the depth of a slump) it's powerfully difficult to spot the moment when the economy moves from expansion to recession. The NBER Business Cycle Dating Committee will only tell you when it's much too late to save your money or your reputation (ask Donald Luskin).

Central banks, for whom this is basically the be-all and end-all (because monetary policy is one of those areas where different action is appropriate during recessions and expansions), spend a hell of a lot of time and effort on this question - the Bank of England used to have a large and well-staffed department of "Conjunctural Analysis", even tolerating the somewhat dubious word "Conjunctural" for the purpose (of or pertaining to the current conjuncture, allegedly, although don't mention it during tea at a lexicographer's). Forecasting the recent past is an honourable and sensible profession. Nigel Lawson, in his autobiography, suggested that it should be the main goal of the economics profession and there is a lot to what he says.

If you look at it in that context, the forecasting service described doesn't seem to me to have done all that badly at all. Shortly after the recession began, and well before the NBER spoke up, they made their recession call. They didn't call it too early (they aren't permabears who hang around making undated predictions of doom for years and then claim vindication, naming no names) and they didn't hang on to a "not necessarily a recession" call when it went wrong. That's about the best you can reasonably expect from an economic forecasting service. It is a bit of a shame that for purposes of marketing material, all these commercial forecasters have to pretend to be the Oracles of Delphi, but this is the world we live in.

[1] Related to this, a great big massive digression on the fascinating subject of correct use of forecast information, which has been taking up a percentage of my time this last month - People tend to hugely underestimate how small an informational "edge" can be, and still be amazingly useful. If, for example, you have a trader who every day has a 55% chance of making a 1% profit and a 45% change of making a 1% loss, then at the end of a year (250 trading days), he will on average make a return of around 28% with a standard deviation of 20% (Sharpe ratio 1.3), and will show a positive return over the year 93% of the time. That would be pretty amazing performance from a hedge fund - this guy would be very solidly top quintile on any measure you care to name. I have dressed this one up a bit by abusing the miracle of compound interest (the 'edge' in this example is made to look clearer by effectively compounding it 250 times), but the principle illustrated is a real one - important real-world applications can make use of forecasting edges much smaller than this guy's 5%[2].

And to return to my subject - "the man who can spot when something's going wrong and stop losing, is also a highly useful lad to have around, and perhaps a bit more realistic to hope for". In order to explain what I mean by this, we need to think a bit more about the nature of interesting real-world forecasting problems. Consider what would happen if I took my imaginary trader above and imposed a 10% stop-loss discipline on him (ie, if at any point his total returns ytd were worse than -10%, I closed him down). Would this make the expected returns better, or worse?

The answer is, "worse" - in this case. It's worse because I set the example up so that a 10% loss isn't informative - every day the guy comes in and he either makes 1% or loses it. There's a drift over time because of his edge, but every day is a brand new draw from the probability distribution, and the fact that in some runs of history, the guy's portfolio has gone down from 100 to 90 half way through the year is not informative about whether it's going to go up or down from there (Markov process, yes, that's the phrase I'm looking for, christ dementia is clearly setting in this week)[2]. That's how I set the example up. If I had set it up differently, I could have made it the case that there was a lot of persistency in the returns series, in which case a stop-loss order would have been a very sensible thing to do indeed (imagine, say, a "Groundhog Day" version of the same spreadsheet, where the guy's daily trading returns from the first week are repeated again and again for the rest of the year - in that case, if he's had a bad first week, you obviously need to sack him right away). In general, this is a special case of the Kelly Criterion; the extent to which you should use stop-losses or similar discipline depends on the extent to which you believe that returns to date are informative about your betting edge.

Which case is relevant? Depends on what your forecasting problem is. Some things are like Markov processes and some things aren't. Is the stock market? Dunno. Anyway, what is this, a stock tips newsletter? I thought we were talking at a slightly higher level than that. This isn't about investment returns; it's just that, inevitably when you're talking about information theory or probability, you end up coming back to examples about betting or stock trading, because that's the clearest context in which to demonstrate that it matters not just whether you were right but by how much you were right.

[2] Alternative illustration - go to Las Vegas and see the kind of things you can build with the cash flow from a house edge of about 2%. This is also using the high-frequency compounding trick.

[3] Actually I knew it was a Markov process all along and in fac wrote and deleted a rather pissy digression about distinctions between "random walk", "Markov process", "unit root process" and other forecasting terms of art, mainly about the annoying tendency of financial economists to use the phrase "random walk" as if it meant "impossible to predict" (the definition of a Wiener process is that the increments are independent of each other, not that they're independent of everything else, you bastards[4]). This bit put in in order to avoid scaring off laymen by excessively aggressive wielding of the math cock.

[5] Oh god, I'm annoyed all over again. Look, consider the series X, which is a random walk. Consider the series Y such that Y(t) = X(t-1). Y is a random walk too isn't it? Isn't it? It is, isn't it? And X(t) is a perfect forecast of Y(t+1), isn't it? So "random walk" doesn't mean "unforecastable", does it? Why is this so fucking hard to understand???? Sorry, it's been a very long week.
5 comments this item posted by the management 10/16/2009 12:10:00 AM

Tuesday, October 13, 2009

The Wages of Terrorism

There are a bunch of advertising posters up on the Tube for The Times's Kabul coverage, which claim that "The Taliban pays $15 a day. The average wage in Afghanistan is $2 a day", and thus through some chain of causal reasoning, that we should all buy the Times.

Trying to find a source for this number reveals a) lots of estimates going from $8 to $20 and b) no source. I also dispute whether the average wage in Afghanistan (for young healthy males who could otherwise join the Taliban) is in fact $2 a day, as this would suggest average income of about $1/day, and although Afghanistan is horribly poor, it isn't at that level of poverty.

But setting that aside, and taking the $15 figure, how does this work in terms of financial logistics, exactly? Assuming that officers get paid a little more than enlisted men, at this level the wage bill for a 10-men Taliban unit would be about $5000 a month. Without getting into the questions of financing, how do the Taliban handle payroll? I can't believe that there are paymasters hiking around ToraBora with suitcases full of currency, and I can't find any reports suggesting that slain Taliban fighters are usually found to be carrying large sums of cash, so I don't think they are paid cash in hand. On the other hand, it seems a bit far-fetched to assume that they're getting paid by the Afghan equivalent of BACS transfer either.

In principle, I suppose the Taliban groups could be making gold deposits in the name of its fighters in the hawalada banking system, which is often surprisingly advanced. But this would require the existence of a centralised register of active fighters, which couldn't be more disaggregated than the financing of the Taliban.

I end up concluding that this "economic motive" for Afghans to join the Taliban might be a bit of a reassuring myth (reassuring in that it suggests that economic development could undermine the Taliban's ability to recruit, although frankly if the Times figures are right, we would have to be looking for something that could cause an octupling of average wages which doesn't look all that realistic either), and would welcome any comments from David Kilcullen fans wanting to convince me otherwise.

I note that Che Guevara's book on Guerilla Warfare doesn't discuss wages at all; as far as I can see, the payment of a daily wage is quite unusual for guerilla armies, I would surmise precisely because of the logistical difficulties.
72 comments this item posted by the management 10/13/2009 12:41:00 AM

Monday, October 12, 2009

It's like raaaaaaiiiiieeeeeeeain on your wedding day

Ross Douthat of the New York Times writes on the subject of Obama's Nobel Peace Prize. I cannot help noticing that when the New York Times came and offered him a column, he did not turn it down saying "no, I clearly do not deserve this honour, others are far more qualified for it that me".
3 comments this item posted by the management 10/12/2009 01:53:00 AM

Friday, October 09, 2009

Hell freezes over

yes folks, it's the last part of the Freakonomics review. I think I'll gather them all together and do a summing up post on Crooked Timber (this last bit added just simply as a sort of methadone for me to ease the cold-turkey process from sweet, sweet procrastination).

(Update! Christ, I could have saved myself some time if I'd found John DiNardo's review, which makes substantially all of my important points and which was written in December 2005!)

(Update! Or for that matter, this pithy summary of James Heckman's work on what's wrong with the natural experiment methodology, written by ... Steven Levitt!)

Part Five - How Freaked Is Economics?

Well, I promised myself I'd finish this before the sequel appeared in the shops, and the conclusion has been made, shall we say, somewhat easier by the fact that the burden of my conclusion - that there is something terribly, horribly wrong with the state of modern economics - has become somewhat of an open door to push against. I swear that my notes for this review (begun in 2003 2005, thanks Dave W!) contain the draft passage:

"When future generations ask the economics profession 'What were you doing while the great bubble built up ahead of the Second Great Depression?', and we have to reply 'Lots and lots of quirky little working papers about sumo wrestling and speed-dating', it is going to be really, really, fucking embarrassing"

And we did, and it was; thank God nobody told the truth to HM The Queen, or the high brows of the economics profession might be decorating a series of pikestaffs outside Traitors' Gate.

The basic problem with the Freakonomics era was that the profession abandoned the study of production, consumption and exchange. I don't wholly agree with Lord Skidelsky, but he is right - economics is the study of the economy, it's not the study of "rational choice" or "behaviour" in the abstract, and the fact that econometricians have invented a huge part of the toolkit of modern statistics doesn't mean that anything you can estimate using an econometrics package is thereby "economics".

We stopped doing economics and started doing awful amateur-hour sociology, basically, because we believed that all the major problems had been solved, that some form of dynamic general equilibrium was all that there was to be said about the economy considered as a system, and that the only interesting things to do were growth theory and finance. It is no coincidence that Freakonomics began in Chicago; for a guy like Levitt who doesn't possess the engineering-maths to be a finance theorist or the empirical skills to do endogenous growth, there was literally nothing to do.

The sociology of academia in the USA also played its part, as James Heckman spotted at the time. Because of the unenviable economics of the academic labour market in American universities, graduate students were encouraged to finish their PhDs according to a specific schedule, to write dissertations that were capable of being turned into journal articles in a specific way, and to follow fashion in citation-gathering. Heckman was tearing his hair out over this, obviously, as this made it more or less economically unviable to carry out the kind of economic work that he does (and did) - careful, time-consuming, incremental, often abstruse but always relevant to the very big questions of the economy.

And so we ended up with Freakonomics, the disciplinary equivalent of the battery chicken. The subject matter became more and more cutesy and trivial, methodological corner-cutting in "natural experiments" became the norm, and the idea that there could actually be a subject of macroeconomics became almost quaint. The Freakonomics blog still tries to preserve itself against irrelevance by declaring the financial crisis to have been merely a failure of macroeconomics (thus presumably leaving Freakonomics to carry the field?), but it's desperately unconvincing, particularly given that they end up citing a fairly badly misconceived critique of the whole discipline in order to do so.

So, where to now? Well, I don't think it's 100% bad news. I am hoping that the instrumental variables/natural experiment movement will die on the vine, simply because the interest in the profession has now swung back to the big, important macro aggregates, and "quirky" datasets aren't considered as interesting as they used to be. Also, I profoundly hope that Charles Manski partial identification approach catches on, as it seems to me from half way through his book that this is clearly the correct way to address the kind of problems that natural experiment/instrumental variable literature does so badly. (The guts of the partial identification approach is that one models the data nonparametrically in order to put some very wide bounds on a quantity of interest, then start making parametric assumptions in order to narrow those bounds, checking all the way along what assumptions you need to make in order to get results. It's an approach that has safeguards intrinsically built into it against the central problem of Freakonomics; the tendency to say that "whichever way you cut it, X", when you mean "whichever way I cut it, X". My basic issue with the whole Levitt approach is that Freakonomists have this horrible habit of presenting their results as being much more authoritative than they actually are, often in policy contexts where this overselling is almost guaranteed to have baleful implications.

But however things have turned out, my intuition is that Freakonomics has had its moment in the sun. The central selling point was always, basically, academic machismo; the presumption on the part of economists that because they were "smart" in the Larry Summers sense, they could turn their hand to anything and the rest of the world was bound to listen to them. Those days, to put it mildly, are gone.
41 comments this item posted by the management 10/09/2009 10:08:00 AM
Deep Thoughts

It is not really as if the Dalai Lama or Aung San Suu Kyi have actually achieved all that much either.
3 comments this item posted by the management 10/09/2009 08:36:00 AM

Monday, October 05, 2009

Scenes from the decline and fall of Freemasonry

A plan of Sandusky, Ohio, town-planned by the Master of the local lodge in 1818, and with the masonic square-and-compasses clearly set out in its street plan[1]

Sandusky, today. Still visible if you squint, but the compasses have been all but obliterated by subsequent development.

[1] As dryly noted in the Element Encyclopedia of Secret Societies and Hidden Knowledge, all sorts of Dan Brown wannabes get very very excited about really rather arguable Masonic symbols allegedly encoded in the street plan of Washington DC. Very few bother to get excited about the much more obvious and well-founded "symbology" in Sandusky Ohio, and so far nobody has bothered to come up with a global conspiracy theory suggesting that the hidden rulers of the world are based in Sandusky. I don't know why; there's a decent amusement park and a few good restaurants.
6 comments this item posted by the management 10/05/2009 01:31:00 AM

Saturday, October 03, 2009

Environmental news

Apparently parakeet season starts today. These parakeets (descended from a pair that escaped from London Zoo apparently) are meant to be a serious plague over London's parks, but I don't think I've ever seen any. The closest I've ever come is when I used to go jogging on Hampstead Heath in the evenings, when one often saw the odd cockatoo.

Puerile, I know. It does get one thinking though, that environmentalists who worry about disappearing habitats are just too unadventurous in their thinking. Who'd have thought that parakeets would have flourished in London? Maybe there are lots of other ostensibly endangered animals that just need to be taken out of their comfort zone. Take pandas for example. They're running out of their tiny little bit of China, so why not give them a run out in Chiswick? They could hardly do worse, and you never know, they might thrive. Similarly, why not introduce a few tigers to Cambridgeshire? If they did well, they wouldn't be endangered any more, and it would certainly concentrate people's minds on the subject of whether the Siberian tiger was actually more trouble than it was worth.

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13 comments this item posted by the management 10/03/2009 10:41:00 AM

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