18/03/2013 § 4 Comments
The subject of gifted children and the kinds of adults they become has been studied for a century. A good starting point is ‘The Outsiders’, an article from high-IQ society publication. Although it was first published in 1987, it is still relevant.
One researcher of giftedness, Lewis Terman, found that children with IQs above 140 tended to become one of three types of adults: Satisfactory, Some maladjustment, or Serious maladjustment. Maladjustment appears to be positively correlated with IQ.
Leta Hollingworth discussed four specific sources of maladjustment. Two of these are failure to suffer fools gladly and isolation from the rest of humanity. Quoting the author quoting Hollingworth:
This tendency to become isolated is one of the most important factors to be considered in guiding the development of personality in highly intelligent children, but it does not become a serious problem except at the very extreme degrees of intelligence. The majority of children between 130 and 150 find fairly easy adjustment, because neighborhoods and schools are selective, so that like-minded children tend to be located in the same schools and districts. Furthermore, the gifted child, being large and strong for his age, is acceptable to playmates a year or two older. Great difficulty arises only when a young child is above 160 IQ. At the extremely high levels of 180 or 190 IQ, the problem of friendships is difficult indeed, and the younger the person the more difficult it is. The trouble decreases with age because as persons become adult, they naturally seek and find on their own initiative groups who are like-minded, such as learned societies [3, p. 264].
In a nutshell, gifted children may be poorly socialised because society doesn’t have much to offer them (or so it seems) and doesn’t have a place for them.
With that in mind, it was interesting reading Corey Robin’s take on William Ackman, a billionaire hedge fund manager. It’s a riff on a profile of Ackman in Vanity Fair. It seems that Ackman, um, well, Corey can tell you:
What’s odd in Ackman’s case is how loathed he is by his colleagues.
Ackman is smart. Let me amend that. Ackman has a high IQ. And, it seems, also works hard, plays hard, et cetera and so forth. He remembers his college entrance exam (SAT) score — 1530. That puts his IQ around 160, in the top 99.99%. It also puts him in the ranks of ‘more likely than average to be maladjusted’.
Socialisation — learning the rule of society — puts restrictions on our behaviour. If you don’t learn the restrictions, then they don’t bind you. No, let me change that. You can learn the rules in two different ways. You can internalise them, so that they just become part of what it is to be a good member of your society. Or, you can learn them as anthropological phenomena: in this sort of situation, members of this tribe do thus-and-such. The rules bind you when you allow them to, and you cast them off when they aren’t functional. When you’re the smartest guy in the room, you just might decide that the rules don’t apply to you.
I figure that’s what’s happened with Ackman and others like him. Gifted children all grown up, they feel above and outside society, which gives them carte blanche to act as they choose. And what they’ve chosen to do is compete about everything, just to prove they are the Masters of the Universe. The hard part is, a billion dollars can’t fix the maladjustment. In some ways, it probably makes it worse.
Just remember, these are the guys running the international financial system. These are the guys who needed the US taxpayer to bail them out.
18/02/2013 § 2 Comments
Selon cette théorie de la “stupidité fonctionnelle”, le monde de la finance serait dicté par le “fais d’abord, réfléchis après”. Une attitude qui tend à écarter les questions gênantes, et les longues réflexions sur les actions des salariés – alors même qu’on attend d’eux de grandes compétences.
(According to this theory of ‘functional stupidity, the financial world is ruled by ‘act first, think later’. This attitude tends to avoid difficult questions or considered reflection on behaviour by employees — even while they are expected to be extremely capable.)
The journal article in question is Alvesson and Spicer (2012), ‘A Stupidity-Based Theory of Organizations’ (here). I liked this comment from the conclusion:
Furthermore, we think the consensus in this broad field needs to be challenged – perhaps key developments and contemporary conditions also mean that modern economies and organizations become more ‘stupidity-intensive’?
Can I add ‘stupidity’ as a factor of production in our CGE model?
The central idea is not far from Simon’s bounded rationality (which they discuss briefly). Cognitive power is limited, we can’t take everything in, so we use shortcuts. One problem is feedback loops. When things are going well, the positive feedback reinforces the mental shortcuts. If ‘go along to get along’ keeps producing results, you do more of it.
But, if the behaviour is increasing the risk of low-probability events, there isn’t a feedback loop to tell you that. The negative feedback doesn’t kick in until something happens. Alvesson and Spicer suggest that this becomes a time for reflection and reassessment. The stupidity is no longer functional, so people have the opportunity to find new behaviours.
Reassessment is only one possibility. Zizek noted (in First as tragedy?) that in times of crisis people tend to return to safe ways of thinking, return to the old ways, even return to an imagined past. If functional stupidity is that past, then there is the possibility of more of the same only worse. In a paper I’ve discussed here before, ’What can psychoanalysis offer organization studies today?‘, Costas and Taheri describe two possible directions that ‘authentic management’ leads: greater authoritarianism or more reflective behaviour inside organisations. It’s the same with functionally stupid organisations in crisis. They could hold fast to what worked in the past or reconsider how to adapt to new conditions.
Of course, the argument presupposes that the financial sector actually has to bear any consequences of its myopia. If it just gets rewarded regardless — which is what happened in the crisis — the herd behaviour described by Alvesson and Spicer will continue unabated.
15/02/2013 § 10 Comments
Reading through the post-mortems of the financial crisis, I’ve been struck by something. The behaviour of the finance sector doesn’t fit the standard economics model, the Samuelson textbook depiction, or the Heckscher–Ohlin model of trade, or the Solow model, or any of the other bog-standard depictions of the economic system that we like to teach.
A key idea is that capital is a factor of production, like labour, land, and maybe entrepreneurship, management, natural resources, human capital, or any of the other factors people like to add. Two things about this capital:
- capital gets a return for its use, which accrues to the owner of said capital, and
- owners (capitalists, entrepreneurs, whatever) receive a return commensurate with the risk they take: higher returns are required to entice people to take greater risks (and thereby promote innovation).
But, but, but…that’s not what’s happened.
If you read the accounts of the financial crisis, two things are clear:
1. The people administering the mortgage-backed securities (MBSs) are having a hard time proving they own the mortgaged they say they do. To quote Adam Levitin:
The mortgage foreclosure process is beset by a variety of problems. These range from procedural defects (including, but not limited to robosigning) to outright counterfeiting of documents to questions about the validity of private-label mortgage securitizations that could mean that these mortgage-backed securities are not actually backed by any mortgages whatsoever. While the extent of these problems is unknown at present, the evidence is mounting that it is not limited to one-off cases, but that there may be pervasive defects throughout the foreclosure and securitization processes.
That is, these folks aren’t sure of what they own, and yet they are selling derivatives based on what they think they might have. More frighteningly, banks are taking or selling houses they don’t own.
2. Risk and reward are now de-coupled. Companies in the finance sector took gambles on the housing market, and things didn’t go their way. That happens. An evolutionary account of the market economy is that success should be rewarded and failure should lead to extinction. AIG, just to name one company, took massive risk onto its books by insuring the value of MBSs. Their clients claimed against the policies, which was going to drive AIG into bankruptcy. AIG got bailed out, as did a number of other financial firms. So, for finance firms, success is rewarded but so was failure.
In the months leading up to early November 2008, AIG had been actively engaged in efforts to negotiate tear-ups of its CDS contracts with its counterparties. AIG was completely unsuccessful. The need for the tear-ups was real; AIG was effectively hemorrhaging cash.
But what happened? Wall Street posted record profits in 2009 and had its fourth-most-profitable year in 2010, after it ‘benefited from a series of federal bailouts as well as low interest rates’.
Why aren’t more economists having a crisis of faith? The story and the models that we use to talk about the economy appear flawed in a fundamental way. It isn’t about innovation and efficiency, the supply side responding to signals from the demand side. Instead, fraud, crime, and collusion seem to be the path to riches.
14/02/2013 § Leave a Comment
I’ve been writing a paper for today’s conference, ‘Lacan and the Discourse of Capitalism’. I’ll post an abstract or paper later, but I wanted to point to a few resources about the financial crisis for your viewing pleasure.
One is this great graphic from the IMF about the structure of MBSs and CDOs. The structure is kind of simple but kind of not, and the graphic captures that pretty well. It’s funny that they use water pipes to show the flow of funds — very MONIAC.
Trawling around looking for information on the problems with MBSs, I came across Professor Adam J. Levitin (Georgetown Law, Washington D.C.). He has been writing about the legal issues of MBSs and testifying to the US Congress (so they have no excuse not to understand the problems). For example, in ‘Robo-Signing, Chain of Title, Loss Mitigation, and Other Issues in Mortgage Servicing’, he bluntly states
The chain of title problems are highly technical, but they pose a potential systemic risk to the US economy.
Unfortunately, I think there’s a tendency just to hope it sorts itself out.
And finally, just in case you’ve forgotten what happened and when, they are places to refresh your memory. The UK Guardian has a nice timeline. For more detail (much more detail), I found a paper by Robert E. Marks, ‘Learning Lessons? The Global Financial Crisis four years on’, helpful. It includes lovely gems like:
2005 August 25−27: Raghuram Rajan (MIT PhD ’91), Economic Counsellor and Director of Research, International Monetary Fund (IMF), presents a paper at a symposium to honour Alan Greenspan’s tenure at the Fed warning that the financial system is taking on potentially dangerous levels of risk. He is mocked.
Just a few reminders of the chaos of the last few years.
07/08/2012 § 2 Comments
Front page of the Dominion Post business section was the Reserve Bank wagging its finger at the economy. The guts of it are on the Bank’s website. The main message:
“But it is fair to note that we have suspected for a long time that New Zealand’s private and external debts were too high to be sustained,” Dr Bollard said.
Getting older is strange. I remember things, how things were — and not just from some book, but because we lived and breathed them.
Fifteen years ago, we lived and breathed two financial ideas. One was the Modigliani–Miller theorem (the other was the Black–Scholes model of asset prices). Wikipedia helpfully summarises MM:
The basic theorem states that, under a certain market price process…, the value of a firm is unaffected by how that firm is financed.
Most of the time, we just discarded the phrase between the commas, the one that says it all depends on the market being just so. Instead, we carried on as if equity and debt were basically equivalent. It didn’t matter because equity demanded a return and would seek it wherever it could, which was equivalent to paying for borrowed funds. Given the predictability of asset prices afforded by Black-Scholes, risk could be managed — it could be priced into the asset valuation which was independent of finance structure. What we believed was true for firms we then also shifted to households. It didn’t matter how you structured the financing for your household assets — debt was as good as equity.
It turned out that Minsky was right in a way that Modigliani and Miller were not. MM of course had the get-out-of-jail-free card stuck between those commas, but that didn’t matter to the firms and investors who believed the vulgar version of the theorem.
Now, Dr Bollard tells us that the debts were too high. When he says, ‘we have suspected for a long time’, it is fair to ask who this ‘we’ is. Fifteen years ago, the greybeards and the young hustlers told us something else. In those days, debt was equivalent to equity and the path to greater riches through leverage.
Now, ‘we’ think they were wrong. Then, when we accumulated the debt, we thought they were right.
If Dr Bollard wants to wag his finger at someone, he should start with the experts.
21/03/2012 § 6 Comments
My wife and I spent over an hour this weekend trying to answer a simple question: how much money did my KiwiSaver account earn? This should be straightforward. After all, the whole reason for having a superannuation/retirement savings account is for it to grow. An important part of that growth is the return on investment.
My fund doesn’t make it easy to figure out the return. I could easily find the current value of my account, but not how much I had invested or earned. I don’t know how the other providers are, but the little I’ve heard indicates they aren’t any better. So, let me make a suggestion: KiwiSaver providers should be required to provide easily-understandable statements that show:
- the value of the account
- the amount of funds deposited
- the amount of earnings
- the rate of return.
Back to our weekend’s work. The first thing I did was look at the general statements of asset class and fund performance. The stated performance of the fund, which is an index fund, was 1.12% in the three months to 31 January. The reported asset class performances were all for the three month to 31 December, so aren’t for the same period. Nevertheless, I calculated an expected return based on asset class weightings:
|Asset class 1||2.0%||2.5%|
|Asset class 2||6.0%||2.9%|
|Asset class 3||12.0%||1.3%|
|Asset class 4||10.0%||7.1%|
|Asset class 5||25.0%||1.9%|
|Asset class 6||45.0%||7.5%|
What has this told me? Well, not much. I don’t know whether the difference between 5.0% and 1.12% is due to the time period, the fund’s actual allocation across asset classes, performance of the fund’s individual investments, or something else. I can’t evaluate my investment or the fund’s performance.
Next, I figured that a statement of transactions would help. It did, but not immediately. This provider reports transactions through the ‘sweep’ account. The account lists all the money deposited by the employee, employer, and government. But, each deposit is then swept into the investment accounts. That means that each credit is offset by a debit. When they calculate the fund balance, the credits and debits sum to zero. Not very informative.
I had to copy the list of transactions from the webpage and paste them into a spreadsheet, then find the total just for the incoming transactions. This isn’t hard — for someone who does this sort of data manipulation for a living — but why should I have to do it? It’s a simple piece of information that should be provided.
Once I calculated my deposits, I could figure out my earnings from the difference between deposits and current fund value. Taking an annual view, I calculated my return at about 2%. Not very satisfying, and certainly not the 5% I calculated for the 3 months to 31 January. Of course, this isn’t the actual return. The real return calculation would look at the changes to the account over time — when each deposit was made and how the account grew during the year.
I emailed the provider and asked them to tell me how much money my investment made. They replied the next day (hurrah!) with a 13-page PDF of my account history (what?). They said:
In your call [sic], you requested we calculate the ‘Real return’ of your account. We take this to mean the return on your account after fees, taxation and inflation. Unfortunately, this is not something we offer investors. There are many different ways returns can be calculated; the published returns of the [fund] reflect the industry standard.
This is not something they offer investors. Let that sink in. They don’t offer investors that key piece of information — how their investments actually performed. And why not? Well, because it isn’t the industry standard.
This is my suggestion: let’s make it the industry standard. Let’s require that KiwiSaver funds tell us how much we — each one of us individually — have actually made on our investments. The Government wants us to save more? The financial industry wants our savings? That’s fine. Tell us what we get for our money.
16/03/2012 § Leave a Comment
They don’t make the Masters of the Universe like they used to. Y’know, the kind who’d kick ass and take names, who’d run down punk kids under the freeway, who didn’t whine about their feelings.
Now, they want not just money and power, but also ‘moral fiber’ and ‘culture’. Otherwise, they will stamp their feet and leave.
This is the best response. Darth Vader writes:
TODAY is my last day at the Empire.
After almost 12 years, first as a summer intern, then in the Death Star and now in London, I believe I have worked here long enough to understand the trajectory of its culture, its people and its massive, genocidal space machines. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.
I find myself longing for Leona ‘Only the little people pay taxes’ Helmsley.
(h/t Brad Delong)
02/12/2011 § 4 Comments
Really?! This is the best The Competitiveness Institute could do?
Look, when I started this blog, I promised myself I wouldn’t run down every stupid idea. I would be positive and constructive. Well, it’s my blog and I’ll rant if I want to (rant if I want to). (That, by the way, is a snowclone, a charming term.)
TCI had Prof Enright speak at their conference yesterday. Enright worked with Porter on the 1991 book on New Zealand competitiveness. So far, so good. What did he come all the way from Hong Kong to tell us?
Apparently, NZ is ‘still’ at a crossroads. He laid out two scenarios for the future. In one, NZ is able to use its advantages to its advantage, while in the other, the advantages don’t produce much of an advantage. So, the big take-away message (with chips) is that things could go well unless they don’t. Here, I’ll let the reporter tell us what the professor said:
In essence it’s the ability to develop competitive clusters of companies that can succeed against international competition in the domestic market and can inject themselves globally into those markets in a sustainable way.
If ‘competitive’ = ‘capable of succeeding’, which is all it really means, then he’s just told us that we will succeed when we have companies that can succeed. How is this any help for thinking about the economy of NZ and policies that might promote growth and/or the general welfare?
He is also fuzzy on the details. For example, what is a ‘strong’ government? I can provide examples of ‘strong’ governments I wouldn’t want in charge of the country. How about ‘strong education’? There is some dispute over how ‘strong’ the education is in NZ, and at what levels, and for what portion of the population. What about technical capabilities and Kiwi ingenuity, which he calls our ‘non-traditional advantages’? The innovation literature of the last umpteen years has lauded our capabilities and ingenuity. How, exactly, have they pushed us up the OECD growth table over the last 20 years?
Why am I getting myself in a lather over this? Because improving NZ’s economic growth is hard. It’s economically complex. It involves different people with their own plans and dreams, preferences, ideologies, skills, and resources. Lots of people have been trying to make sense of it for years. We have to get the mix right with workers, skills, business plans, management capabilities, infrastructure, institutions, government policy, international markets, innovations, and that je ne sais quoi that makes it all hum. In general, NZ doesn’t do too badly, just not as well as some other places.
We certainly don’t need someone flying in after 20 years, telling us we are ‘still’ at a crossroads, and offering to write us another report.
14/11/2011 § 3 Comments
From my point of view, liquidity creation, duration transformation, and simple diversification are all attempts to make the law of large numbers work for us. They are largely successful attempts not to buy liquidity, immediacy, and insurance from those who want to sell them, but rather to create them out of whole cloth–via clever applications of the principles of probability.
I probably liked it because probabilities and blackjack intrigue me. Relying on having enough transactions to keep actual claims on reserves fairly close to predicted, human society has figured out how to grease the wheels of commerce.
I wanted to add two things. What I remember of Doug Henwood’s account of Marx’s critique is that the problem is with proliferation of financial instruments. It isn’t fractional reserve per se, it’s the continual development of ever-more complex and opaque fractions of fractions. The recent experience with mortgage-backed securities bears out the critique. First, the investors in CDOs didn’t know what was in the bundles they were buying. Secondly, what people claimed was in the bundles of mortgages actually wasn’t, because the necessary legalities hadn’t been observed.
That gives rise to the second point. Fractional reserves is another case in which the concept is great, but one can take it too far. I don’t hand out pieces of paper saying ‘backed by Bill’s house’, but the bank effectively is. Somewhere between the two is a social optimum. Searching for that sweet spot of maximum liquidity, immediacy, and insurance (with appropriate preference weightings) has proven to be a messy affair.