Emanuel Derman

The internecine arguments by economists in the daily papers show that a good part of economics is about

• what is good; and
• how to achieve it,

i.e. about philosophy and politics.  In British universities a major in Economics used to be part of PPE – the triple concentration in Politics, Philosophy and Economics. Puts economics with the traditional moral “sciences” of values.

The emerging paradigm in academic economics is PNE – Psychology, Neuroscience and Economics. Puts economics with the traditional value-free sciences.

But, if economics is about what’s good and how to get it, it can’t be value-free. Hence …

The hurricane edition of the NY Times contains an article about a new British TV show on the downside of immortality. It reminded me of something similar I once contributed to Edge’s 2009 Question. The link to their 2009 Question — What Will Change Everything? — is broken, and so I reproduce my paragraphs here:

What Will Change Everything?
NO MORE TIME DECAY

The biggest game-changer looming in your future, if not mine, is Life Prolongation. It works for mice and worms, and surely one of these days it’ll work for the rest of us.

The current price for Life Prolongation seems to be semi-starvation; the people who try it wear loose clothes to hide their ribs and intentions. There’s something desperate and shameful about starving yourself in order to live longer. But right now biologists are tinkering with reservatrol and sirtuins, trying to get you the benefit of life prolongation without cutting back on calories.

Life and love gets their edge from the possibility of their ending. What will life be like when we live forever? Nothing will be the same.

The study of financial options shows that there is no free lunch. What you lose on the swings you gain on the roundabouts. If you want optionality, you have to pay a price, and part of that price is that the value of your option erodes every day. That’s time decay. If you want a world where nothing fades away with time anymore, it will be because because there’s nothing to fade away.

No one dies. No one gets older. No one gets sick. You can’t tell how old someone is by looking at them or touching them. No May-September romances. No room for new people. Everyone’s an American car in Havana, endlessly repaired and maintained long after its original manufacturer is defunct. No breeding. No one born. No more evolution. No sex. No need to hurry. No need to console anyone. If you want something done, give it to a busy man, but no one need be busy when you have forever. Life without death changes absolutely everything.

Who’s going to do the real work, then? Chosen people who will volunteer or be volunteered to be mortal.

If you want things to stay the same, then things will have to change (Giuseppe di Lampedusa in The Leopard).

I have been reading a column in the Sydney Morning Herald by their Economics Writer Jessica Irvine. She writes:

Kahneman says we can use this knowledge about our irrationality to influence public policy. We should make it so people have to opt out of things we find socially desirable and opt in to things we think undesirable. Innate inertia will do the rest. (My italics).

I don’t know whether she is quoting Kahneman in the second sentence, or quoting herself, but when I read it I was struck by the glib use of we and people. Who exactly are the “we” that will determine what is socially desirable and who are the “people” that will do the opting?

I had thought globalization was a good idea. The developed world was rich, and it seemed as though outsourcing was going to diminish the wealth discrepancy between the rich and poor, decreasing the slope of the wealth line between the USA and the developing world.

Globalization (Intended)

This is more or less what happened, actually. China and India are indeed richer.

But, what went wrong, in the USA and other parts of the west, seems to have been the following. If you look recursively at the USA  in the chart above, you see that the slope of the wealth line between the rich and poor within the outsourcing USA actually increased.

Globalization (Actual)

The slope of the wealth line  increased even as the slope of the world’s wealth line decreased.

How it got that way is a big part of the current problem. When the slope within a country becomes too large, the country itself becomes unstable, which, nowadays, makes the whole world unstable.

If there’s one larger lesson one learns from options theory that transcends its technical details, it’s that there aren’t unmitigated goods. Every benefit thing has its price. Convexity/optionality is valuable, but its downside is rapid time decay.You can’t have your cake and eat it (unless you notice a kind of convexity that no one else has yet recognized).

Liquidity too is not an unmitigated good, and the world recognizes this in many important issues by creating friction and viscosity to slow things down. Without friction some things would never happen and life couldn’t go on.

You can have friction in the time dimension. People used to get engaged before they got married, then wait again for a marriage license, pass blood tests, etc. Divorce takes time, too. If you only join a gym, you have a few days to change your mind. Illiquidity makes people pause and think about the long run. Wall Street partnerships and the illiquidity of partners’ assets made firms think long term.

You can have friction in space. Co-op buildings outlaw or tax the flipping of apartments, for the benefit of the long-term residents. Some stock markets have circuit breakers to slow things down. Some countries impose a stamp tax on stock buying and selling. Glass-Steagall imposed barriers on mixing lending with trading.

Statistical arbitrage firms claim to be a liquidity providers and therefore good for you. It’s not self-evident at all. And if it does provide liquidity, it is the kind of liquidity you can do without if you’re a long-term resident of the market. If a little liquidity is good is more better? Not so obvious.

Too much friction may be bad, but a little friction is often a good thing.

A Merkel-Sarkozy Tobin-style transactions tax on trading is worth trying, but not because it raises money for the government. It’s good because it puts a small amount of sand in the gears of frivolity whose demand for increased lubrication only seems to be useful, and therefore makes people wait a bit before they act. If the same pause could be achieved without taxation — for example by putting a random delay in the transmission and withdrawal of electronic orders — maybe that might be OK too.

Google’s big battle will be that they know (and care) nothing about customer support or user interface. I early-adopted and hated the clunky Motorola Droid and I’m intensely happy to be rid of it. Unlike Apple, there was no one responsible for the device as a device. And I couldn’t upgrade to newer ones when the hardware improved because Google’s own software wouldn’t successfully sync any newer Droid with Google’s own calendar.

Maybe Google will learn, but they released something unworthy of being sold for good money, even fiat money. I feel obliged to recycle bits excerpted from the web diary of the seven stages of grief I went thru in my year-long battle with the Droid:

Early days: patience and optimism

The insides of the Droid are fine. It’s the user interface that lacks deep polish, even though it oozes shallow polish. I suppose one should expect this; Google has little experience with designing complex interfaces and they have lots to learn. (I can point out some flaws on Apple’s Mail: when you delete a message, it doesn’t take you automatically to the next one.)

Becoming anoid: The monster won’t sync properly; I take solace in William Blake and swear to persevere

The trouble is that Verizon sells it, Motorola makes the hardware, and Google unsupports the software. There is lots of room for things to fall in the cracks. Every time I try to make one thing work a little better, it’s back to square one.

Like Nostradamus, William Blake knew what I would be up against with the Droid:

From Wikipedia: “Verizon serves as a Satanic force similar to Milton’s Satan.”

“Lo, a shadow of horror is risen
In Eternity! Unknown, unprolific!
Self-closd, all-repelling: what Demon
Hath form’d this abominable void
This soul-shudd’ring vacuum?–Some said
“It is Verizon“”

But Blake also knew the cure, as English schoolboys sing in their Jerusalem hymn:

“I will not cease from Mental Fight,
Nor shall my Droid sleep in my hand:
Till I have made the Bastard sync,
No matter wtf Google planned.”

Forebodings: The Invisible Hand Appears

If, like me, you are the proud owner of a Verizon-Motorola-Google Droid, you will be interested to know that its synchronization problems are dwarfed by a new one I’ve discovered: The Invisible Hand!

Lest you think I am the only poor soul so afflicted, I recommend you google or bing “motorola android touch screen jitter.”

This is the situation. Sometimes, the Droid screen starts to jitter, as though stroked by invisible touches from some phantom Dybbuk trying to arouse it. It looks as though it is suffering endless and continual touch screen input. The screen scrolls up and down, left and right, opens up the picture gallery, displays menus, asks you to enter data, ceaselessly.

Needless to say, this makes looking at your calendar or dialing a phone number an impossibility. Often, it makes unlocking the screen and using the smartphone in any way at all a non-event.

Healing: The Ogden Nash Equilibrium

You may have hoid
I dumped my droid
into a garbage can I found (using Google Voice Search) on the corner of  33rd
and Seven.
I’m in heaven.
There it lay,
Pleading as I walked away
“process.android.email not responding: Force Quit or Close?”

So it goes.

 

In the 1960s the key question for the East was: can you have Communism with a human face?

Hungary tried it in ’56, Poland and Czechoslovakia a decade later, and the answer pretty quickly turned out to be NO. Cuba hasn’t succeeded either, though it may not be all their fault. And as regards China, their face is only half human and it’s not Communist except in name.

But for us, on the heels of the Great & Ongoing Financial Crisis, the long poor tail of the income distribution in the U.S,. the general state of joblessness, and the riots in London, all coupled with some companies making records profits in the midst of a recession, the question is:

Can you have capitalism with a human face?

An answer to this would be an answer to many of the current problems of the West.

______

What stands in the way of a more human-focused capitalism? Here are only a few incomplete thoughts that come to mind in the light of everyday events.

• In the USA, one item is the fear of being labeled “socialist.” Too much government and the dependence that goes with it is wasteful, but services and regulation are obviously necessary. We seem to have too much in areas government shouldn’t be in, and too little in areas they should. I like:
  • minimal interference by the “state” with private behavior; but
  • a good safety net for everyone including health care and certain basic amenities;after that
  • private enterprise, with the risk, potential rewards and potential failures of risk-taking above that safety net, for both corporations and individual;
    Nobody too big to fail; no confusing illiquidity with insolvency; let insolvent companies wind down; recapitalization with new management rather than prolonged resuscitation; but somehow, if resuscitation by taxpayers  is occasionally unavoidable, then a large fraction of future earnings given to taxpayers for a long time as the cost of present taxpayer salvation (every put given demands a call in return); in short, allow people and corporations to move on from failure but don’t reward them for it.
  • taxation as far as possible used neutrally, with minimal attempts to modify people’s behavior (no mortgage deductions …); treat people as adults.

Easy to say, of course, but how to put this into practice, or even agree on what it means, is another story.

• Another problem is the financialization of the economy, which is another way of saying that middlemen have been getting very rich. Banks are, or perhaps should be, glorified utilities, helping transfer capital from one set of people to another. Yet classes of bank employees who are the middlemen in these utility industries have become very rich, doing much better than their shareholders, who have received little return on their capital over the past five or more years. It’s a mystery how this persists. In the case of manufacturers, employees do well when shareholders do well; think Apple, and vice versa. In banking, that correlation breaks down. Another mystery is how this persists despite competition. In manufacturing, competition lowers profits. Think of what’s happened to computer manufacturers two decades ago, or the manufacturers of GPS systems for cars more recently.

• Perhaps one has to recognize that finance is an essential service of the economy, and treat some core of financial services, the least risk-taking part,  as a utility, like water and electricity and fire brigades, provided by government, there in an emergency, regulated, compensated appropriately.

About once a year I end up writing something about karma, and, in these uninspiring times,  this is one of those days.

According to Wikipedia:

“Karma is not punishment or retribution but simply an extended expression or consequence of natural acts. Karma … names the universal principle of cause and effect, action and reaction that governs all life. The effects experienced are also able to be mitigated by actions and are not necessarily fated … it is not a simple, one-to-one correspondence of reward or punishment. Karma is not fate, for humans act with free will creating their own destiny … The conquest of karma lies in intelligent action and dispassionate response.”

I have another definition, which I believe I once read somewhere:

“Karma is the mechanical expiation of sin.”

I always seem to remember that I saw it attributed to Tolstoy, whom it seems as though it suits, especially the older Tolstoy. I quoted it in my book “My Life as a Quant.” But when I google this quote, all I ever find is my own attribution of it, so I must be wrong. Anyhow, I like it. I take it to mean that the universe wants you to stop behaving mechanically in relation to the things you do that are wrong; if you don’t cease by voluntary expiation and repair things yourself,  then the universe will mechanically grind away at your vanities until you submit — involuntary expiation, an unpleasant prospect.

I often feel that this is what is happening to the U.S. these past few years: involuntary expiation. If you won’t change from inside then the universe works to change you from outside. From inside is better than from outside. Changes are called for, and no one with power and influence wants to re-examine their behavior and cease behaving mechanically. As it says in Wikipedia, the conquest of karma lies in intelligent action and dispassionate response. More prosaically, karma is what happens when you kick the can down the road.

I write about this a little in the book I’m completing, Models.Behaving.Badly. What’s miraculous is that occasionally, rarely, there are people like Mandela and de Klerk, or Gorbachev, who stop behaving like programmed machines, and break the cycle of karma. In the US we’re still waiting for someone like that. One has to beware of charismatic leaders, especially in periods of mass unhappiness, but we need some nonmechanical person to look up to and change the status quo.

I have spent too much time on Twitter*.

Nevertheless, one of the things I did notice is how many of the economic tweets are arguments about statistics. One in particular, pointed at by @FelixSalmon and @JustinWolfers, is an article that stresses:

… statistics is a rhetorical practice.  The goal is not just to convey information but rather to change minds.

The author of that extract, Jeff Ely, is a professor of Economics at Northwestern. I wonder whether professors of statistics would agree with his definition. In any event, it made me think about whether statistics is a science, or, indeed, what is a science**?

In my categorical scheme, science is about finding the rules or relations the world satisfies. I suppose I am assuming the existence of an objective world.

Therefore:

• I wouldn’t call mathematics a science. I’d call it a tool or a method. Gauss called it “the Queen of the Sciences”, a reference to the role of the queen in chess, I think.
• I’d call physics, chemistry and biology, etc., the natural sciences, in accord with tradition.
• I’d call economics and politics the moral disciplines because there will hardly ever/never be an objectively true answer to a question.
• And I’d call statistics the heuristics of extrapolating data. I don’t mean that pejoratively.

In that case, when an individual ignores pure statistical evidence that comes from a collection of data, that is extrapolation heuristics, I don’t think you can fairly say they’re ignoring “science”.

I foresee someone pointing out that all real science is based on the statistical analysis of data too. That’s true. But it’s only science that’s being ignored if there’s a theory or model or explanation underlying it too, some deductive scheme based on structural principles.

________________

* I wonder if anyone has calculated the amount of GDP lost to the nation by people, not in the news business and still holding jobs, who obsessively look at tweets, their own, responses to their own, and others.

** A colleague of mine once told me that his father said that any field that attempts to make the word science part of its name (nutrition science, social science, domestic science) cannot be a science. When I was in graduate school, and my friends and I went off to work in the evening or on the weekend,we said we’re going to “do some physics”. The biologists I knew, under similar circumstances, said they were going to “do some science”. And they were, but I thought it was a strange and glamorous usage.