Month: March 2022

Stock Volatility and the War Puzzle

U.S. stock volatility is 33 percent lower during wartime and periods of conflict. This is true even for World Wars I and II, which would seemingly increase uncertainty. In a seminal paper, Schwert (1989) identified the “war puzzle” as one of the most surprising facts from two centuries of stock volatility data. We propose an explanation for the puzzle: the profits of firms become easier to forecast during wartime due to massive government spending. We test this hypothesis using newly-constructed data on more than 100 years of defense spending. The aggregate analysis finds that defense spending reduces stock volatility. The sector level regressions show that defense spending predicts lower stock volatility for firms that produce military goods. Finally, an event-study demonstrates that earnings forecasts of defense firms by equity analysts become significantly less disperse after 9/11 and the invasions of Afghanistan (2001) and Iraq (2003).

That is from a new NBER working paper by Gustavo S. Cortes, Angela Vossmeyer, and Marc D. Weidenmier.

Effective Altruism is and will be more influential than you think

One of the privileges of reading Emergent Ventures applications is that I get a cross-sample — admittedly a skewed one — of who and what is actually influencing people.

When it comes to smart and many of the very smartest young people, the influence of Effective Altruism on their thought is radically underreported and underrepresented.

That’s it!  File under “true.”

US Pandemic Policy: Failures, Successes, and Lessons

My talk at Bowling Green State University on US Pandemic Policy: Failures, Successes, and Lessons

This was not a black swan event. This was an entirely predicted and predictable event. We knew it was going to happen….And yet, we weren’t ready.

I am told that my talk made many people angry (not at me, natch).

What I’ve been reading

1. Charles Clover, Black Wind, White Snow: The Rise of Russia’s New Nationalism.  An excellent look at all the icky ideas that have been circulating around Russia for the last few decades.  This book also brings the relevant characters to life, for better or worse.  Recommended.

2. Christopher Prendergast, Living and Dying with Marcel Proust.  Unlike most of the secondary literature, this book actually makes In Search of Lost Time sound like it is worth reading.

3. Elizabeth Popp Berman, Thinking Like an Economist: How Efficiency Replaced Equality in U.S. Public Policy.  A useful book, and many people should read it, that said I have some caveats.  Was “equality” ever the standard?  Why isn’t there more public choice/political economy analysis in here?

4. Joseph Sassoon, The Global Merchants: The Enterprise and Extravagance of the Sassoon Dynasty.  A fun read, I had not known the family was Iraqi-Jewish, or so heavily involved in the opium trade in 19th century China.  The author, by the way, is a distant relation to the main family tree, but it turns out he can read all the relevant languages for deciphering the family archives (and hardly anyone else can).

5. Elizabeth Bowen, Eva Trout.  Bowen has to be one of the most underrated writers of the twentieth century.  No human ever has told me to read one of her books!  Yet this one is a subtle knockout.

Why Artificial Intelligence Increases the Importance of Humans in War

Recent scholarship on artificial intelligence (AI) and international security focuses on the political and ethical consequences of replacing human warriors with machines. Yet AI is not a simple substitute for human decision-making. The advances in commercial machine learning that are reducing the costs of statistical prediction are simultaneously increasing the value of data (which enable prediction) and judgment (which determines why prediction matters). But these key complements—quality data and clear judgment—may not be present, or present to the same degree, in the uncertain and conflictual business of war. This has two important strategic implications. First, military organizations that adopt AI will tend to become more complex to accommodate the challenges of data and judgment across a variety of decision-making tasks. Second, data and judgment will tend to become attractive targets in strategic competition. As a result, conflicts involving AI complements are likely to unfold very differently than visions of AI substitution would suggest. Rather than rapid robotic wars and decisive shifts in military power, AI-enabled conflict will likely involve significant uncertainty, organizational friction, and chronic controversy. Greater military reliance on AI will therefore make the human element in war even more important, not less.

That is from a new paper by Avi Goldfarb and Jon R. Lindsay, via the excellent Kevin Lewis.

Kotkin on Russia and the West

A great interview with historian Stephen Kotkin. Kotkin has some some thoughts on the Kennan, Mearsheimer, Kissinger, Hill, Service et al. view that expanding NATO was a precipitating event in the Ukraine-Russia war which are well taken, albeit he fails to think on the margin. Much more important is his full throated defense of the West. Just a few months ago a defense like this would have been branded as right-wing agitprop and the author attacked for not being woke to the evils of capitalism. But Putin has reminded the West of its virtues.

How do you define “the West”?

The West is a series of institutions and values. The West is not a geographical place. Russia is European, but not Western. Japan is Western, but not European. “Western” means rule of law, democracy, private property, open markets, respect for the individual, diversity, pluralism of opinion, and all the other freedoms that we enjoy, which we sometimes take for granted. We sometimes forget where they came from. But that’s what the West is.

And yet, as corrupt as China is, they’ve lifted tens of millions of people out of extreme poverty. Education levels are rising. The Chinese leaders credit themselves with enormous achievements.

Who did that? Did the Chinese regime do that? Or Chinese society? Let’s be careful not to allow the Chinese Communists to expropriate, as it were, the hard labor, the entrepreneurialism, the dynamism of millions and millions of people in that society.

On a kind of natural resource curse:

…in Russia, wealth comes right up out of the ground! The problem for authoritarian regimes is not economic growth. The problem is how to pay the patronage for their élites, how to keep the élites loyal, especially the security services and the upper levels of the officer corps. If money just gushes out of the ground in the form of hydrocarbons or diamonds or other minerals, the oppressors can emancipate themselves from the oppressed. The oppressors can say, we don’t need you. We don’t need your taxes. We don’t need you to vote. We don’t rely on you for anything, because we have oil and gas, palladium and titanium.

On why the stupid get on top:

You have to remember that these regimes practice something called “negative selection.” [In a democracy, AT] You’re going to promote people to be editors, and you’re going to hire writers, because they’re talented; you’re not afraid if they’re geniuses. But, in an authoritarian regime, that’s not what they do. They hire people who are a little bit, as they say in Russian, tupoi, not very bright. They hire them precisely because they won’t be too competent, too clever, to organize a coup against them. Putin surrounds himself with people who are maybe not the sharpest tools in the drawer on purpose.

That does two things. It enables him to feel more secure, through all his paranoia, that they’re not clever enough to take him down. But it also diminishes the power of the Russian state because you have a construction foreman who’s the defense minister [Sergei Shoigu], and he was feeding Putin all sorts of nonsense about what they were going to do in Ukraine. Negative selection does protect the leader, but it also undermines his regime.

On the importance of error correction:

…Finally, you’ve given credit to the Biden Administration for reading out its intelligence about the coming invasion, for sanctions, and for a kind of mature response to what’s happening. What have they gotten wrong?

They’ve done much better than we anticipated based upon what we saw in Afghanistan and the botched run-up on the deal to sell nuclear submarines to the Australians. They’ve learned from their mistakes. That’s the thing about the United States. We have corrective mechanisms. We can learn from our mistakes. We have a political system that punishes mistakes. We have strong institutions. We have a powerful society, a powerful and free media. Administrations that perform badly can learn and get better, which is not the case in Russia or in China. It’s an advantage that we can’t forget.

And most importantly, we need to blaze a path to de-escalation.

The problem now is not that the Biden Administration made mistakes; it’s that it’s hard to figure out how to de-escalate, how to get out of the spiral of mutual maximalism. We keep raising the stakes with more and more sanctions and cancellations. There is pressure on our side to “do something” because the Ukrainians are dying every day while we are sitting on the sidelines, militarily, in some ways. (Although, as I said, we’re supplying them with arms, and we’re doing a lot in cyber.) The pressure is on to be maximalist on our side, but, the more you corner them, the more there’s nothing to lose for Putin, the more he can raise the stakes, unfortunately. He has many tools that he hasn’t used that can hurt us. We need a de-escalation from the maximalist spiral, and we need a little bit of luck and good fortune, perhaps in Moscow, perhaps in Helsinki or Jerusalem, perhaps in Beijing, but certainly in Kyiv.

A great interview. Read the whole thing.

Do pictures signal less power than words?

This research shows people are perceived as less powerful when they use pictures versus words. This effect was found across picture types (company logos, emojis, and photographs) and use contexts (clothing prints, written messages, and Zoom profiles). Mediation analysis and a mediation-by-moderation design show this happens because picture-use signals a greater desire for social proximity (versus distance) than word-use, and a desire for social proximity is associated with lower power. Finally, we find that people strategically use words (pictures) when aiming to signal more (less) power. We refute alternative explanations including differences in the content of pictures and words, the medium’s perceived appropriateness, the context’s formality, and the target’s age and gender. Our research shows pictures and words are not interchangeable means of representation. Rather, they signal distinct social values with reputational consequences.

That is from new research by Elinor Amit, Shai Danziger, and Pamela K. Smith.  Via the excellent Kevin Lewis.

Claims about the evolution of memes

GoodToSell serves up a cyclical/asymptotic model of meme evolution and competition:

This is also an industry dominated by network effects. The forces that lead to such explosive growth, such as the scalability of info-tech, also lead to its downfall, as one or two companies dominate each niche. This means that the profitabilty component of evolution lessens its selective power, as platforms collect monopoly rents once all our attention has been accounted for.

Finally, algo-generated memes competed a little too well there for a minute. The shrillness reached its peak sometime in the past 3 years, and yet here we are, not in a civil war. The ideas were selected, in the inital expansion and takeover of memes, for pure potency and engagement, but not for accuracy or longevity. As people catch on, we will build up a societal defense immune system against purely mimetic viruses. Even now, I see many people simply detaching, having been burned thinking we were entering a societal event horizon—it turns out material reality was still dictated by material necessity, and the old powers that be are still in control, if temporarily perturbed. 4chan may still spin off a potent meme every once in a while, causing people to think that vaccines are population control, but after getting burned enough, and evading fact-checkers and censorship, people will eventually fall into habituation, and learned epistemic helplessness, back into the arms of traditional media, willing and occaisonally able to interpret things accurately…

Here is the entire post.

Yes those new service sector jobs are getting weirder

On Thursday afternoon, 30 top TikTok stars gathered on a Zoom call to receive key information about the war unfolding in Ukraine. National Security Council staffers and White House press secretary Jen Psaki briefed the influencers about the United States’ strategic goals in the region and answered questions on distributing aid to Ukrainians, working with NATO and how the United States would react to a Russian use of nuclear weapons.

Here is the full story, via Bryant Seaman, and several other MR readers.

Immigration as a problem of “optimal harvesting”

Assume you are judging immigration policy from a nationalistic point of view for the receiving country.  Furthermore, assume that you have in place, or could have in place, a mechanism for positive selection of migrants.  That is, you can attract some real talent, some Edward Tellers and Piet Mondrians.

I then wonder if for any desired amount of immigration, whether it should not be taken from countries with equal or lower birth rates than the receiving country.

Let’s say you have country X — Ruritania — with a relatively high birth rate.  In that country, the relatively talented people are having a fair number of children and producing a decent “rate of return” on their talent.  Why pluck them from that multiplicative environment?  A generation or two later, the prospects from that country will be all the brighter.

Conversely, if you take in talent from a country with an equal or lower birth rate to yours, you are not lowering the future rate of potentially talented babies born.

Note that if you wait to take in talent from Ruritania, it is not because you don’t want them.  It is because you want more/better of them later in the future.

Furthermore, if you are taking migrants from Ruritania in the future, when their birth rates are declining, you are also taking in individuals who, in the Beckerian sense, are receiving relatively high quality human capital investments from their parents, at least relative to that country’s past.

The perceptive will note that this argument holds regardless of the absolute number of migrants you might wish to take in, high or low.

Friday assorted links

1. Redux of my 2018 post “My Favorite Things Ukraine,” closes with this: “Overall, this is a stunningly impressive list, though there are legitimate questions as to who and what exactly counts as Ukrainian.  They’re still trying to sort that one out, which is part of the problem.”  The comments are interesting too.

2. Is progress in mathematics understudied?

3. “Insurance reduces anxiety and repetitious thoughts related to the mishap; with fewer thoughts about the mishap, its cognitive availability is lower and so it seems less likely to occur.

4. Using AI to decode pig calls.

5. Why was Norway a welfare state laggard?