Abstract:
The recent financial crisis has generated many distinct perspectives from various quarters. In this article, I review a diverse set of 21 books on the crisis, 11 written by academics, and 10 written by journalists and one former Treasury Secretary. No single narrative emerges from this broad and often contradictory collection of interpretations, but the sheer variety of conclusions is informative, and underscores the desperate need for the economics profession to establish a single set of facts from which more accurate inferences and narratives can be constructed.
It is an instructive look at how bad we are at discovering the truth and talking about it. Here is part of his beginning:
To illustrate just how complicated it can get, consider the following “facts” that have become part of the folk wisdom of the crisis:
1. The devotion to the Efficient Markets Hypothesis led investors astray, causing them to ignore the possibility that securitized debt2 was mispriced and that the real-estate bubble could burst.
2. Wall Street compensation contracts were too focused on short-term trading profits rather than longer-term incentives. Also, there was excessive risk-taking because these CEOs were betting with other people’s money, not their own.
3. Investment banks greatly increased their leverage in the years leading up to the crisis, thanks to a rule change by the U.S. Securities and Exchange Commission (SEC).
While each of these claims seems perfectly plausible, especially in light of the events of 2007–2009, the empirical evidence isn’t as clear.
Starting on p.35, you can find a new take on the myth of the 2004 SEC change to Rule 15c3–1 (though see the first comment), relating to the supposed increase in leverage requirements from 12-1 to 33-1:
…it turns out that the 2004 SEC amendment to Rule 15c3–1 did nothing to change the leverage restrictions of these financial institutions. In a speech given by the SEC’s director of the Division of Markets and Trading on April 9, 2009 (Sirri, 2009), Dr. Erik Sirri stated clearly and unequivocally that “First, and most importantly, the Commission did not undo any leverage restrictions in 2004”. He cites several documented and verifiable facts to support this surprising conclusion, and this correction was reiterated in a letter from Michael Macchiaroli, Associate Director of the SEC’s Division of Markets and Trading to the General Accountability Office (GAO) on July 17, 2009, and reproduced in the GAO Report GAO–09–739 (2009, p. 117).
It is also shown that the higher leverage was common in the late 1990s. There is more to the discussion, but it is time to reconsider this point.
NASA’s Kepler mission has discovered the first Earth-size planets orbiting a sun-like star outside our solar system. The planets, called Kepler-20e and Kepler-20f, are too close to their star to be in the so-called habitable zone where liquid water could exist on a planet’s surface, but they are the smallest exoplanets ever confirmed around a star like our sun.
The discovery marks the next important milestone in the ultimate search for planets like Earth. The new planets are thought to be rocky. Kepler-20e is slightly smaller than Venus, measuring 0.87 times the radius of Earth. Kepler-20f is slightly larger than Earth, measuring 1.03 times its radius. Both planets reside in a five-planet system called Kepler-20, approximately 1,000 light-years away in the constellation Lyra.
The link is here and for the pointer I thank Bernard Guerrero.
Allen’s new new crop are the Internet magicians. “They’ve got a different approach and different goals. I’m not sure they even want to develop an act that they can perform live; they’re interested in making videos that go viral. From my viewpoint, it’s not a problem so much as it’s an interesting evolution.”
The full story is here, and for the pointer I thank Mark Thorson.
The latest rumour is that both ATLAS and CMS have evidence that the Higgs mass is about 125 GeV/C2 at confidence levels of 3.5σ and 2.5σ respectively. At 3.5σ, the measurement could be the result of a random fluke just 0.1% of the time whereas at 2.5σ the fluke factor is about 1%.
If you are really optimistic, I believe you can add these two results together in quadrature to get an overall result with a significance of 4.3σ.
While these might sound like fantastic odds to you and me, particle physicists normally wait until they have a confidence of 5σ or greater before they call it a “discovery”. Anything over 3σ is described as “evidence”.
…Crease wisely cites past experience as the number-one reason for caution. Indeed he quotes University of Oxford physicist and data-analysis guru Louis Lyons as saying “We have all too often seen interesting effects at the 3σ or 4σ level go away as more data are collected.”
As Crease points out, nearly everyone he spoke to in writing his article “had tales – many well known – of signals that went away, some at 3σ: proton decay, monopoles, the pentaquark, an excess at Fermilab of high-transverse-momentum jets”.
Here is more, and for the pointer I thank Ken Regan. Here are the InTrade markets, which are pricing observation before 2014 at 88.
We now return to your regularly scheduled programming.
Size really matters: prior to the era of large genome-wide association studies, the large effect sizes reported in small initial genetic studies often dwindled towards zero (that is, an odds ratio of one) as more samples were studied. Adapted from Ioannidis 2001 et al., Nat Genet 29:306-309.
Genomes Unzipped: In October of 1992, genetics researchers published a potentially groundbreaking finding in Nature: a genetic variant in the angiotensin-converting enzyme ACE appeared to modify an individual’s risk of having a heart attack. This finding was notable at the time for the size of the study, which involved a total of over 500 individuals from four cohorts, and the effect size of the identified variant–in a population initially identified as low-risk for heart attack, the variant had an odds ratio of over 3 (with a corresponding p-value less than 0.0001).
Readers familiar with the history of medical association studies will be unsurprised by what happened over the next few years: initial excitement (this same polymorphism was associated with diabetes! And longevity!) was followed by inconclusive replication studies and, ultimately, disappointment. In 2000, 8 years after the initial report, a large study involving over 5,000 cases and controls found absolutely no detectable effect of the ACE polymorphism on heart attack risk.
The ACE story is not unique to the ACE polymorphism or to medical genetics; the problem is common to most fields of empirical science. If the sample size is small then statistically significant results must have big effect sizes. Combine this with a publication bias toward statistically significant results, plenty of opportunities to subset the data in various ways and lots of researchers looking at lots of data and the result is diminishing effects with increasing confidence, as beautifully shown in the figure.
PsycNet: The effect of a grateful outlook on psychological and physical well-being was examined. In Studies 1 and 2, participants were randomly assigned to 1 of 3 experimental conditions (hassles, gratitude listing, and either neutral life events or social comparison); they then kept weekly (Study 1) or daily (Study 2) records of their moods, coping behaviors, health behaviors, physical symptoms, and overall life appraisals. In a 3rd study, persons with neuromuscular disease were randomly assigned to either the gratitude condition or to a control condition. The gratitude-outlook groups exhibited heightened well-being across several, though not all, of the outcome measures across the 3 studies, relative to the comparison groups. The effect on positive affect appeared to be the most robust finding. Results suggest that a conscious focus on blessings may have emotional and interpersonal benefits.
Male nursery web spiders often woo potential lady-friends with gifts wrapped in silk. Mating may ensue, during which a female unspools the present, expecting to find a tasty treat. But the males can be unscrupulous. Some offerings contain inedible plant seeds or empty insect exoskeletons.
…The empty-handed males were mostly unsuccessful at mating. Whereas those with a gift could get the girl. But if the gift was worthless, the females quickly realized the deceit and pushed the copulating males off.
The Scientific American blog post (based on this paper) makes it sound as if the males are the only ones using deception and dirty tricks. But why do the males silk wrap their gifts? Why not just present the females with food?
Females presented with food will often grab the food and run, leaving the males doubly hungry. A wrapped package is harder to steal (the males have a better grip on the silk) and as the females slowly unwrap their potentially delicious presents the males copulate. Thus, the rituals of silken wrapped gifts conceal intricate conflicts over resources and sex. Only among spiders, of course.
The Nature.com summary is here, the new paper is here (pdf), abstract:
Quantum states are the key mathematical objects in quantum theory. It is therefore surprising that physicists have been unable to agree on what a quantum state represents. There are at least two opposing schools of thought, each almost as old as quantum theory itself. One is that a pure state is a physical property of system, much like position and momentum in classical mechanics. Another is that even a pure state has only a statistical significance, akin to a probability distribution in statistical mechanics. Here we show that, given only very mild assumptions, the statistical interpretation of the quantum state is inconsistent with the predictions of quantum theory. This result holds even in the presence of small amounts of experimental noise, and is therefore amenable to experimental test using present or near-future technology. If the predictions of quantum theory are confirmed, such a test would show that distinct quantum states must correspond to physically distinct states of reality.
I have no ability to judge this, but it seems serious people are taking it seriously. Hat tip goes to Kevin Drum.
…the single most important change affecting the world’s population — its expansion from 1.6 billion people in 1900 to today’s 6 billion — would not have been possible without the synthesis of ammonia.
…All the children to be seen running around or leading docile water buffaloes in China’s southern provinces, throughout the Nile Delta, or in the manicured landscapes of Java got their body proteins, via urea their parents spread on bunded fields, from the Haber-Bosch synthesis of ammonia.
Another wondrous discovery from late 19th century/turn of the century Germany, though on the other side of the balance Haber played a critical role in inventing the German poison gases used in World War I. Have I mentioned that Vaclav Smil is one of the most important thinkers/writers today, in any field? It is worth reading all of his books, and there are not many people (with many books that is!) you can say that about.
By the way, many people think that Clara Immerwahr (Fritz Haber’s first wife, and the first female PhD at the University of Breslau) looks like Taylor Swift:
They compiled data establishing, among other things, that certain areas of the body are particularly ticklish (the nape of the neck, for you do-it-yourselfers), that the most playful rats tend to be the most ticklish, that rats can become conditioned to chirp simply in anticipation of being tickled, that tickle response rates decline after adolescence, that young rats preferentially spend time with older ones who chirp more frequently, that the tickle response appears to generate social bonding, that chirping decreases in the presence of negative stimuli (such as the scent of a cat), that rats will run mazes and press levers to get tickled, etc. Based on their research and observations, Panksepp and his fellow researchers hypothesized that rats, when being tickled or engaging in other playful activities, experience social joy that they vocalize through 50 kHz chirping, a primordial form of laughter that is evolutionarily related to joyful social laughter in young human children.
Here is more, with further references and links at the bottom, and for the pointer I thank Michelle Dawson.
In Why they call it Green Energy: The Summers/Klain/Browner Memo I discussed the Shepherds Flat wind project, a $1.9 billion dollar project subsidized to the tune of $1.2 billion. Today, the NYTimes has a good piece on an even bigger subsidy sucker, a $1.6 billion CA solar project that is nearly 90% subsidized by taxpayers and ratepayers leaving a nice profit but virtually no risk for its corporate backers. The grateful but perhaps overly voluble CEO of the corporation building the project had this to say:
As NRG’s chief executive, David W. Crane, put it to Wall Street analysts early this year, the government’s largess was a once-in-a-generation opportunity…
“I have never seen anything that I have had to do in my 20 years in the power industry that involved less risk than these projects,” he said in a recent interview. “It is just filling the desert with panels.”
I suspect that he might have continued, “it was like taking candy from a baby,” but that is just a suspicion.
There are good reasons for taxing all sources of carbon and subsidizing cleaner energy sources (especially R&D) but huge subsidies targeted on a handful of corporations without “skin in the game” are a recipe for waste, corruption and abuse. We can only hope that this was just a once in a generation opportunity.
Addendum: The NYTimes usually has great info-graphics but today’s experiment made it more difficult not easier to get to the key information.
Hat tip: Daniel S.
Addendum 2: It’s telling that so many people want to shift the debate away from the advisability of particular solar and wind subsidies to whether I or others have been consistent about coal, oil and nuclear subsidies.
For the record, in this very post I discuss taxing carbon, obviously including oil and coal, so it is clear that I do not favor subsidizing those energy sources. Also, careful readers (most MR readers!), will see that I am especially worried about “huge subsidies targeted on a handful of corporations,” both of those clauses are important. In this case, for example, we are talking about nearly 90% subsidies and they are targeted on a case by case basis; put these two things together and you get waste, corruption and abuse. For these reasons, I am less worried about subsidies to green energy that leave private firms with lots of skin in the game and that are open to any firm.
The excitement quickly fades as students brush up against the reality of what David E. Goldberg, an emeritus engineering professor, calls “the math-science death march.” Freshmen in college wade through a blizzard of calculus, physics and chemistry in lecture halls with hundreds of other students. And then many wash out.
Studies have found that roughly 40 percent of students planning engineering and science majors end up switching to other subjects or failing to get any degree. That increases to as much as 60 percent when pre-medical students, who typically have the strongest SAT scores and high school science preparation, are included, according to new data from the University of California at Los Angeles. That is twice the combined attrition rate of all other majors.
Could it be that too many people like being the smartest one in the room? Or is it some other explanation?:
“But if you take two students who have the same high school grade-point average and SAT scores, and you put one in a highly selective school like Berkeley and the other in a school with lower average scores like Cal State, that Berkeley student is at least 13 percent less likely than the one at Cal State to finish a STEM degree.”
From the folks that brought you BigDog, a robot that can walk, run and do push-ups. Notice especially how the robot is able to stand on one foot when it shifts its weight.
With regard to age, there’s a suggestion that enjoyment rises through childhood, peaks in adolescence and then gradually fades with age. Related to this is the ‘snuggle theory’ – the idea that viewing horror films may be a rite of passage for young people, providing them with an opportunity to fulfil their traditional gender roles. A paper from the late 1980s by Dolf Zillmann, Norbert Mundorf and others found that male undergrads paired with a female partner (unbeknown to them, a research assistant), enjoyed a 14-minute clip from Friday the 13th Part III almost twice as much if she showed distress during the film. Female undergrads, by contrast, said they enjoyed the film more if their male companion appeared calm and unmoved. Moreover, men who were initially considered unattractive were later judged more appealing if they displayed courage during the film viewing. ‘Scary movies and monsters are just the ticket for girls to scream and hold on to a date for dear life and for the date (male or female) to be there to reassure, protect, defend and, if need be, destroy the monster,’ says Fischoff. ‘Both are playing gender roles prescribed by a culture.’
