Guerilla Economics

Edge: THE FOURTH QUADRANT: A MAP OF THE LIMITS OF STATISTICS By Nassim Nicholas Taleb

Nassim Taleb (wiki).

Statistical and applied probabilistic knowledge is the core of knowledge; statistics is what tells you if something is true, false, or merely anecdotal; it is the "logic of science"; it is the instrument of risk-taking; it is the applied tools of epistemology; you can't be a modern intellectual and not think probabilistically—but... let's not be suckers. The problem is much more complicated than it seems to the casual, mechanistic user who picked it up in graduate school. Statistics can fool you. In fact it is fooling your government right now. It can even bankrupt the system (let's face it: use of probabilistic methods for the estimation of risks did just blow up the banking system).

via www.edge.org

The "fourth quadrant" (extreme events with extreme outcomes) provides part of the justification for a scenario planning methodology. These events are where statistical likelihoods derived from Normal distributions break down. They come without historical precedent, precisely because they are so unlikely (see the economist describing the 1 in 10,000 year likelihood of the credit crunch). However, they have complex payoffs and therefore are serous trouble. 

Hypothesis: Market World is at risk of an increased number of "endogenous black swan events", i.e. extreme outcomes generated within the system. This in itself may put a long run limit on the operation of a "free" i.e. Washington Consensus market structure. In other words, the self- equilibriating tendency in "Turbo Captalism" is it's inbuilt tendency to generate Black Swans. 

Yes, I heard that South Park request .....

....and if this were a politics course, you'd get at least 5 minutes of SP a week (because Mssrs Parker and Stone are, as are all the best satirists, tremendously shrewd commentators).  But as this isn't, the only thing that came to mind for business was the non strategy of the gnomes:

Beware, as a drone in your post graduation jobs, this is what you will get from management when they try to sell you a lemon internally. These same people will then wonder why they get low productivity and no gratitude. The thicker skinned members of the kakistocracy will content themselves with their fat paychecks and the thinner skinned will engage in relentless self abuse battery about why nobody likes their whining arse. A good article: Human Resources from an Organizational Behavior Perspective: Some Paradoxes Explained by Jeffrey Pfeffer, Journal of Economic Perspectives Volume 21, Number 4 —Fall 2007—Pages 115–134

James Burke Connections

James Burke. Genius, historian of genius, maker of one of the greatest TV programmes ever.

Let me explain. Back in the 1970s the heavily regulated British TV environment was responsible for adding some true gems to the world repository of human knowledge. Because there were only three channels, and two of those were the BBC, you didn't have to worry about competitive strategy, so you could make programmes to satisfy other objectives. OK you laugh now at the safari suits and flares, and you compare the stilted narratives and all the rest with our hyperaccelerated graphics and everything louder than everything else sound (and you know, us engineers should take a Dogme vow forswearing the use of heavy compression on the master channel.)but let me tell you something. In ten years time, if anything exists of our current creative models, everything we produce now will look just as stupid as old stuff does now. They'll be lining up comedians to say unfunny pieces to camera about Big Brother just as we do now about say The Tube or whatever.

But, like whatever. I loved this when I was ickle. It got me interested in the history of innovation, which is not normally a nice easy linear progression but a set of fits and starts, jumps forward and backwards. It also got me interested in the betweens, which are the really important factors. That is to say, the things which only happen when you connect up knowledge in different fields. We can easily become knowledge islands. So build fucking bridges.

Anyway here's JB at his best. This ep of connections links the atomic bomb to the stirrup. It's clear and it's compelling and it's very interesting. Part One here.

Get the rest while they're still up. I promise you that if you are interested it will reward you. Now to only disconnect, as we might deliberately misquote Forster. You can also get connections here

But why would you. £243 for fucking DVD box set? Are you taking the piss. Yes you are. Thank the ineffable Tao therefore for  a modern knowledge connection method. Here. Thank JamesBurkeFan at youtube for sterling work in uploading to the 'toob. Be careful with the 12GB vols 1, 2, 3 set (it will take days to dl.)

And remember to ding a dong every hour, when you pick a flower, even when your lover has gone....

More on Happiness

The happiness debate continues. There's a good dissenting article on growth at Prospect, by Will Wilkinson who makes some very pertinent and sensible points. From TFA

The trouble with happiness research is that it is too often a mirror: we look into the data and see our ideology reflected. No one emerges from the happiness literature politically transformed. A dispassionate inquirer with no preconceptions would find that the happiness data say both too little and too much to build a usefully specific politics. Mostly he or she would find that liberal market democracies are where happiness flourishes most. But we already knew we wanted one of those. We already have one of those. Yet the happiness data don't tell us whether we ought to prefer the Swedish or the American type of liberal democracy, which is pretty much the main debate.

Point taken. Oliver James, meanwhile also has a book to plug a point to make in the Guardian, 23rd October:

The greatest crime of the Blatcherites has been the spreading of the affluenza virus among the rest of us. They seem to despise mothers who care for their small children - or anyone else whose work is not paid. They use education to create good little consumer-producers, not to set minds free. They lock students into debts, then impose an insecure, workaholic working environment and a bloated property market that keeps the young on a hedonic, consumerist treadmill. Above all, their talk of "opportunity", "choice" and "freedom" is just Americanised material aspirationalism.

Point taken, again.

I have some reservations about both. Wilkinson, for instance, cites a couple of studies on the empirics of reported happiness in support of his view, but the evidence is a little more nuanced. The quote from Benjamin Friedman is true, but it's not actually too difficult to construct a behaviuoral model from pretty simple consumer choice theory that would say that the utility one gets from having a position of status is what one values, and since status is essentially only a relative concept it is pretty obvious that one is setting oneself up for battle or frustration by doing so.

James, on the other hand, also feels broadly right, but has an alarming tendency to go off on one (this individualist capitalism thing at the end just didn't smell right to me).

I think there's something economists can do to help here, which is to make sure when we tell people about utility maximisation, we are a) not doing so as a prescription and b) making it clear that utility is not necessarily identified with any particular concept. We could also be more honest about the failings of the standard model and more careful about the conclusions we draw from it. And we can also, pace Wilkinson, be clear that relative factors are important to people too.

What would I advise? I'm not a psychologist and don't have any training in psychology, but my guess would be that happiness as a whole can only be achieved indirectly. If you try to be happy, you're almost certainly doomed to fail. If you can get beyond the whole concept, to the extent that it doesn't matter, it's more likely to come, in a similar way to the known fact that people who are desperate to pull never do....(OK, it's a fact. There's absolutely no evidence for it but it is a fact and both of you know it). Does growth matter? Well for a lot of reasons, yes. Do other things matter (like community, family, human respect), equally yes.

Result: My call is James, narrowly, on penalties.

From the Strategist's Brain

Great article on Porter's return to Strategy and competitiveness.

Von Clausewitz homepage. (The great Prussian military strategist has a lot of interesting stuff to say about business.)

Art of War online. (Note this was originally an eidetic text and has a hell of a lot of stuff that's not immediately comprehensible. It's also got some stuff in it that was meant to be incomprehensible to all but adepts)

Deposed CEO has something interesting to say

From Wired, A really good interview with Carly Fiorina, former CEO of HP.

Of course, numbers are important in a business too. But I think frequently people don't understand that numbers are usually lagging indicators. The results that a business posts in the quarter or the products that a business puts on a shelf are the result of decisions that have already been made.

Whilst I'm at it

So, a part of the brain governs selfishness. (Science, via boing^2). Tested using behavioural Game Theory experiments.

Really good coverage as ever at mindhacks. , waiting for neuroeconomist to chip in.

Google not Juche, Kim is

So using my current Juche obsession, I will express my Chajusong, creativity and conciousness by conflating the two top stories of the day, other than Colleen McRooney's new Bentley and Jade Goody winning a Celebrity of the Year gong that is.

Firstly Kim demonstrates the power of Chajusong by building a bomb. Brilliant. Look Kim, nobody within range of Pyongyang is at all interested in nuking your short arsed hide (Oh I'm on safe ground attacking Kim alright. hardly controversial.). They're all too busy being or becoming well off. Just like the Juche economy? Breaking away from the world is clever? in 1914 Argentina was one of the richest countries in the world. Then they either elected a succession of one eyed populists or got juntad by them, broke away from the rest of the world and got into an almighty mess. That's what happens when you try. Even the old Soviet bloc were insulated from the worst damage their economic systems caused by the fact that they traded as a bloc, and once the Wall fell, Cuba, for instance, was plunged well and truly into the dudu. But hey, nobody's died of malnutrition in Pyongyang. And, so you've got a bomb? You've been trying for years. Japan could probably have one in weeks if they wanted and it'll be smaller and cheaper than yours.

For no better reason than I just want to believe he's as ridiculous as he looks, the picture's how I think of Kim.

OK now Google, they don't follow this old fangled Juche thing so well, for all their wonderful chajusong, which hath served us so well with means to get information and detect egregious plagiarism. The reason I say this is that their acquisition of YouTube is recognition that their own video service sucked a monkey's ass, and that the market would eventually be right. Not Juche, but correct.

On the $1.6 Bn figure. Hmmm. Not sure. The terms of the deal aren't fully out yet, but I wonder whether the more important bit to watch is the content deals with Warner, CBS et al. As important as the shiny technology and widespread user base that Google bought is the third leg of the stool, the content. A deal that satisfies all three parties is increasingly looking to be the real dealmaker, as copyright starts to move from the legal realm to the realm of customer relations management.

That's what I think is worth watching!

Happiness And Economics

Allegedly, they say, that money cannot buy you happiness or love.

This has become a bit of a bone of contention, as policy makers have begun to realise that despite increasing richness, the good burghers of many estates are not happy. Why is this, they ask in dismay?

Professor Richard Layard and psychotherapist Oliver James have some answers. They include the hypotheses that a) above a certain level of income, we are more interested in relative increases in income and or status (I am middle class. I look up to him because he is Upper Class, and I look down on him because he is working class....) b) we have inbuilt mechanisms towards discounting up or down, and c) it's the market it drives us nuts.

To an extent I think they're all true, but with riders. For a start, reading Happiness by Layard and Britain on the Couch by James makes for a frustrating comparison, Layard's book being the as yet less developed, although his original LSE articles are by far the more detailed in their exposition and import.

In October's Prospect magazine, Will Wilkinson  (blog) looks sceptically at the evidence. But again, the truth feels somewhere else.......

Meanwhile the nation of Bhutan has moved under its benevolent buddhist absolute monarchy to looking at Gross National Happiness rather than GDP. Its GDP at PPP is 117th in the world ($3,921 per capita) compared to the UK (at position 18 with $ 30,436) . BTW, Luxembourg is no 1 with a whopping great tax free $70,000 per capita GDP value.

Valuing happiness, or even defining it in order to value it is a difficult problem. James Tobin (Nobel prize in Economics, 1981) was one person with a cool adaptation of GDP to take account of happiness, but his measure of economic welfare never caught on, not least because it would have been costly to collect and process the data. (Who knows, maybe this worth revisiting with 30 years of productivity improvements in data processing.)

Similarly (MIAC people take note....) Her Majesty's government also took a look into this question . They used a Garvinesque model and although they are still refining and tweaking the model to get a consistent set of estimators, there are still problems.

The Mystery of Capital

Hernando de Soto's acclaimed analysis of why some countries undergo rapid economic development and some do not.

Ultimately it all comes down to property rights (sorry, this is a very short and simple explanation in no way doing justice to de Soto's argument)

Funnily enough, John Sutherland pointed out a similar thing in his educational masterpiece "It's everybody's business"

Part 1

Part 2

The key idea that property rights are essential for the formation and utilisation of capital is common currency amongst economists. It's absolutely also key that solutions that seem developmentally correct can founder if one does not consider the availability of capital and its embodiment in some form of property rights. After all, one would actually need e.g title to one's home to borrow against its value, and say if one lived in a shanty in Lima one would most likely not have title to one's shack. Therefore, the capital that exists embodied in the shack is to some extent "dead": that is to say, it can't really work for you.

A good, non head hurting explanation here. As ever, original video in the Prelinger archives