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Archive for December 2007

Bitter defeat

with 8 comments

Some more reading recommendations, this time on the immediate aftermath of WWII: the Russian occupation of Berlin and the US occupation of Tokyo. It’s interesting that (at least in English translation) both the Germans and Japanese referred acerbically to their conquerors as the Victors.

Why this subject? I’m interested in how people behave when the framework of civilization has all but collapsed (i.e., the Hobbesian natural state, where life is nasty, brutish and short), and also in how order and the social contract are subsequently reimposed.

A Woman in Berlin: this memoir is interesting because of the period it covers — 8 weeks beginning in April 1945, including the siege of Berlin, the early Russian occupation, and emerging postwar normalcy — but also because of the unmatched clarity and insight of the 34 year old German author, a Russian-speaking journalist with a cosmopolitan background. Most readers will be shocked at the behavior of the Russian occupiers (in particular the mass rapes), but if the recollections of the author are correct the Russians seemed to have behaved much better than their German counterparts in the earlier eastern campaigns. I was quite impressed by the literary quality of the writing and feel that this memoir should someday make an excellent film.

Related recommendations: the early short fiction of Nobel laureate Heinrich Boll. Until I read this memoir I felt Boll’s stories (“Trümmerliteratur”—the literature of the rubble) best captured the feel of occupied Germany. See also After the Reich: the Brutal History of the Allied Occupation for a historian’s summary with none of the literary merits of Boll or the memoir (which seems to be used as a primary source by a number of historians).

Tokyo Year Zero: this is a novel, and a bit over the top, but captures well the deprivation and despair of Tokyo in 1946 (Guardian review). The title evokes Rossellini’s film Germany Year Zero, which I also recommend. See also John Dower’s Embracing Defeat, which seems to have provided some of the historical background.

Written by infoproc

December 28, 2007 at 6:52 pm

Posted in books

Anatomy of a CDO

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Click the image for the original flash graphic, which illustrates quite clearly the re-bundling of securities. The process may sound technical, but in fact it appears the main variable is just an estimate of default probability and recovery fraction for various categories of mortgages. It will be interesting to see, when the dust settles, how much of the (massive) error in prediction came from outright fraud on the mortgage application (essentially, miscategorization) versus error in estimates of default probability by category.

WSJ: … Mr. Ribotsky says the selling required little effort, as Merrill drummed up interest from its network of contacts. “That’s what they get their fees for,” he says.

Norma sold some $525 million in CDO slices — largely the lower-rated ones with higher returns — to investors. Merrill declined to say whether it kept Norma’s triple-A rated, $975 million super-senior tranche or sold it to another financial institution.

Many investment banks with CDO businesses — Citigroup Inc., Morgan Stanley and UBS — frequently kept or bought these super-senior pieces, whose lower returns interested few investors. In doing so, they bet that the top CDO slices, which typically comprised as much as 60% of the whole CDO, were insulated from losses.

By September, Norma was in trouble. Amid a steep decline in house prices and rising defaults on mortgage loans, the value of subprime-backed securities went into a free fall. As increasingly worrisome delinquency data rolled in, analysts upped their estimates of total losses on subprime-backed securities issued in 2006 to 20% or more, a level that would wipe out most triple-B-rated securities.

Within weeks, ratings firms began to change their views. In October, Moody’s downgraded $33.4 billion worth of mortgage-backed securities, including those which Norma had insured. Those downgrades set the stage for a review of CDOs backed by those securities — and then further downgrades.

Mezzanine CDOs such as Norma were the hardest hit. On Nov. 2, Moody’s slashed the ratings on seven of Norma’s nine rated slices, three all the way from investment-grade to junk. Fitch downgraded all nine slices to junk, including two that it had rated triple-A.

Worse Performances

Other mezzanine CDOs, including some underwritten by other investment banks, have had worse performances. Around 30 are now in default, according to S&P. Norma is still paying interest on its securities. It is not known whether it has had to make payouts under the credit default swap agreements.

Ratings companies say their March opinions represented their best read at the time, and called the subprime deterioration unprecedented and unexpectedly rapid. “It’s one of the worst performances that we’ve seen,” says Kevin Kendra, a managing director at Fitch. “The world has changed quite drastically — and our view of the world has changed quite drastically.”

By mid-December, $153.5 billion in CDO slices had been downgraded, according to Deutsche Bank. Because banks owned the lion’s share of the mezzanine CDOs, they bore the brunt of the losses. In all, banks’ write-downs on mortgage investments announced so far add up to more than $70 billion.

For larger banks, holdings of mezzanine CDOs could account for one-third to three-quarters of the total losses. In addition to the $9.4 billion fourth-quarter write-down Morgan Stanley just announced it would take, Citigroup has projected its fourth-quarter write-down could reach $11 billion. UBS said this month it would take a $10 billion write-down after taking a $4.4 billion third-quarter loss.

Merrill, for its part, took a $7.9 billion write-down on mortgage-related holdings in the third quarter. Analysts expect it to write down a similar amount in the current quarter, which would represent the largest losses of any bank. News of the losses have led to the ouster of CEO Stan O’Neal and Osman Semerci, the bank’s global head of fixed income. Mr. Margolis left this summer.

Written by infoproc

December 27, 2007 at 4:45 pm

Nerds!

with 4 comments

I haven’t read this yet, but am looking forward to it. (OK, maybe I just like the title and cover 🙂

Here is the author’s web page; he’s a psychology professor at Bennington.

Q: Do other countries have this problem?

A: The idea that it is unattractive or unappealing to be intelligent is not a universal concept. Not in Asia, certainly not in India. There’s no concept in India that being good at math and science and technology has negative social consequences. That’s the reason there are so many Indian engineers.

Q: Why did this grow out of American culture?

A: Historically, America is a place for men of action, for men who discover things, make things with their hands, have practical intelligence as opposed to book learning. Book-learning was suspect — the musty old European way, as opposed to practical, snazzy America. I think this tradition has never gone away.

The problem is that now it just doesn’t work anymore. You can’t do anything unless you pay attention in school. You can’t invent things without knowing calculus. If you don’t study math, it won’t work. Benjamin Franklin was an American genius, a model of the American tinkerer, but the Ben Franklin model is not working anymore.

Q. Wasn’t everyone talking about the need for better math and science education back in the days of Sputnik?

A: What’s new is the sexualization of it. Kids live in such a sexualized world. … (If you are called a nerd or a geek, it’s) not just creepy or weird, you’re labeled as someone who is never going to get laid. There’s a lot more at stake because kids are so much more exposed to a culture that’s all about being attractive, having sex early.

The nerds and the geek stereotype is that if you’re doing well in math and science, you are completely unattractive to the opposite sex.

All the nerd and geek self-tests, what they ask you is: Are you good at science and math? Are you unwashed? Have you never had a date? You don’t know anyone’s phone number except your mothers?

Written by infoproc

December 27, 2007 at 4:18 pm

Posted in aspergers, geeks, nerds

On earth peace, good will toward men

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For years, when asked what I wanted for Christmas, I’ve been replying peace on earth, good will toward men 🙂

No one ever seems to recognize that this comes from the bible, Luke 2.14 to be precise!

Linus said it best in A Charlie Brown Christmas:

And there were in the same country shepherds abiding in the field, keeping watch over their flock by night.

And, lo, the angel of the Lord came upon them, and the glory of the Lord shone round about them: and they were sore afraid.

And the angel said unto them, Fear not: for, behold, I bring you good tidings of great joy, which shall be to all people.

For unto you is born this day in the city of David a Saviour, which is Christ the Lord.

And this shall be a sign unto you; Ye shall find the babe wrapped in swaddling clothes, lying in a manger.

And suddenly there was with the angel a multitude of the heavenly host praising God, and saying,

Glory to God in the highest, and on earth peace, good will toward men.

Merry Christmas!

Written by infoproc

December 23, 2007 at 10:29 pm

Posted in christmas

Vacation reading: Gregory Clark’s A Farewell to Alms

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A Farewell to Alms: A Brief Economic History of the World

Clark’s book is an ambitious look at world economic history. The first half of the book is an excellent discussion of the Malthusian trap, in which increases in standard of living only lead to increases in population, which then (over generations) lead to declines in standard of living. The only stable point of this dynamics is at subsistence-level income. I need to think more about it, but I suspect Clark overstates the case for how well the Malthusian model applied in early human history. My impression is that there were wide disparities in levels of development that can’t be easily explained in that context.

The second half of the book concerns the industrial revolution, and advances his (controversial) thesis that one of the main causes for this qualitative shift in the rate of human advancement was genetic. By analyzing historical demographic data he argues that by 1800 almost all residents of England were descended from previous generations of wealthy strivers — reproduction rates correlated highly with family wealth in the previous Malthusian era, and the wealthy literally replaced the poor over time (less favored offspring of the rich often become the poor of future generations). Therefore, traits which are positive for commerce, long term planning, wealth accumulation, market organization, etc. had become much more widespread thanks to natural selection. I find this effect plausible — it is consistent with recent genetic data on accelerated human evolution — but am not as convinced that it dominates over cultural factors (at least, the two would work hand in hand). His case that it was a priori likely for England to be the first to have an industrial revolution doesn’t seem particularly convincing (see Kenneth Pomeranz’s Great Divergence for another set of arguments based on geography and natural resources).

Clark makes the interesting connection between modern man’s descent from the strivers of previous generations and the hedonic treadmill: our happiness seems to correlate more with our position relative to perceived peers than with absolute levels of wealth.

I like the following quote from the final chapter of the book. I always found it very amusing that modern economic models can’t do much better than to treat technological change as an exogenous, stochastic variable. (Yes, I know about Romer and growth theory, but would lump that in the “can’t do much better” category.)

God clearly created the laws of the economic world in order to have a little fun at economists’ expense. In other areas of inquiry, such as the physical sciences, there has been a steady accumulation of knowledge over the past four hundred years. Earlier theories proved inadequate. But those that replaced them encompassed the earlier theories and gave practitioners greater ability to predict outcomes across a wider range of conditions. In economics, however, we see instead that our ability to describe and predict the economic world reached a peak around 1800. In the years since the Industrial Revolution there has been a progressive and continuing disengagement of economic models from any ability to predict differences of income and wealth across time and across countries and regions.

Written by infoproc

December 21, 2007 at 5:37 pm

Vacation reading: Gregory Clark’s A Farewell to Alms

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A Farewell to Alms: A Brief Economic History of the World

Clark’s book is an ambitious look at world economic history. The first half of the book is an excellent discussion of the Malthusian trap, in which increases in standard of living only lead to increases in population, which then (over generations) lead to declines in standard of living. The only stable point of this dynamics is at subsistence-level income. I need to think more about it, but I suspect Clark overstates the case for how well the Malthusian model applied in early human history. My impression is that there were wide disparities in levels of development that can’t be easily explained in that context.

The second half of the book concerns the industrial revolution, and advances his (controversial) thesis that one of the main causes for this qualitative shift in the rate of human advancement was genetic. By analyzing historical demographic data he argues that by 1800 almost all residents of England were descended from previous generations of wealthy strivers — reproduction rates correlated highly with family wealth in the previous Malthusian era, and the wealthy literally replaced the poor over time (less favored offspring of the rich often become the poor of future generations). Therefore, traits which are positive for commerce, long term planning, wealth accumulation, market organization, etc. had become much more widespread thanks to natural selection. I find this effect plausible — it is consistent with recent genetic data on accelerated human evolution — but am not as convinced that it dominates over cultural factors (at least, the two would work hand in hand). His case that it was a priori likely for England to be the first to have an industrial revolution doesn’t seem particularly convincing (see Kenneth Pomeranz’s Great Divergence for another set of arguments based on geography and natural resources).

Clark makes the interesting connection between modern man’s descent from the strivers of previous generations and the hedonic treadmill: our happiness seems to correlate more with our position relative to perceived peers than with absolute levels of wealth.

I like the following quote from the final chapter of the book. I always found it very amusing that modern economic models can’t do much better than to treat technological change as an exogenous, stochastic variable. (Yes, I know about Romer and growth theory, but would lump that in the “can’t do much better” category.)

God clearly created the laws of the economic world in order to have a little fun at economists’ expense. In other areas of inquiry, such as the physical sciences, there has been a steady accumulation of knowledge over the past four hundred years. Earlier theories proved inadequate. But those that replaced them encompassed the earlier theories and gave practitioners greater ability to predict outcomes across a wider range of conditions. In economics, however, we see instead that our ability to describe and predict the economic world reached a peak around 1800. In the years since the Industrial Revolution there has been a progressive and continuing disengagement of economic models from any ability to predict differences of income and wealth across time and across countries and regions.

Written by infoproc

December 21, 2007 at 5:37 pm

Vacation reading: Gregory Clark’s A Farewell to Alms

leave a comment »

A Farewell to Alms: A Brief Economic History of the World

Clark’s book is an ambitious look at world economic history. The first half of the book is an excellent discussion of the Malthusian trap, in which increases in standard of living only lead to increases in population, which then (over generations) lead to declines in standard of living. The only stable point of this dynamics is at subsistence-level income. I need to think more about it, but I suspect Clark overstates the case for how well the Malthusian model applied in early human history. My impression is that there were wide disparities in levels of development that can’t be easily explained in that context.

The second half of the book concerns the industrial revolution, and advances his (controversial) thesis that one of the main causes for this qualitative shift in the rate of human advancement was genetic. By analyzing historical demographic data he argues that by 1800 almost all residents of England were descended from previous generations of wealthy strivers — reproduction rates correlated highly with family wealth in the previous Malthusian era, and the wealthy literally replaced the poor over time (less favored offspring of the rich often become the poor of future generations). Therefore, traits which are positive for commerce, long term planning, wealth accumulation, market organization, etc. had become much more widespread thanks to natural selection. I find this effect plausible — it is consistent with recent genetic data on accelerated human evolution — but am not as convinced that it dominates over cultural factors (at least, the two would work hand in hand). His case that it was a priori likely for England to be the first to have an industrial revolution doesn’t seem particularly convincing (see Kenneth Pomeranz’s Great Divergence for another set of arguments based on geography and natural resources).

Clark makes the interesting connection between modern man’s descent from the strivers of previous generations and the hedonic treadmill: our happiness seems to correlate more with our position relative to perceived peers than with absolute levels of wealth.

I like the following quote from the final chapter of the book. I always found it very amusing that modern economic models can’t do much better than to treat technological change as an exogenous, stochastic variable. (Yes, I know about Romer and growth theory, but would lump that in the “can’t do much better” category.)

God clearly created the laws of the economic world in order to have a little fun at economists’ expense. In other areas of inquiry, such as the physical sciences, there has been a steady accumulation of knowledge over the past four hundred years. Earlier theories proved inadequate. But those that replaced them encompassed the earlier theories and gave practitioners greater ability to predict outcomes across a wider range of conditions. In economics, however, we see instead that our ability to describe and predict the economic world reached a peak around 1800. In the years since the Industrial Revolution there has been a progressive and continuing disengagement of economic models from any ability to predict differences of income and wealth across time and across countries and regions.

Written by infoproc

December 21, 2007 at 5:37 pm

How to run a hedge fund

with 2 comments

Via Mark Thoma, this nice summary of how to run a hedge fund, taking advantage of the fee structure and the asymmetry of compensation and risk. If the fund goes up, the manager gets paid. If the fund goes down, the manager still gets paid the management fee, if not the performance component. This means he is incentivized to take asymmetric bets like selling insurance policies, which have a high probability of a decent return from the premium, but a small chance of blowing up due to a rare event. In the latter case the investors lose their money but not the manager. What looks like a decent return by the fund might in fact reflect crazy risk taking — it’s hard for investors to know.

But don’t be too critical. These people are making our economy more efficient 😉

Most managers don’t behave this way, although it’s an example of the more general agency problem, which arises whenever the incentives and interests of a principal differ from those of an agent (e.g., hired to manage a company or financial portfolio owned by the principal).

Washington Post: …It is extremely difficult to tell, based on past performance, whether a fund is being run by true financial wizards, by no-talent managers who happen to get lucky or by outright scam artists.

To illustrate how easy it is to set up a hedge fund scam, consider the following example. An enterprising man named Oz sets up a new fund with the stated aim of earning 10 percent in excess of some benchmark rate of return, say 4 percent. The fund will run for five years, and investors can cash out at the end of each year if they wish. The fee is the standard ‘2 and 20’: 2 percent annually for funds under management, and a 20 percent incentive fee for returns that exceed the benchmark.

Although he has no investment track record, Oz has a smooth manner, a doctorate in physics and many rich acquaintances. He raises $100 million and opens shop. He then studies the derivatives market and finds an event on which the market places fairly long odds, say 9:1. In other words, it costs $.10 to buy an option that pays $1 if the event occurs and $0 otherwise. The nature of the event is unimportant: it might be a large fall in the stock market, Florida getting hit by a Category 5 hurricane or Russian President Vladimir Putin dying before the end of the year.

Next Oz writes some covered options on this event and sells 110 million of them in the derivatives market. This obligates him to pay the option holders $110 million if the event does occur and nothing if it does not. He collects $11 million on the options. To cover his obligations in case the ‘bad’ event occurs, he uses the investors’ money plus the proceeds from the options to buy $110 million in one-year Treasury bills yielding 4 percent, which he deposits in escrow. This leaves $1 million in “pocket money,” which he uses to lease some computer terminals and hire a few geeks to sit in front of them, just in case his investors drop by.

The probability is ninety percent that the bad event does not occur and Oz owes nothing to the option holders. With a gross return (before expenses) of $15,400,000, the investors are thrilled, and so is Oz. He collects $2 million in management fees (of which he has only spent $1 million), plus a performance bonus equal to 20 percent of the ‘excess return’, namely, 20 percent of $11,400,000. All in all, Oz nets over $3 million for doing absolutely nothing.

Oz can then repeat the same gambit next year. When the fund terminates after five years, the chances are nearly 60 percent that the unlucky event will never have occurred. Oz looks like a genius and gets paid like a genius. …

Written by infoproc

December 19, 2007 at 5:35 pm

Posted in finance, hedge funds

Miami 2007: 10 years of AdS/CFT

with one comment

I found this tag and notes when I sat down for the afternoon session 🙂

Miami micro-climate is killing me: outside it’s 80 and humid (with small rainstorms rolling through), but indoor temperatures seem to vary from 60-70 degrees! Sometimes I’m shivering under blasts of cold air in the lecture hall — I’ve discovered you have to carry a jacket around with you all the time just in case the AC is on overkill.

Written by infoproc

December 16, 2007 at 10:05 pm

Posted in physics

More mutants

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From the Economist, a nice summary of the Hawks et al. paper on a possible recent speedup in human evolution.

Economist: …Dr Moyzis’s paper suggests is a wider phenomenon—that Homo sapiens is continuing to undergo local evolution. He and his colleagues reckon they can both estimate the rate of evolution and identify many of the evolving genes, by using a trick with the clumsy name of linkage disequilibrium.

Genes are linked together in cell nuclei on structures called chromosomes. These come in pairs, one from each parent. However, when sperm and egg cells are formed, the maternal and paternal chromosomes swap bits of DNA to create a new mixture. The pieces of DNA swapped are complementary—that is, they contain the same types of gene. But they may contain different versions of the genes in question, and these different versions can have different biological effects.

Over the generations this process of swapping mixes the genes up thoroughly, and an equilibrium emerges. If a new mutation appears, however, it will take quite a while for that thorough mixing to happen. This means recent mutations can be spotted because they are still linked to the same neighbouring bits of DNA as they were when they first appeared. Moreover, the size of these neighbouring blocks gives an indication of how long ago the mutation in question emerged; long blocks suggest a recent mutation because the mixing process has not had time to break them up.

All this has been known for decades, but it is only recently that enough human DNA sequences have become available for the technique to be used to compare people from different parts of the world. And this is what Dr Moyzis and his colleagues have now done.

What they have found is that about 1,800 protein-coding genes, some 7% of the total known, show signs of having been subject to recent natural selection. By recent, they mean within the past 80,000 years. Moreover, as the chart shows, the rate of change has speeded up over the course of that period. (The sudden fall-off at the end is caused because the linkage-disequilibrium method cannot easily detect very recent mutations, rather than by a sudden reduction in the rate of evolution.) The researchers put this acceleration down to two things. First, the human population has expanded rapidly during that period, which increases the size of the gene pool in which mutations can occur. Second, the environment in which people find themselves has also changed rapidly, creating new contexts in which those mutations might have beneficial effects.

That environmental change itself has two causes. The past 80,000 years is the period in which humanity has spread out of Africa to the rest of the world, and each new place brings its own challenges. It has also been a period of enormous cultural change, and that, too, creates evolutionary pressures. In acknowledgment of these diverse circumstances, the researchers looked in detail at the DNA of four groups of people from around the planet: Yoruba from Africa, Han Chinese and Japanese from Asia, and Europeans.

Various themes emerged. An important one was protection from disease, suspected to be a consequence of the increased risk of infection that living in settlements brings. In this context, for example, various mutations of a gene called G6PD that are thought to offer protection from malaria sprang up independently in different places.

A second theme is response to changes in diet caused by the domestication of plants and animals. One example of this is variation in LCT, a gene involved in the metabolism of lactose, a sugar found in milk. All human babies can metabolise lactose, but only some adults can manage the trick. That fact, and the gene involved, have been known for some time. But Dr Moyzis’s team have worked out the details of the evolution of LCT. They suspect that it was responsible for the sudden spread of the Indo-European group of humanity about 4,000 years ago, and also for the more recent spread of the Tutsis in Africa, whose ancestors independently evolved a tolerant version of the gene.

The pressures behind other changes are less obvious. In the past 2,000-3,000 years, for example, Europeans have undergone changes in the gene for a protein that moves potassium ions in and out of nerve cells and taste buds. There have also been European changes in genes linked to cancer and Alzheimer’s disease. Chinese, Japanese and Europeans, meanwhile, have all seen changes in a serotonin transporter. Serotonin is one of the brain’s messenger molecules, and is particularly involved in establishing mood.

The finding that may cause most controversy, however, is that in the Asian groups there has been strong selection for one variant of a gene that, in a different form, is responsible for Gaucher’s disease. A few years ago two of the paper’s other authors, Gregory Cochran and Henry Harpending, suggested that the Gaucher’s form of the gene might be connected with the higher than average intelligence notable among Ashkenazi Jews. The unstated inference is that something similar might be true in Asians, too.

The Ashkenazim paper caused quite a stir at the time. It was merely a hypothesis, but it did suggest a programme of research that could be conducted to test the hypothesis. So far, no one—daring or foolish—has tried. Eventually, however, such questions will have to be faced. The paper Dr Moyzis and his colleagues have just published is a ranging shot, but the amount of recent human evolution it has exposed is surprising. Others will no doubt follow, and the genetic meaning of the term “race”, if it has one, will be exposed for all to see.

Written by infoproc

December 15, 2007 at 4:08 am

Posted in evolution, genetics, mutants