Wednesday, October 31, 2007

Economics of clones

Livestock cloning operations in the heartland! :-)

Note even genetically enhanced male progeny display larger variance than female progeny. I guess this is just because they lack a second X chromosome.

WIRED: ...Like it or not, guys like Don Coover have already turned meat-eaters into a test market for the safety of cloned meat. "It's inevitable that there are large numbers of clone progeny in the food supply," says Blake Russell, vice president of sales and business development at ViaGen, another cloning company. "The likelihood that anyone could credibly say 'Our animals are not descended from clones' is zero."

The reason cloning makes economic sense isn't that ranchers will sell the actual clones for food. The idea is to sell their offspring. Artificial insemination and semen- shipping have made breeding for optimum genetics a highly profitable business. The owner of a champion bull can charge top dollar for its breeding services or its descendants. Eventually, of course, that animal will get too old to reproduce. But if you clone it, you can keep that revenue stream open. Clones can be bred just like their progenitors, spreading those popular qualities further into the gene pool. "Part of the value of cloning is that you're buying something with unique genetic potential. It's almost like brand identity," says John Lawrence, an extension livestock economist at Iowa State University. "In many regards it's less risky, because you can say you have a proven animal."

Today, it costs about $1,500 to raise a naturally conceived dairy heifer from conception to breeding age; it costs roughly $17,000 to clone a cow. The figures are about $200 versus $4,000 for hogs. (The price drops if you make multiple copies.) But with natural or assisted reproduction, roughly 5 to 10 percent of all females and 50 percent of all males bred for better genetics don't inherit their parents' best qualities and must be sold at a loss, as "salvage" animals. Cloning, on the other hand, almost guarantees the high- fidelity replication of desirable traits. So the clone of a champion bull has higher downstream breeding potential than, say, that bull's brother. If the original bull was a good breeder, then the clone's semen sells for more and its offspring are worth more. For hogs, the numbers add up fast: Through artificial insemination, one boar can impregnate 400 sows a year, yielding about 4,000 piglets. But if that boar was cloned from a proven superior male, its progeny will be worth about $6 more per piglet in "improved feed conversion, growth rate, survivability, and meat quality," says Russell of ViaGen. "So a $3,000 investment in cloning can create $24,000 in added value per year."

Tuesday, October 30, 2007

Small (anthropic?) world

My former PhD advisor gives an interdisciplinary lunch talk at the Berkeley faculty club and gets immediately blogged by Brad Delong!

More on the anthropic principle from this blog. Call me a skeptic ;-)

Lawrence Hall

Lawrence Hall is the name of a building (the Lawrence Hall of Science) and a professor (Lawrence Hall of Physics). The second came to the Berkeley Monday Faculty Lunch Forum to argue that there is empirical content to the Anthropic Cosmological Principle.

What is this principle? Put it this way. Suppose somebody asks you why the universe is pervaded by an 80-20 nitrogen-oxygen gas mixture, or why it is 300K outside. The answer is that the universe isn't like that but that where you are is like that because if you wet surrounded by chlorine gas or in a place where it is 400K you--and all life like you--would be dead. Our confidence in these "anthropic" explanations is strong because we can point to places we know of that lack the 80-20 atmosphere--the asteroid belt--and places where it is not a shirtsleeve 300K--Cambridge, Massachusetts.

Can this anthropic principle be applied to more fundamental issues? Can we say that the mass of the d quark is what it is because if it were 20% lower than the neutron would be absolutely stable and there would be no stars? We cannot see any places in the multiverse where the mass of the down quark is lower, but our predecessors did not know about the asteroid belt and other places lacking an 80-20 atmosphere, and the anthropic explanation for why there is oxygen around for us to breathe was just as valid then for them as it is for us. Is it doing science to use this anthropic principle--or is it just meaningless and tautological? After all, pretty much everything in the universe has to be the way that it is for there to be a physicist with the same name as a building talking in the Seaborg Room of the Berkeley Faculty Club Monday at lunchtime--start with Lawrence Hall as your premise, and you have "explained" everything, in some sense.

Lawrence Hall thinks that there is empirical content, and his argument goes like this...

Friday, October 26, 2007

The one sided clash of civilizations

This NYTimes article describes the creation of the King Abdullah University of Science and Technology (KAUST), a $12.5B endowment from King Abdullah of Saudi Arabia. The prospects for creating a world class university there seem dim, even with significant financial resources -- would you leave your position in, e.g., Boston, for one at KAUST? Similar undertakings, such as KAIST in Korea, can depend on a deep pool of expatriate (Korean emigrants abroad) and local talent.

The article reveals that this particular clash of civilizations is very one-sided.
NYTimes: ...For the new institution, the king has cut his own education ministry out the loop, hiring the state-owned oil giant Saudi Aramco to build the campus, create its curriculum and attract foreigners.

Supporters of what is to be called the King Abdullah University of Science and Technology, or Kaust, wonder whether the king is simply building another gated island to be dominated by foreigners, like the compounds for oil industry workers that have existed here for decades, or creating an institution that will have a real impact on Saudi society and the rest of the Arab world.

“There are two Saudi Arabias,” said Jamal Khashoggi, the editor of Al Watan, a newspaper. “The question is which Saudi Arabia will take over.”

The king has broken taboos, declaring that the Arabs have fallen critically behind much of the modern world in intellectual achievement and that his country depends too much on oil and not enough on creating wealth through innovation.

“There is a deep knowledge gap separating the Arab and Islamic nations from the process and progress of contemporary global civilization,” said Abdallah S. Jumah, the chief executive of Saudi Aramco. “We are no longer keeping pace with the advances of our era.”

Wednesday, October 24, 2007

Artificial life

From Slashdot. I don't know if there is AI (machine intelligence) involved, but it would be easy to set up that way...

At Foo Camp I took a poll of some leading security researchers and the majority thought that the probability of a major Internet failure (e.g., 100M people without access for several days) due to botnets or worms was close to 100 percent over the next few years.

Storm Worm Strikes Back at Security Pros

Posted by ScuttleMonkey on Wednesday October 24, @01:25PM
from the skynet-worm dept.

alphadogg writes "The Storm worm, which some say is the world's biggest botnet despite waning in recent months, is now fighting back against security researchers that seek to destroy it and has them running scared, conference attendees in NYC heard this week. The worm can figure out which users are trying to probe its command-and-control servers, and it retaliates by launching DDoS attacks against them, shutting down their Internet access for days, says an IBM architect."

Tuesday, October 23, 2007

Masters of the Universe

The Times reports on a recent dinner hosted by Institutional Investor.

NYTimes: Not since Michael Milken’s Predators’ Ball in the 1980’s have so many of Wall Street’s bold-faced names dared to mingle together. Until last night.

Institutional Investor, the first trade magazine to cover Wall Street, celebrated its 40th birthday Monday by throwing itself a party at the American Museum of Natural History in Manhattan. Masters of the Universe from around the nation and the world flew in for the event. There was Henry Kravis, seated next to Jean-Claude Trichet, president of the European Central Bank. Across the way was Mr. Milken himself, whom Mr. Kravis praised in a brief speech for helping to create the modern private equity industry.

Mr. Milken didn’t make a speech to the crowd, but he circulated among them and seemed to take pleasure at being surrounded by so many of what he referred to DealBook as his “disciples.”

Also on hand was James D. Wolfensohn, former president of the World Bank. John C. Bogle, the founder of the Vanguard Group, mingled during the cocktail hour with other luminaries such as John Whitehead, the former chairman of Goldman Sachs, credited with creating the securities firm’s vaunted culture.

John Thornton, the former president of Goldman Sachs, who now splits his time between New York and Beijing, also attended, as did Joseph L. Rice III, co-founder of the private equity firm Clayton, Dubilier & Rice.

James Simons, founder of Renaissance Technologies, one of the most successful “quant” hedge funds in history, mixed with younger hedge fund managers such as William Ackman, the activist investor, and David Einhorn of Greenlight Capital.

Perhaps the highlight of the evening was when Mr. Kravis jokingly apologized to his peers in the audience for charging his investors 20 percent of profits in 1976, which became a benchmark for private equity and hedge funds. He said that, at the time, there was no going rate, so he and his partners decided 20 percent was fair. In retrospect, he said with a laugh, “You could have gotten 25 percent.”

The room burst out laughing.

Then Mr. Simons of Renaissance took the stage. He famously takes more than 40 percent of all profits from his fund investors. “We blissfully ignored” the benchmark Mr. Kravis created, he said.

Mr. Simons also explained how the summer’s credit crunch caused his fund briefly to lose 8.7 percent in only a few days ––”a remarkable amount of money,” he said nonchalantly — though it later rebounded. At the time, he wrote a note to his investors about the losses, observing with a laugh that it took a couple of “gin and tonics to get that letter out.”

He went on to jokingly taunt Mr. Kravis into buying his firm. “If he wants to buy my company for $30 billion, I’m going to make it damn easy for him,” Mr. Simons said.

From the comments:

This convention was made up of people who sacrificed their personal lives to use their extreme intellects and incredible work ethics to strive to be the best in their fields. This is exactly what America was built on and should be what keeps us going forward. We as a country should reward winners, but instead we encourage mediocrity with the whole “everyone is a winner, everyone is great” mentality. Congratulations to those invited to this great event and if you really don’t like it then work harder to change the system, but that does mean actually working which you may not be inclined to do.
— Posted by Eric

Why are people assuming these people make money by plundering society? Jim Simons makes money as fairly and squarely as anyone in the world. Anyone can do what he does…if they come up with the magic formula. There’s nothing unfair about that, and it does society a world of good. The huge creation of wealth around the world is largely due to capital being deployed to its most productive use. What are masters of the universe but the “central planners” of the free market — the better the job they do, the more money they make, and the richer we all become.
— Posted by James

Monday, October 22, 2007

Fraud and the subprime mess

Via Calculated Risk, this Moody's data suggests that outright fraud is one of the main causes of high default rates on recent subprime mortgages.

Subprime Mortgage Market Update: September 2007:

The data show that, as we have noted in previous communications, loan performance for the 2006 subprime vintage seems to be driven primarily by the proportions of stated documentation loans and high CLTV loans backing the transactions as well as the proportion of loans that combine (or "layer") these risk characteristics. (Stated documentation loans are those loans for which the borrower's income and assets are not verified by documentation during the loan approval process and therefore are more likely to be overstated.) Interestingly, FICO scores and LTV ratios do not vary significantly between the strongest and weakest performing transactions and on average transaction performance does not appear to have been influenced by these characteristics.

Brain drain: from the Punjab to the bayou

Congratulations to Bobby (Piyush) Jindal, govenor-elect of Louisiana. Does this photo remind you of Bobby Kennedy?

NYTimes: A Son of Immigrants Rises in a Southern State

Piyush Jindal was born on June 10, 1971, in Baton Rouge to Hindu parents who had come to the United States six months before so his mother could pursue a graduate degree in nuclear physics at Louisiana State University. His father was an engineer from the Punjab region of India, the only one of nine siblings to attend high school. The younger Jindal, growing up in Baton Rouge, was not expected to come home from school with anything less than 100 on tests. Public high school in Baton Rouge was followed by Brown, where Mr. Jindal was Phi Beta Kappa, and a conversion to Roman Catholicism that Mr. Jindal has described in transformative terms. “I draw my definition of integrity from my Christian faith,” Mr. Jindal said during the campaign. “In my faith, you give 100 percent of yourself to God.”

“But we live in a pluralistic state,” he was careful to add.

After Oxford, a well-paid stint at the Washington consultants McKinsey and Company was followed by an interview for the job of secretary of the state Department of Health and Hospitals with the newly elected Republican governor of Louisiana, Mike Foster, in 1995. Mr. Jindal was 24; it was the biggest department in state government, and it was in serious financial trouble. He got the job despite Mr. Foster’s initial skepticism, made cuts and restored the department to financial stability; Louisiana still has one of the highest percentages of uninsured, however.

Friday, October 19, 2007


Note: save your firm millions (billions) of dollars by using this free CDO price calculator.

WSJ covers the origin of SIVs and the current rescue operation. Too big to fail?

The situation today is much worse than with LTCM. In that case, it was a single firm whose positions needed an orderly settlement. Here it is an entire asset class. I am not sure how this new MLEC will work -- will it really restore confidence in the asset class? Either defaults will (greatly) exceed what was priced in by the models or they will not. Only the future can tell. If default rates turn out to be high (and/or we see a big -- say 10% -- drop in real estate prices), the markdowns have to be big, and someone will have to pay. I suppose the consortium can step in to keep things orderly, but if outcomes are bad it is the consortium that will be on the hook.

WSJ: ...Fears are rife that dozens of huge, structured investment vehicles, or SIVs, many of them affiliated with banks, will be forced to unload billions of dollars of mortgage-backed securities and other assets. Such a fire sale could cripple debt markets that play a crucial role in the global economy by providing financing for everything from company payrolls to mortgage loans.

In recent weeks, bankers and Treasury officials have held a string of urgent meetings to address the problem. They summoned Messrs. Sossidis and Partridge-Hicks because of their expertise in SIVs, which until weeks earlier some of them had never even heard about. Gordian Knot runs the world's biggest such fund, with some $57 billion in assets, from an office in London's ritzy Mayfair district.

The two bankers are part of a small coterie of London bankers who engendered what became a $400 billion industry. The funds boomed because they allowed banks to reap profits from investments in newfangled securities, but without setting aside capital to mitigate the risk.

Now the industry has become a significant threat to the stability of global financial markets. After the recent meetings, Citigroup, Bank of America Corp. and J.P. Morgan Chase & Co. announced an extraordinary effort: They will attempt to raise a fund of as much as $100 billion by the end of the year aimed at supporting an orderly unwinding of many SIVs, with an eye toward restoring investors' confidence in the debt markets that the funds use to raise money. They chose $100 billion as a goal for the superfund based on a back-of-the-envelope calculation -- roughly one-third of the $350 billion in debt issued by SIVs would be coming due in the next six to nine months.

Significant Obstacles

The plan faces significant obstacles. Some bankers have been hesitant to take part on the grounds that it would amount to a private-sector bailout of Citigroup -- an assertion the bank denies. Citigroup is the largest player in the SIV market with seven funds holding about $80 billion in assets. Many investors are skeptical.

The late 1980s, when the idea for SIVs was born, was a period of sweeping change in the credit markets. The concept of securities backed by home mortgages was evolving, and the junk-bond boom that made Michael Milken famous was going strong.

Mr. Partridge-Hicks, working in London, and Mr. Sossidis, based in New York, were looking for a better way for Citigroup clients -- pension funds and banks -- to profit from the nascent market for securities backed by assets such as commercial mortgages and credit-card receivables.

The two bankers hatched the idea of setting up a fund that would issue short-term commercial paper and medium-term notes to investors, then use the money to buy higher-yielding assets, typically longer-term ones. The bank would profit by collecting fees for operating the fund. The fund's assets would belong to its investors, so they would stay off the bank's balance sheet. SIVs had an advantage over conduits, a similar structure that was already gaining popularity: They didn't require banks to cover fully the fund's debts if the commercial-paper market dried up.

...Assets in SIVs ballooned into the hundreds of billions of dollars globally, but the business remained local, dominated by London-based bankers and lawyers, many of whom had some connection to Citigroup. After the departure of Messrs. Sossidis and Partridge-Hicks, Citigroup's London office launched five more SIVs with names such as Centauri and Dorada. Their combined assets reached $100 billion earlier this year. In 1997, two more bankers left Citigroup for Germany's Dresdner Kleinwort to help arrange an SIV called K2 Corp. Citigroup also earned fees by helping other banks arrange SIVs, such as Tango Finance Ltd., which it set up for Dutch bank Rabobank in 2002.


London, a Small World

Most of the few dozen SIVs, typically registered in offshore havens such as the Cayman Islands, are managed out of London. Most players attribute the city's dominance to the fact that SIVs are extremely complex, often taking as much as a year to set up, so it is difficult for new players to enter. Because the business started in London, most people with the necessary skills and experience are in the United Kingdom, says Geoff Fuller, an attorney with Allen & Overy LLP in London, who has advised Citigroup and other clients on SIVs and other structured-finance products. "It's a small world where people know who their competitors are," says Mr. Fuller.

Mr. Sossidis says that as the SIV market peaked in recent years, many of the new players didn't fully recognize the perils involved in borrowing money short-term and investing it long-term. "These were the last ones to enter, the first ones to exit," he says.

In the wake of the 1998 collapse of hedge fund Long-Term Capital Management, Gordian Knot took precautions to protect itself from being forced to sell its assets if markets turned against it. Among other things, the company got rid of a trigger that would force its flagship Sigma fund to sell if the value of its assets fell. In addition, he says, the firm sought to better match the duration of its assets and liabilities. Analysts now say that veteran organizations such as Gordian Knot should be able to survive the current crisis.

When troubles with subprime mortgage loans in the U.S. sparked a broader credit crisis this summer, SIVs didn't appear to be affected because few had exposure to subprime loans. On July 23, Moody's Investors Service said in a report that SIVs were "an oasis of calm in the subprime maelstrom."

Within days, though, weaknesses began to show in the short-term debt market. In late July, a bank affiliate set up by German bank IKB Deutsche Industriebank ran into trouble. It had relied on extremely short-term financing in the commercial-paper market to finance investments in risky securities backed by subprime loans. A month later, Cheyne Finance, a $6.6 billion SIV operated by a London hedge fund, began liquidating assets to repay debts.

By now, investors in Citigroup's SIVs were growing concerned. Citigroup's London office issued a letter to investors in its seven SIVs saying that its funds were sound. On Sept. 6, the bank took the extraordinary step of stating publicly, through statements to the London Stock Exchange, that its SIVs had little subprime exposure. But Citigroup, too, was selling assets. Today the bank estimates the value of its SIVs at $80 billion, down from nearly $100 billion in August.

Throughout August, U.S. Treasury Secretary Henry Paulson and other top Treasury officials were watching with increasing concern as the commercial-paper market, on which SIVs rely for much of their funding, began showing signs of severe strain. Information from the Treasury's markets room, where staff sit in front of flat-screen monitors scrutinizing market movements, was painting an ominous picture. The difference between yields on Treasury bills, which are considered safe investments, and corporate commercial paper, which companies issue to fund day-to-day expenses, was growing sharply -- a sign that investors were rapidly losing confidence.

Robert Steel, Mr. Paulson's top domestic finance adviser and a former Goldman Sachs Group Inc. executive, learned from colleagues on Wall Street that the crux of the trouble was SIVs. Investors in the commercial-paper market had all but stopped lending to the vehicles. Mr. Steel and others within Treasury began to worry that the bank-affiliated funds would engage in a fire sale of assets, a move that could exacerbate the credit crunch and damp the broader economy. "What you don't want is a disorderly liquidation," Mr. Steel explains.

Dumping of Assets

On Sept. 13, Mr. Steel began phoning Wall Street executives. That Sunday, Sept. 16, about 30 people gathered in a large conference room across the hall from Mr. Paulson's office. The group included executives from Citigroup, Goldman Sachs, Lehman Brothers Holdings Inc., Merrill Lynch & Co., Bank of America, J.P. Morgan Chase, Bear Stearns Cos. and Barclays PLC. As they munched on sandwiches provided by Treasury, a consensus emerged that large-scale dumping of assets was a likely outcome over the next year, people who attended the meeting say.

At first, some bank representatives were hesitant to get involved, saying they didn't see a need to participate if they didn't have exposure to SIVs, according to the people who attended. But Treasury officials stressed that even if the banks didn't have direct exposure to SIV assets, there was a broader risk that would eventually filter down to everyone, including those firms.

At least one bank representative suggested that Treasury step in with some money to help bail out the firms, the people who attended say. Mr. Steel told the group that wasn't an option: Treasury would only back a private-sector, market-based solution. "We bought the sandwiches, and that's it," Mr. Steel told those assembled.

In the room was Nazareth Festekjian, a 15-year Citigroup veteran who runs a group that deals with unusual situations, such as the restructuring of Iraq's debt in 2005. Mr. Festekjian, 46 years old, hadn't known what an SIV was until he received a call several weeks earlier from a government contact asking him to work on a solution.

He and his team came up with the idea to create a fund that could "bridge the gap" in the market by acquiring assets in a way that might give investors more comfort, according to a person familiar with the matter. At the meeting, Mr. Festekjian unveiled his plan, which was printed up in color, says one person who was present.

Backing Away

The following week, the group again gathered in New York. There were fewer bankers, but they were joined by big SIV investors, including Fidelity and Federated Investors Inc., and by Messrs. Sossidis and Partridge-Hicks. SIV managers expressed frustration with investors for backing away from the market, according to two people who attended. Investors complained that the SIVs were not as reliable as they had been billed, one of these people says. Ultimately, all sides settled down and agreed that a solution would be important for the market.

...The plan still may not come to fruition if not enough banks agree to provide financing, or if SIVs decide that the cost of participation is too high. Some SIVs, including those sponsored by smaller U.S. banks, have started working out their own solutions with investors, and say they don't plan to join the superfund. Architects of the plan could be satisfied if no one at all ended up using the fund, so long as its existence staved off a collapse of the SIV market, according to a person familiar with their thinking.

Thursday, October 18, 2007


A special report from the Economist on innovation.

Economist: JOHN KAO is an innovation guru described as “Mr Creativity” by this newspaper a decade ago. Now he is concerned about America losing its global lead and becoming “the fat, complacent Detroit of nations”. In his new book, “Innovation Nation”, he points to warning signs, such as America's underinvestment in physical infrastructure, its slow start on broadband, its pitiful public schools and its frostiness toward immigrants since September 11th 2001—even though immigrants provided much of America's creativity. The rise of Asia's innovators is a “silent Sputnik”, he argues, invoking a cold war analogy. What America needs, he reckons, is a big push by federal government to promote innovation, akin to the Apollo space project that put a man on the moon.

Curtis Carlson puts it in starker terms: “India and China are a tsunami about to overwhelm us.” As head of California's Stanford Research Institute, Mr Carlson knows the strengths of Silicon Valley from first-hand experience. And yet here he is insisting that America's information technology, services and medical-devices industries are about to be lost. “I predict that millions of jobs will be destroyed in our country, like in the 1980s when American firms refused to adopt total-quality management techniques while the Japanese surged ahead.” The only way out, he insists, is “to learn the tools of innovation” and forge entirely new, knowledge-based industries in energy technology, biotechnology and other science-based sectors.

It is natural to be sceptical of such dour arguments and calls for government action. After all, the United States still leads in innovation. Whether it is by traditional measures, like spending on research and the number of patents registered, or less tangible but more important ones, like the number of entrepreneurial start-ups, levels of venture-capital funding or the payback from new inventions, America is invariably at the top of the league. Indeed, the Council on Competitiveness recently concluded in a report that, by and large, the outlook is bright for America.

...Sergey Brin, who co-founded Google with Mr Page, insists that “Silicon Valley doesn't have better ideas and isn't smarter than the rest of the world” but it has the edge in filtering ideas and executing them. That magic still happens and attracts people from around the world who are “bold, ambitious, determined to scale up and able to raise money here actually to do it.” Mr Brin points to Elon Musk as an example.

Mr Musk moved from South Africa to eventually settle in California to make his fortune. His equation for success is: “talent times drive times opportunity”. Unlike many countries, America is never satisfied with the status quo. “There is a culture here that celebrates the achievements of individuals—and it is too often forgotten in history that it is individuals, not governments or economic systems, that are responsible for extraordinary breakthroughs,” he says.

...But surely innovation and entrepreneurship are not the same thing? Following the most useful definition—that innovation brings fresh thinking to the marketplace that creates value for a company, its customers and for society at large—someone who opens yet another corner café may be a successful entrepreneur but not much of an innovator.

The ones worth paying attention to are a special type of entrepreneur who embraces new ideas. These are the people who are able to carry out the “creative destruction” that Schumpeter marvelled at. In Europe they are thin on the ground: too many Europeans opt for comfortable jobs working for Siemens or Electricité de France than the risk and bother of starting speculative new companies.

This is worrying for Europe. National champions and incumbents are not disruptive innovators: upstarts are. From 1980 to 2001, all of the net growth in American employment came from firms younger than five years old. Established firms lost many jobs over that period and dozens fell off the Fortune 500 list.

Big corporations have been dying off and disappearing from stockmarket indices. Most of the dynamism of the world economy comes from innovative entrepreneurs and a handful of multinationals (like GE, IBM, 3M, P&G and Boeing, all of whom have stayed on the Fortune 500 list for over 50 years or so) and which constantly reinvent themselves.

Carl Schramm, president of the Kaufman Foundation, which studies entrepreneurship and innovation, says that “for the United States to survive and continue its economic and political leadership in the world, we must see entrepreneurship as our central comparative advantage. Nothing else can give us the necessary leverage to remain an economic superpower.”

Wednesday, October 17, 2007

More where those came from...

Our seminar speaker yesterday was A.P. Balachandran, a distinguished theorist from Syracuse University. During lunch I asked him what the effective population of India was for producing technical and scientific talent. That is, what fraction of the population has access to educational opportunites equivalent to those in advanced countries. I asked whether the number might be 300 million, but he replied it might be closer to 100 million. If so, we can look forward to a rapid increase in the number of Indian scientists and engineers in the next generation, as their economy continues to develop. It's scary to think that we currently only feel the effect of 10% of their population! The literacy rate in India is only about 60% at the moment.

Sunday, October 14, 2007

Rescue in progress

Shades of LTCM -- a big rescue operation organized in the background by the Treasury.


Several of the world’s biggest banks are in talks to put up about $75 billion in a backup fund that could be used to buy risky mortgage securities and other assets, a move designed to ease pressure on a crucial part of the credit markets that threatens the broader economy.

Citigroup, Bank of America and JPMorgan Chase, along with several other financial institutions, have been meeting to come up with a plan to create a fund that could prevent a sharp sell-off in securities owned by bank-affiliated investment vehicles. The meetings, which began three weeks ago, have been orchestrated by senior officials at the Treasury Department, and the discussions have intensified in the last few days.

A broad framework for an agreement could be reached as early as tomorrow, according to people with knowledge of the discussions, but many important details still need to be hammered out. Another round of discussions is taking place this weekend, and it is still possible that the parties will not reach an agreement.

“Treasury is very serious about getting some solution in place to take away the fear hanging over the markets,” said Alex Roever, a credit analyst at JPMorgan Chase who has been following the discussions but is not involved in them. “It is a very challenging thing to do. There are so many parties involved and they all don’t agree.

The proposal echoes the 1998 bailout of the hedge fund Long Term Capital Management, when a group of big banks came together to prevent the fund from collapsing after it made a series of bad bets. And the current round of crisis-driven collaboration illustrates the heightened level of concern among both government and financial players.

While there are signs that the broader credit markets have begun to stabilize after the Federal Reserve lowered interest rates last month, a pocket of the commercial paper market remains under siege: structured investment vehicles, known as SIVs. The fear is that problems with these vehicles could infect the broader economy.

SIVs, which issue short-term notes to invest in longer-term securities with higher yields, are often organized by banks but are not actually owned or held by them. They are supposed to be financed through the issuance of commercial paper backed by pools of home loans and credit card debt, but the loss of confidence in the quality of subprime mortgage bonds has also tainted these securities.

Analysts say that investors have all but stopped buying SIV-affiliated commercial paper, and the worry is that the 30 or so SIVs will unload billions of dollars of mortgage-related assets all at once. That would put intense pressure on prices. As Wall Street firms and hedge funds mark value of similar investments they held to their new lower values, they face potentially huge hits to their profits.

Still, the impact on the biggest banks is even more severe. In times of crisis, they are committed — either legally or to maintain their reputations — to stepping in to buy those securities. Banks have already been buying significant amounts of commercial paper in recent weeks, even though they did not have to. But if they are forced to bring those assets onto their balance sheets, they might be less willing to lend to businesses and consumers. That could set off a credit crunch and thrust the economy into a recession.

The proposal being floated calls for the creation of a “Super-SIV,” or a SIV-like fund fully backed by several of the world’s biggest banks to provide emergency financing. The Super-SIV would issue short-term notes to finance the purchase of assets held by the SIVs affiliated with the banks, with the hope of reassuring investors.

But whether the banks would buy the assets directly or just buy the short-term debt is still unclear, according to people briefed on the situation. So are other aspects, like the amount of capital each bank would need to contribute, how it would be administrated, and the fee structures and cost burdens.

The effort to create a backup fund began about three weeks ago, when the Treasury secretary, Henry M. Paulson, called a meeting in Washington that included the chief executives of Citigroup, Bank of America, JPMorgan and other big banks. With Wall Street firms having almost no luck finding buyers for mortgage-backed securities and derivatives, Mr. Paulson wanted to see what could be done to relieve the bottleneck.

Ramanujan fictionalized

This morning I heard this interview on NPR with the author of The Indian Clerk, a fictionalization of Ramanujan's story. Since the author knows little mathematics, I am a bit skeptical as to the quality of the book (see second review at link above), despite the fascinating material on which it is based.

The interview reminded me of the quote below, from Hardy writing in A Mathematician's Apology:
I still say to myself when I am depressed and find myself forced to listen to pompous and tiresome people, ‘Well, I have done one thing you could never have done, and that is to have collaborated with both Littlewood and Ramanujan on something like equal terms’.

Saturday, October 13, 2007

What equity risk premium?

Some economists view the equity risk premium as a major theoretical puzzle. US equities have significantly and consistently outperformed bonds in the last 100 years. Why have investors not bid up stock prices to erase this premium? (Perhaps they already have ;-)

It's important to note that US performance is exceptional relative to that of other countries. Part of the risk in the equity risk premium is that we might eventually regress to the mean.

Another underappreciated point is that it was during the most recent period of data that we abandoned hard currency (left the gold standard). It wasn't widely understood that inflation is a threat to bonds but less so to equities (corporations can pass inflation through to consumers -- costs, revenue and earnings are all in real dollars).

Economist: Contrary to popular belief, stocks do not always go up

IF AMERICAN investors have learned any lesson in the last 25 years, it is to buy shares on the dips. The slide in 2000-02 may have been longer and deeper than they were used to but normal service was eventually resumed, driving the Dow Jones Industrial Average to a record high on October 1st.

Among American financial commentators, it is almost universally accepted that shares always rise over the long run. And this perception does seem to be backed up by evidence; if you take any 20-year period, Wall Street has always delivered positive real returns. In addition, one ought to expect shares (which are risky) to deliver a higher return than risk-free assets such as government bonds.

...Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School examined* the record of 16 stockmarkets which were in continuous operation over the course of the 20th century. In itself, this selection showed survivorship bias by excluding the likes of Russia and China. The academics found that only three other countries could match the American record of having no 20-year periods with negative real returns.

Other investors were far less lucky. Japanese, French, German and Spanish investors all suffered instances where they had to wait 50-60 years to earn a positive real return; in Italy and Belgium, the waiting period stretched to 70 years. It was no good following the famous advice to “put the shares in a drawer and forget about them”; the furniture would not have lasted that long.

Besides survivorship bias, there is another problem with the belief that stockmarkets must always go up; the very existence of the belief is likely to lead to its falsification. Investors will keep buying until prices reach stratospheric levels. That clearly happened in Japan in the late 1980s and with the technology-heavy NASDAQ index in the late 1990s; the latter is still, after seven years, not much more than half its peak level.

A significant proportion of the return from equities in the second half of the 20th century came from a re-rating of shares; investors were willing to pay a higher multiple for profits. But re-rating cannot continue forever. Although ratings have fallen significantly since the heady days of 2000, that is in large part due to the remarkable strength of corporate profits, now close to a 40-year high relative to national output. If profits revert to the mean, that could act as a drag on stockmarket performance. And, as with Japan, investors do not have much in the way of income to fall back on; the dividend yield on the American market is just 1.7%.

If investors want a simple parallel with share prices, they need only turn to the American housing market. Back in 2005, Ben Bernanke, then an economic adviser to the president, was asked about the possibility of a decline in house prices on CNBC, a financial-television channel. He said, “We've never had a decline in housing prices on a nationwide basis. What I think is more likely is that house prices will slow, maybe stabilise.”

Lots of people took the same view and were willing to borrow (and lend) on a vast scale on the grounds that higher house prices would always bail them out. They are now counting their losses. Investors in equities should beware of overcommitting themselves on the basis of a similar belief. Just ask the Japanese.

Tuesday, October 09, 2007

Bounded cognition

Many people lack standard cognitive tools useful for understanding the world around them. Perhaps the most egregious case: probability and statistics, which are central to understanding health, economics, risk, crime, society, evolution, global warming, etc. Very few people have any facility for calculating risk, visualizing a distribution, understanding the difference between the average, the median, variance, etc.

A remnant of the cold war era curriculum still in place in the US: if students learn advanced math it tends to be calculus, whereas a course on probability, statistics and thinking distributionally would be more useful. (I say this reluctantly, since I am a physical scientist and calculus is in the curriculum largely for its utility in fields related to mine.)

In the post below, blogger Mark Liberman (a linguist at Penn) notes that our situation parallels the absence of concepts for specific numbers (i.e., "ten") among primitive cultures like the Piraha of the Amazon. We may find their condition amusing, or even sad. Personally, I find it tragic that leading public intellectuals around the world are mostly innumerate and don't understand basic physics.

Language Log

The Pirahã language and culture seem to lack not only the words but also the concepts for numbers, using instead less precise terms like "small size", "large size" and "collection". And the Pirahã people themselves seem to be suprisingly uninterested in learning about numbers, and even actively resistant to doing so, despite the fact that in their frequent dealings with traders they have a practical need to evaluate and compare numerical expressions. A similar situation seems to obtain among some other groups in Amazonia, and a lack of indigenous words for numbers has been reported elsewhere in the world.

Many people find this hard to believe. These are simple and natural concepts, of great practical importance: how could rational people resist learning to understand and use them? I don't know the answer. But I do know that we can investigate a strictly comparable case, equally puzzling to me, right here in the U.S. of A.

Until about a hundred years ago, our language and culture lacked the words and ideas needed to deal with the evaluation and comparison of sampled properties of groups. Even today, only a minuscule proportion of the U.S. population understands even the simplest form of these concepts and terms. Out of the roughly 300 million Americans, I doubt that as many as 500 thousand grasp these ideas to any practical extent, and 50,000 might be a better estimate. The rest of the population is surprisingly uninterested in learning, and even actively resists the intermittent attempts to teach them, despite the fact that in their frequent dealings with social and biomedical scientists they have a practical need to evaluate and compare the numerical properties of representative samples.

[OK, perhaps 500k is an underestimate... Surely >1% of the population has been exposed to these ideas and remembers the main points?]

...Before 1900 or so, only a few mathematical geniuses like Gauss (1777-1855) had any real ability to deal with these issues. But even today, most of the population still relies on crude modes of expression like the attribution of numerical properties to prototypes ("A woman uses about 20,000 words per day while a man uses about 7,000") or the comparison of bare-plural nouns ("men are happier than women").

Sometimes, people are just avoiding more cumbersome modes of expression -- "Xs are P-er than Ys" instead of (say) "The mean P measurement in a sample of Xs was greater than the mean P measurement in a sample of Ys, by an amount that would arise by chance fewer than once in 20 trials, assuming that the two samples were drawn from a single population in which P is normally distributed". But I submit that even most intellectuals don't really know how to think about the evaluation and comparison of distributions -- not even simple univariate gaussian distributions, much less more complex situations. And many people who do sort of understand this, at some level, generally fall back on thinking (as well as talking) about properties of group prototypes rather than properties of distributions of individual characteristics.

If you're one of the people who find distribution-talk mystifying, and don't really see why you should have to learn it, or perhaps think that you're just not the kind of person who learns things like this -- congratulations, you now know exactly how (I imagine) the Pirahã feel about number-talk.

Does this matter? Well, in the newspapers every week, there are dozens of stories about risks and rewards, epidemiology and politics, social trends and psychological differences, with serious public-policy implications, which you can't understand without understanding distribution-talk. And usually you won't just feel baffled -- instead, you'll think you understand, and draw the wrong conclusions.

In fact, the people who write these stories mostly don't understand distribution-talk themselves, and in any case they believe that they need to write for an audience that doesn't understand it. As a result, news stories on these topics are usually impossible to understand correctly unless you go back to the primary sources in order to recover the information that's been distorted or omitted. I imagine that something similar must happen when one Pirahã tells another about the deal that this month's river trader is offering on knives.

Here's a great comment:

For many years I attempted to teach Biology and Genetics students the rudiments of statistics, with, alas, only limited success. The notions of population, sample, variance, hypothesis testing, etc. require more time and practice than can be devoted to them in such courses. Most students in the life sciences are math-phobic and few take statistics courses until they reach graduate school. Even among professional biologists publishing in journals like Science and Nature you can find examples of statistical ignorance. Is it any wonder that the average man on the street doesn't understand them either? Practical statistics needs to be incorporated into high school math courses and, possibly, earlier. But I'd remain doubtful that even then the average person would understand enough to be critical of what they read in the papers.

Posted by: Dale Hoyt | October 7, 2007 8:21 PM

For a real life example, see Gary Taubes' book on nutrition and public health research, reviewed here. Even the medical establishment adopted hypotheses that were not in any way supported by good statistical data.

Monday, October 08, 2007

Quantum randomness

I'm in a New Scientist article entitled Universe explained by quantum randomness. I can't access the entire thing, since I don't have a New Scientist subscription, but I've pasted the free-access part of the article below.

The article is based on observations made in this paper, where...

...I discuss a rather strong implication of quantum mechanics. Simple entropic or information theoretic arguments, together with standard big bang cosmology, imply that essentially all the detailed aspects of the world around us (the arrangement of galaxies in clusters, electrons in stars, leaves on trees, or books on bookshelves) are random consequences of quantum outcomes. There is simply not enough information in the initial conditions to specify all of these things. Unless their variability is illusory, it must result from quantum randomness. Very little about the universe today is predictable, even with perfect knowledge of the initial conditions and subsequent dynamical evolution.

Universe explained by quantum randomness
08 October 2007
Marcus Chown
Magazine issue 2624

Look around you - at the sun in the sky, a tree swaying in the breeze, a woman walking her dog down your street. You may think all these things have a cause. Einstein did. He hated the idea of quantum randomness underlying everything, which is why he declared, "God does not play dice".

Tough, says Stephen Hsu of the University of Oregon in Eugene. "Not only does God play dice with the universe but, if he did not, the complex universe we see around us would not exist at all. We owe everything to randomness."

Hsu came to his startling conclusion by comparing the amount of information in today's universe with that in the first moments of creation. According to standard cosmology, the universe grew enormously in the first split second of its existence, blowing up from a tiny patch of vacuum. "Because the patch was exponentially smaller ...

Sunday, October 07, 2007

Attractiveness and sexual behavior

Here's an interesting paper by some Australian researchers. I wouldn't take all of their conclusions too seriously. For example, testosterone levels would impact behavior as well as body dimorphism, so the correlation found between sexual success and dimorphism (e.g., masculine body type in males) might signal something about the behavior of the males as opposed to reaction on the part of women. What is interesting is that advantaged (attractive) males tend to use their advantage towards short term relationships, whereas attractive females pursue long term relationships. See earlier related post.

Attractiveness and sexual behavior: Does attractiveness enhance mating success?

4. Discussion

Attractive men and women were more successful in implementing their preferred mating strategies according to parental investment theory. Men with attractive faces and bodies enjoyed significantly more short-term mating success than their peers, with no cost in their long-term mating success, whereas women with attractive faces had more long-term mating success than their peers. Attractive men (bodies) and women (faces) also became sexually active earlier than their peers, which would enhance reproductive success for both sexes in the absence of contraception. These results support the assumption underlying much current research on attractiveness, that attractive traits are important in mate choice and may be sexually selected.

Attractiveness enhanced mating success for both men and women, suggesting that both sexes choose partners with attractive traits. This finding challenges claims that male market value is principally determined by earning potential and relationship commitment (e.g., Pawloskwi & Dunbar, 1999). Attractiveness of the face and body contributed independently to male mating success because they were uncorrelated, but both affected success. Only facial attractiveness contributed to female mating success, which is surprising if attractive female bodies advertise fertility, as widely believed (e.g., Singh, 1993). However, males may have been able to assess this information from the face because face and body attractiveness were correlated in females (see also Thornhill & Grammer, 1999). It is not clear why the face and body should signal similar information in females but not in males. Future research is needed to determine the relative contributions of face and body attractiveness to overall attractiveness in each sex.

Friday, October 05, 2007

Two book reviews

I've had both of these on my shelf for some time, but haven't found time to write detailed reviews.

Google's PageRank and Beyond, Langville and Meyer (Princeton University Press).

Written by two math professors, this is the best technical account I could find of search algorithms. The math (mainly linear algebra and a little graph theory) is accessible and introduced in a self-contained way in a separate chapter. The coverage isn't limited to beautiful algorithmic ideas (the primary one being to find the dominant eigenvector of the matrix representing the graph of hyperlinks) -- the discussion includes nitty gritty details like how to treat dangling nodes, how to accelerate computations, etc. There's also a running historical summary of Google's development up to and including the IPO.

If you're wondering why I have this book, it's not just academic curiosity -- the PageRank algorithm in its basic form can be understood pretty quickly from overviews available online. I'm interested in understanding the current state of the art and the possibility of improvements ;-)

An Engine, Not a Camera, D. MacKenzie (MIT Press)

This is the best history of modern finance and options pricing theory I have yet read. MacKenzie has a sufficient understanding of the theory and of the subtle sociological issues involved (strangely, he is not an economist but a sociologist). Figures like Mandelbrot (the mathematician), Thorp (perhaps the real inventor of Black-Scholes) and Osborne (a physicist) appear along with better known economists like Samuelson, Fama, Miller, Sharpe, Black, Scholes, Merton, etc. The section on Mandelbrot and Levy distributions is especially good, as is the account of LTCM. The title is from Milton Friedman, who (controversially) characterized economic theory as an "engine to analyze the world, not a photographic reproduction of it".

Thursday, October 04, 2007

Econ 101

The following is a real posting from Craigslist. The guy who replied is a VP at JP Morgan.

I remember not so long ago the big thing for money men was to find the clubs where all the models went. Perhaps the supply-demand balance has shifted recently :-)


What am I doing wrong?

Okay, I'm tired of beating around the bush. I'm a beautiful (spectacularly beautiful) 25 year old girl. I'm articulate and classy.

I'm not from New York. I'm looking to get married to a guy who makes at least half a million a year. I know how that sounds, but keep in mind that a million a year is middle class in New York City, so I don't think I'm overreaching at all.

Are there any guys who make 500K or more on this board? Any wives? Could you send me some tips? I dated a business man who makes average around 200 - 250. But that's where I seem to hit a roadblock. 250,000 won't get me to central park west. I know a woman in my yoga class who was married to an investment banker and lives in Tribeca, and she's not as pretty as I am, nor is she a great genius. So what is she doing right? How do I get to her level?

Here are my questions specifically:

- Where do you single rich men hang out? Give me specifics- bars, restaurants, gyms -What are you looking for in a mate? Be honest guys, you won't hurt my feelings -Is there an age range I should be targeting (I'm 25)?

- Why! are some of the women living lavish lifestyles on the upper east side so plain? I've seen really 'plain jane' boring types who have nothing to offer married to incredibly wealthy guys. I've seen drop dead gorgeous girls in singles bars in the east village. What's the story there?

- Jobs I should look out for? Everyone knows - lawyer, investment banker, doctor. How much do those guys really make? And where do they hang out? Where do the hedge fund guys hang out?

- How you decide marriage vs. just a girlfriend? I am looking for MARRIAGE ONLY

Please hold your insults - I'm putting myself out there in an honest way. Most beautiful women are superficial; at least I'm being up front about it. I wouldn't be searching for these kind of guys if I wasn't able to match them - in looks, culture, sophistication, and keeping a nice home and hearth.

it's NOT ok to contact this poster with services or other commercial interests
PostingID: 432279810


Dear Pers-431649184:

I read your posting with great interest and have thought meaningfully about your dilemma. I offer the following analysis Of your predicament.

Firstly, I'm not wasting your time, I qualify as a guy who fits your bill; that is I make more than $500K per year. That said here's how I see it.

Your offer, from the prospective of a guy like me, is plain and simple a crappy business deal. Here's why. Cutting through all the B.S., what you suggest is a simple trade: you bring your looks to the party and I bring my money. Fine, simple. But here's the rub, your looks will fade and my money will likely continue into perpetuity in fact, it is very likely that my income increases but it is an absolute certainty that you won't be getting any more beautiful!

So, in economic terms you are a depreciating asset and I am an earning asset. Not only are you a depreciating asset, your depreciation accelerates! Let me explain, you're 25 now and will likely stay pretty hot for the next 5 years, but less so each year. Then the fade begins in earnest. By 35 stick a fork in you!

So in Wall Street terms, we would call you a trading position, not a buy and hold , hence the rub, marriage. It doesn't make good business sense to "buy you" (which is what you're asking) so I'd rather lease. In case you think I'm being cruel, I would say the following. If my money were to go away, so would you, so when your beauty fades I need an out. It's as simple as that. So a deal that makes sense is dating, not marriage.

Separately, I was taught early in my career about efficient markets. So, I wonder why a girl as "articulate, classy and spectacularly beautiful" as you has been unable to find your sugar daddy. I find it hard to believe that if you are as gorgeous as you say you are that the $500K hasn't found you, if not only for a tryout.

By the way, you could always find a way to make your own money and then we wouldn't need to have this difficult conversation. With all that said, I must say you're going about it the right way but in trading terms this is a classic "pump and dump."

I hope this is helpful, and if you want to enter into some sort of lease, let me know.

Monday, October 01, 2007

From the New Yorker

Louis Menand on Jack Kerouac and the Beats.

Garry Kasparov (audio) on Russia, Putin and Chess.

Ah, the good old days...

"Physics and the excellences of the life it brings" -- those words appear in a letter from Robert Oppenheimer to his younger brother Frank, who was then embarking on his own career in physics. Frank Oppenheimer worked on the Manhattan project and became a high energy experimentalist at Minnesota, but was dismissed over communist party ties. He later helped found the Exploratorium, a science museum in San Francisco.

Here's a nice overview of R. Oppenheimer's life, in the form of a table of contents:

Robert Oppenheimer - Letters and Recollections
by A.K. Smith and C. Weiner

I "Work frantic, bad and graded A"
HARVARD, 1992-1925
II "Making myself for a career"
III "Physics and the excellences of the life it brings"
IV "These terrible years of war"
LOS ALAMOS, 1942-1945
V "High promise ... yet only a stone's throw from despair"

How excellent are things today for young scientists? Here's what Nature had to say:

Is the US producing enough scientists?

Why do young people go into science? Many can't imagine doing anything else—the excitement of discovering new things is irresistible. Robert Oppenheimer once referred to "physics and the obvious excellences of life it brings". Stephen Jay Gould wrote movingly of being a street kid from New York City who hoped one day "to become a scientist and to make, by my own effort, even the tiniest addition to human knowledge..." For talented people, at least in countries where a wide range of opportunities are available, these decisions are often based on the feeling that there is simply no other kind of life that would be as personally rewarding. For others, however, different kinds of rewards no doubt loom large, with employment and salary prospects being the most obvious. As a result, anyone interested in understanding the flow of people into science must come to grips with the larger economic forces that might be shaping it. ...

...Producing more science graduates is undoubtedly a good thing for American science; whether it's a good thing for young American scientists, however, is much less clear, and the current generation of students will be right to be skeptical. The reasons for this were outlined in an excellent 1999 article in the New Republic by Scott Stossel ("Uncontrolled Experiment"). Fundamentally, Stossel argued, American science is a victim of its own success. The impressive increases in funding from the National Institutes of Health have led to an army of graduate students and postdoctoral fellows to carry out the promises of all the funded grant applications. But even this generous level of support isn't adequate to satisfy the demand for independent jobs when these postdocs want to become principal investigators themselves. At the same time, foreign-born students see these low-paying fellowships at well-regarded American graduate programs as relatively attractive. Given that this puts further downward pressure on salaries, the effect is to discourage many American students from embarking on the long training period that is necessary to secure an academic position. To be sure, many students see science as a calling and are perfectly willing to take their chances; others, however, are less likely to ignore the laws of supply and demand when their livelihoods are on the line.

The tone of this editorial is funny -- it's obviously written for the typically monkish and narrowly obsessive researcher, who can't imagine that economic or career considerations might deter someone from pursuing a life in science. (Homo economicus and homo scientus stare at each other in mutual incomprehension :-) Nowadays, success in science seems to be as much a selection for these character or personality traits as it is a selection for talent.

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