Merton on the financial crisis

This talk is long but very good. If you are impatient you can skip to the last 3 minutes where Merton answers a question about the CDS market that has been widely discussed. He points out the value for real world companies of being able to transfer credit risk as opposed to the narrower application of insuring a bond that they actually own.

The central point of the first part of the talk -- the embedded put option in a plain vanilla loan, and associated nonlinearities -- is nice but I don't think it is as essential to the current crisis as he suggests. (It's obviously in his interests to downplay the complexity of new financial instruments relative to traditional ones. The difference, of course, is that we've had much more time to get used to the traditional ones and build the proper safeguards and regulatory systems.) Merton is refreshingly modest about his understanding of the complex causes of the crisis. At one point he notes that the post mortem investigation into the crisis is unlikely to produce a Feynman moment, in which someone holds up an O-ring that caused the disaster!

Here is another link in case the player below doesn't work for you.





I sat in on Merton's graduate class on options pricing theory at Harvard in the early 1990s. I still have the lecture notes and a black paperback copy of Continuous Time Finance. He seemed much more confident at the time, but of course that was before LTCM :-)

I was one of the first people to recast options pricing theory into the language of Feynman path integrals. (You don't need the power of quantum field theory for this; the log of the price of the underlying security is just the position of a particle in simple 1D quantum mechanics in imaginary time -- i.e., it's just Brownian motion.) A friend of mine had been assigned a thesis project by Andy Lo at MIT, to price a certain type of exotic, path dependent option sold by Citibank. Lo didn't know the option could be priced in closed form (neither did Citi, it turns out); he asked my friend to do it numerically by brute force Monte Carlo. Using path integrals I found an exact expression for my friend, which agreed perfectly with his simulations.

Sugar Daddies: MIT grad starts high end prostitution web site ;-)

The Times magazine has a long piece about SeekingArrangement.com, a web site that helps "sugar babies" find rich "sugar daddies" :-) On the site there are 10 babies for every daddy.

I would say that a large number of financially successful guys I have known have analyzed the dating situation (usually over a few drinks) and come to the same conclusions as the users and creator of the site. (See further down the excerpt, and especially the guy called Sam.) I don't personally know very many women who have analyzed it from the other side and come to the sugar baby perspective (or at least will admit to it), but there are obviously lots out there. See the sugar daddy blog for hundreds of comments from sugar babies.

For the Asian version of all this, see Enjo kosai, or "compensated dating" in Japanese (also here and here).

NYTimes: AT FIRST GLANCE, the Web site SeekingArrangement.com seems like any other dating site. Most of the men are looking for fit, sexy women, and most of the women want nice guys who can make them smile and laugh. But if eHarmony or Match.com is a chatty social mixer, Seeking Arrangement is a down-and-dirty marketplace where older moneyed men and cute young women engage in brutally frank transactions. They’re not searching for longtime soul mates; they want no-strings-attached “arrangements” that trade in society’s most valued currencies: wealth, youth and beauty. In the cheesy lexicon of the site, they are “sugar daddies” and “sugar babies.”

There’s the 18-year-old from France asking for $5,000 to $10,000 a month from “a mentor who can provide me with the finer things in life and keep me happy!” And the 49-year-old investor from upstate New York willing to pay $5,000 a month for a “daytime playmate” for “intense connection without commitment.” Critics say the site is at best a convenience store for adulterers and at worst a virtual brothel, but Brandon Wade, Seeking Arrangement’s 38-year-old founder and chief executive, is unperturbed by the criticism. “We stress relationships that are mutually beneficial,” he says. ...

ABOUT 30 PERCENT OF ARRANGEMENTS on the site involve the daddy paying an “allowance,” usually a thousand or two a month, though the site claims some reach $10,000. The rest provide the baby with incidental cash, shopping sprees, gifts, travel or the fleeting illusion that theirs is a high-end, easy life. “I get flown to whatever city I want,” wrote a North Carolina college student, who goes by the name gurlnextdoor on the site’s blog, a mix between an online support group and a kaffeeklatsch. “He pays for it, takes me shopping, we talk, laugh, go out to eat and do whatever we want to do for our days together. . . . I don’t bring up mundane problems about my home life, and he does the same. . . . If I wanted someone to talk to about my life problems, I’d get a boyfriend or a therapist.”

...In fact, Seeking Arrangement pays to have its ads pop up on search engines whenever someone types in “student loan,” “tuition help,” “college support” or “help with rent.” Lola was one of many to stumble on the site that way, when — behind on her rent and tuition and down to one meal a day — she Googled “student loan.” What popped up was hardly what she expected, but she was willing to try almost anything to stay in school.

...Whether sugar relationships amount to prostitution is hotly debated among the site’s members. “Let’s get real here,” wrote GoldenGate on the blog. “I’m with a guy who’s old enough to be my dad, short and balding. Not to mention his other shortcomings, ahem. But he gives me a great big fat allowance every month. If that wasn’t there, we wouldn’t be together.”

Others on the blog were shocked, saying they could never be with a man, even a rich one, if they weren’t somehow attracted to him. Indeed, most go to considerable effort to distinguish between “sugar” and prostitution. (Legally, at least, they are right; since the 1970s, courts have ruled that as long as the woman is paid for some service besides sex — housecleaning, companionship — the arrangement is not the equivalent of prostitution.) They say being a sugar baby is no more an occupation than dating is, especially when the goal of dating is to find a rich boyfriend or a wealthy husband. ...

Some sugar babies also insist that wives who stay in miserable marriages for an American Express black card, mansion or country-club membership are more like prostitutes than they are. And yet the blatant financial transactions leave many uneasy.

...a 22-year-old named Mercedes told me, “I don’t see how people can view this as exploitation.” Mercedes is a junior who pays her own tuition at a Georgia university. She has had six sugar daddies in the past year to supplement her wages busing tables and washing dishes at a bar. “I could go out and work three jobs and still go to school and probably make decent grades, but is that really what I want to do? I make more money this way, and I have a lot more fun because I get to go out to concerts, go shopping, see movies and make money off of it. If instead of this I was just dating a rich guy, it’d be almost the same thing, and society wouldn’t look down on that. You know with a sugar daddy that they’re spending a lot of money on you and they clearly want something in return, but is that really any different than how it is with a boyfriend?”

BRANDON WEY GOT THE IDEA for the site from his own dissatisfying love life as an M.I.T. student and then as a well-off but awkward tech executive. Traditional dating Web sites were no help. “It was difficult to advertise the assets I had compared to hundreds of thousands of guys who had better looks or better pickup lines,” says Wey, now married to a woman 13 years younger than he is, whom he met before the site went live. “I needed to find a way to put myself at the front of the line.”

One sugar daddy whose screen name is Sam has tried long-term girlfriends, mistresses, prostitutes and a brief marriage. ... Sam’s profile on Seeking Arrangement is audacious. He advertises for a woman who is “drop-dead beautiful, sexy, fun and elegantly mannered in a fancy setting. She must turn heads . . . and make me the envy of the crowd.” ... When I asked to chat in person, Sam suggested meeting at CORE, a private Manhattan club where membership is by invitation only and costs $65,000 the first year and where Sam’s assent was required before I could be admitted. Sitting alone at a long conference table in a room set aside for him, he looked utterly unremarkable, a man of average height with a buzz cut and an aloof air. But once Sam got talking, he became affable and witty, especially as he described his unorthodox history with women. He started college when most kids his age were still in middle school. “When you go to college at that age, you’re pretty undatable,” he said. “I was somewhere between a curiosity, a mascot and a friend. I tutored freshman physics and calculus so I could at least be near women. Of course, all they’d do is talk about their boyfriends.”

He has an almost mathematical approach to assessing relationships, and once even computed the costs for a girlfriend, mistress, prostitute and wife — mistresses turn out to be most expensive by the hour; wives, by the year; girlfriends are cheapest all around. But he’s not as calculating as he seems. In fact, he concluded there’s little correlation between cost and quality. Still, he is relentlessly searching for an algorithm that will predict relationships’ success.

Sam is also more determined than most to try separating a sugar baby’s affection and the money she’s paid to provide it. In his arrangements, he says, he establishes a trust in the woman’s name that pays a monthly stipend of at least $5,000 for the length of their contract. If the woman decides to quit sleeping with him at any point, he may quit serving as adviser and pamperer, but the stipend continues regardless. “If I didn’t do that, then it’s like a leash I’m putting on somebody, and that seems really unfair,” he said. “Besides, then I’d never know what the relationship was really about.”

Sam runs these relationships with an explicit business plan, a set budget, measurable goals and quarterly reviews. From the outset, the contract has an end date. It’s a brilliant, if contrived, way to protect his pride. The contract specifies that the romance and sex are to end by the preset date, so there’s no break up, no rejection, no bruised ego. She’s not dumping him; the gig’s just over.

Rationality vs Intelligence

I can believe that intelligence is somewhat uncorrelated with rational behavior (see below for definition; to some extent it is merely the requirement of self-consistency). But do smarter people become more rational once their foibles are revealed to them?

Rationality vs Intelligence: In 2002, the cognitive scientist Daniel Kahneman of Princeton University won the Nobel Prize in Economics for work done with his longtime collaborator Amos Tversky (who died in 1996).

Their work had to do with judgment and decision-making ― what makes our thoughts and actions rational or irrational. They explored how people make choices and assess probabilities, and uncovered basic errors that are typical in decision-making.

The thinking errors they uncovered are not trivial mistakes in a parlor game. To be rational means to adopt appropriate goals, take the appropriate action given one's goals and beliefs, and hold beliefs that are commensurate with available evidence. It means achieving one's life goals using the best means possible.

To violate the thinking rules examined by Kahneman and Tversky thus has the practical consequence that we are less satisfied with our lives than we might be.

Research conducted in my own laboratory has indicated that there are systematic individual differences in the judgment and decision-making skills that Kahneman and Tversky studied.

Ironically, the Nobel Prize was awarded for studies of cognitive characteristics that are entirely missing from the most well-known mental assessment device in the behavioral sciences: intelligence tests.

Scientists and laypeople alike tend to agree that "good thinking" encompasses sound judgment and decision-making ― the type of thinking that helps us achieve our goals. Yet assessments of such good (rational) thinking are nowhere to be found on IQ tests.

Intelligence tests measure important things, but they do not assess the extent of rational thought. This might not be such a grave omission if intelligence were a strong predictor of rational thinking.

But my research group found just the opposite: it is a mild predictor at best, and some rational thinking skills are totally dissociated from intelligence.

To an important degree, intelligence tests determine the academic and professional careers of millions of people in many countries.

Children are given intelligence tests to determine eligibility for admission to school programs for the gifted. Corporations and the military depend on assessment and sorting devices that are little more than disguised intelligence tests.

Perhaps some of this attention to intelligence is necessary, but what is not warranted is the tendency to ignore cognitive capacities that are at least equally important: the capacities that sustain rational thought and action.

Critics of intelligence tests have long pointed out that the tests ignore important parts of mental life, mainly non-cognitive domains such as socio-emotional abilities, empathy, and interpersonal skills.

But intelligence tests are also radically incomplete as measures of cognitive functioning, which is evident from the simple fact that many people display a systematic inability to think or behave rationally despite having a more than adequate IQ.

For a variety of reasons, we have come to overvalue the kinds of thinking skills that intelligence tests measure and undervalue other important cognitive skills, such as the ability to think rationally.

Psychologists have studied the major classes of thinking errors that make people less than rational.

They have studied people's tendencies to show incoherent probability assessments; to be overconfident in knowledge judgments; to ignore the alternative hypothesis; to evaluate evidence with a "my side" bias; to show inconsistent preferences because of framing effects; to over-weigh short-term rewards at the expense of long-term well-being; to allow decisions to be affected by irrelevant context; and many others.

All of these categories of failure of rational judgment and decision-making are very imperfectly correlated with intelligence ― meaning that IQ tests tend not to capture individual differences in rational thought.

Intelligence tests measure mental skills that have been studied for a long time, whereas psychologists have only recently had the tools to measure the tendencies toward rational and irrational thinking. ...

Lawyerland

What lawyers talk about when they talk about law. Something I'm reading at the moment. Joseph is no Mamet but it's worth a look.



Review from Amazon:

Joseph, a poet and law professor at St. John's University in New York, sat down (mostly at meals) with several lawyers of his acquaintance and distilled their conversations into stories that read like radio mini-plays. Indeed, the frank, high-pitched language verges on Mamet. "Reasonable doubt? They go fucking bananas!" declares a weary criminal lawyer of the law-fascinated juries he encounters. A corporate lawyer offers some grim truth: "What we do is determined by who pays us." A loquacious judge, after damning lawyers as liars, finally tells her interviewer of a mind-boggling attempted-murder case involving a husband and wife that resonates with painful clarity. A torts lawyer explicates the world of medical malpractice, where transactional costs trump other considerations: "The public believes in fairness. Well, what's fair for me isn't fair for you." A black lawyer tells a hilarious story about a black law partner who, exasperated by a condescending white client, finally "[g]oes and violates Negro Rule Number One," i.e., never act crazy: act smart. The noirish world that Joseph creates should serve as a tart reminder to practicing lawyers and as a cautionary tale for the aspiring; others may wish for stories with a larger dose of narrative and epiphany.

My favorite bit so far is on page 49:

These people are serious. This client -- Cal Tech. Phi Beta Kappa. He's 33 years old and he's already made two -- going on his third -- separate fortunes in computers. He does not care for lawyers. ... He'll point at a lawyer and say, "Look how twisted, how soft, how false his face is."

A physicist from Iran

We have a sabbatical visitor in our institute who is professor of theoretical physics in Iran. He did his doctoral work at Oxford but this is his first time in the US. He kindly agreed to answer some questions for this blog. I'll try to follow up with more in the future; I realize these first questions are a bit superficial.

Q: How would you describe the scientific situation today in Iran? Do you feel researchers there are up to date on current progress, or is there a gap? Is the government serious about scientific research?

Almost all governments of developing countries have a lot of financial problems and they have to choose where to spend money.

In a few countries such as India and China, the government spends a lot of money for research on purely scientific projects. Other countries don't spend so much money as they have lots of problems to solve. In Iran the financial situation is not so good and there is not enough money to solve these kinds of problem and so scientific research is not similar to the west. I am sure there is gap in some topics.


Q: How popular is physics in Iran (say, versus engineering)? What do the brightest students in Iran tend to study?

Many high school students like physics, however they don't choose physics as their first choice.

The brightest students choose: Medical subjects, Electrical eng., Mechanical eng. and Civil eng. because they may get a job more easily in the future. I mean these subjects are more secure from the economical point of view. Someone with a BSc or even a PhD in physics won't be able to find a job easily.


Q: What is the attitude of scientists in Iran about nuclear weapons development?

Nobody likes nuclear weapons and everyone wants to live in a world without nuclear arms. People in Iran hate war. Iran had 8 years of war with Iraq and people don't like war as they know its consequences. People in Iran are against nuclear weapons.


Q: What is the general attitude of scientists towards the US, the West, etc.?

They like to have scientific relations with all countries.


Q: Can you characterize academic ties to developing countries like India and China? Comparable to those between Iran and the West? Increasing faster?

There is not too much academic interaction between Iran and India or China. There is a little bit more interaction between Iranian scientists and western countries.


Q: The same question for economic ties.

There are strong economic ties between Iran and China (not with India). This is not strange: you go anywhere in the world for shopping and you will see "made in china" almost everywhere. However, economic relations between Iran and Europe are much stronger.

Theories of games

While visiting Vanderbilt over spring break, I discovered that astrophysicist Bob Scherrer and I share a couple of boyhood interests: science fiction and strategic games. Bob actually writes science fiction, and still plays board games with his kids, whereas I switched long ago to "serious" literature and don't play or design games anymore.

But from age 11 to 14 or so (basically until I hit puberty and discovered girls), I spent every Saturday at the local university simulation gaming club, playing games like Panzergruppe Guderian, Starship Troopers or Dungeons and Dragons with college students and other adults. Bob tells me that I should have saved my collection of these games -- that they'd be very valuable today! Actually, the design of games and rule systems interested me even more than play.

Although I admire the elegance of classical games like Chess and Go, I prefer simulation games. More specifically, I enjoy thinking about the design and structure of these games. A good analogy is the distinction between natural science and mathematics. The former attempts to distill truths about the workings (dynamics) of the natural world, whereas the latter can be admired solely for its abstract beauty and elegance. To me Chess sometimes feels too finite and crystalline. The challenge of formulating a system of rules that captures the key strategic or tactical issues facing, e.g., Stalin, or an infantry platoon, or the ruler of a city state, or even a science postdoc, is just messy enough to be more interesting to me than the study of a finite abstract system. To some extent, every theoretical scientist, economist and financial modeler is participating in a kind of game design -- building a simplified model without throwing away the essential details.

I think role playing games are overly maligned, even among the community of gamers. Under ideal circumstances, role playing games are highly educational, and combine components like story telling, negotiation, diplomacy and team building. At the club I attended one of the "game masters" (I know, it sounds silly!) was a portly older man named Bill Dawkins, who preferred to be called Standing Bear (his Native American name). Standing Bear, though possessed of limited formal education, was widely read and had lived a vast life. He was the most creative story teller and world creator I have known. His ideas were easily as original and interesting as those I had encountered in science fiction and fantasy writing. Each of the role playing campaigns he created, taking place over years, was a masterpiece of imagination and myth building. He attracted scores of players from around the region. I often found myself playing alongside or against people I barely knew, although some came to be close friends.

Netbooks and the twilight of wintel dominance?

A nice piece in today's Times on the popularity of netbooks and the threat posed to the Windows-Intel alliance by Linux combined with inexpensive CPUs designed by ARM and other smaller chip companies. The latter are currently used in cellphones, but have enough power to provide basic PC functionality. I've played with a couple of netbooks and really like them. Rumor has it that a Mac netbook is already in the works.

NYTimes: ...The new breed of netbooks, built on cellphone innards, threatens to disrupt that oligopoly.

Based on an architecture called ARM, from ARM Holdings in Britain, cellphone chips consume far less power than Atom chips, and they combine many functions onto a single piece of silicon. At around $20, they cost computer makers less than an Atom chip with its associated components.

But the ARM chips come with a severe trade-off — they cannot run the major versions of Windows or its popular complementary software.

Netbook makers have turned to Linux, an open-source operating system that costs $3 instead of the $25 that Microsoft typically charges for Windows XP. They are also exploring the possibility of using the Android operating system from Google, originally designed for cellphones. (Companies like Acer, Dell and Hewlett-Packard already sell some Atom-based netbooks with Linux.)The cellphone-chip makers argue that the ARM-Linux combination is just fine for a computer meant to handle e-mail, Facebook, streaming video from sites like YouTube and Hulu, and Web-based documents.

Freescale, for example, gave free netbooks to a group of 14- to 20-year-olds and watched what happened. “They would use it for Internet access when eating breakfast or on the couch, or bring it to class for taking notes,” said Glen Burchers, the director of consumer products marketing at Freescale.

Mr. Burchers said a number of companies already making netbooks would show a new round of machines using cellphone chips at the Computex trade show in Taipei, Taiwan, this June.

The future of innovation

A reader sent me this article from PhysicsWorld, which considers the nature of scientific innovation. I particularly agree with Smolin's comments excerpted below. The reward structure of academic science encourages narrow specialization far too much. Tremendous lip service is paid to interdisciplinary work, but in actuality it is very risky to undertake.

Using Smolin's analogy of hill climbing, the dominant strategy today in science is:

1) self-assess own climbing ability
2) choose suitable hill (perhaps inherited from advisor!)
3) climb to local maximum (write some relevant papers with incremental results)
4) squat on hilltop and defend against all attackers (make sure everyone cites your papers; get embedded in small community of researchers defending that hill)
5) train students and postdocs on your hilltop while secretly wishing you understood what other people were doing on their hilltops -- suppressing the curiosity that originally got you into science.

From personal experience, I can tell you that when you leave your little hill to cross a valley and explore somewhere else, the citations of your previous work will plummet, inhabitants of other hills will try to repel you, and funding agencies will ask why you aren't doing mainstream stuff ("he's not serious -- he keeps jumping around"). Based on this incentive system, it is easy to understand why people behave as they do.

...returns on research investment do not arrive steadily and predictably, but erratically and unpredictably, in a manner akin to intellectual earthquakes. Indeed, this idea seems to be more than merely qualitative. Data on human innovation, whether in basic science or technology or business, show that developments emerge from an erratic process with wild unpredictability. For example, as physicist Didier Sornette of the ETH in Zurich and colleagues showed a few years ago, the statistics describing the gross revenues of Hollywood movies over the past 20 years does not follow normal statistics but a power-law curve — closely resembling the famous Gutenberg— Richter law for earthquakes — with a long tail for high-revenue films. A similar pattern describes the financial returns on new drugs produced by the bio-tech industry, on royalties on patents granted to universities, or stock-market returns from hi-tech start-ups.

What we know of processes with power-law dynamics is that the largest events are hugely disproportionate in their consequences. In the metaphor of Nassim Nicholas Taleb’s 2007 best seller The Black Swan, it is not the normal events, the mundane and expected “white swans” that matter the most, but the outliers, the completely unexpected “black swans”. In the context of history, think 11 September 2001 or the invention of the Web. Similarly, scientific history seems to pivot on the rare seismic shifts that no-one predicts or even has a chance of predicting, and on those utterly profound discoveries that transform worlds. They do not flow out of what the philosopher of science Thomas Kuhn called “normal science” — the paradigm-supporting and largely mechanical working out of established ideas — but from “revolutionary”, disruptive and risky science.

Squeezing life out of innovation

All of which, as Sornette has been arguing for several years, has important implications for how we think about and judge research investments. If the path to discovery is full of surprises, and if most of the gains come in just a handful of rare but exceptional events, then even judging whether a research programme is well conceived is deeply problematic. “Almost any attempt to assess research impact over a finite time”, says Sornette, “will include only a few major discoveries and hence be highly unreliable, even if there is a true long-term positive trend.”

This raises an important question: does today’s scientific culture respect this reality? Are we doing our best to let the most important and most disruptive discoveries emerge? Or are we becoming too conservative and constrained by social pressure and the demands of rapid and easily measured returns? The latter possibility, it seems, is of growing concern to many scientists, who suggest that modern science is in danger of losing its creativity unless we can find a systematic way to build a more risk-embracing culture.

The voices making this argument vary widely. For example, the physicist Geoffrey West, who is currently president of the Santa Fe Institute (SFI) in New Mexico, US, points out that in the years following the Second World War, US industry created a steady stream of paradigm-changing innovations, including the transistor and the laser, and it happened because places such as Bell Labs fostered a culture of enormously free innovation. “They brought together serious scientists — physicists, engineers and mathematicians — from across disciplines”, says West, “and created a culture of free thinking without which it’s hard to imagine how these ideas could have come about.”

Unfortunately, today’s academic and corporate cultures seem to be moving in the opposite direction, with practices that stifle risk-taking mavericks who have a broad view of science. At universities and funding agencies, for example, tenure and grant committees take decisions based on narrow criteria (focusing on publication lists, citations and impact factors) or on specific plans for near-term results, all of which inherently favour those working in established fields with well-accepted paradigms. In recent years, tightening business practices and efforts to improve efficiency have also driven corporations in a similar direction. “That may be fine in the accounting department,” says West, “but it’s squeezing the life out of innovation.”

...But physicist Lee Smolin, currently at the Perimeter Institute, suggests that science overall requires a much broader and more coherent approach to risky science. To see the kinds of policies needed, he suggests, it is useful to note that scientists, at least in some rough approximation, follow working styles of two very different kinds, which mirror Kuhn’s distinction between normal and revolutionary science.

Some scientists, he suggests, are what we might call “hill climbers”. They tend to be highly skilled in technical terms and their work mostly takes established lines of insight that pushes them further; they climb upward into the hills in some abstract space of scientific fitness, always taking small steps to improve the agreement of theory and observation. These scientists do “normal” science. In contrast, other scientists are more radical and adventurous in spirit, and they can be seen as “valley crossers”. They may be less skilled technically, but they tend to have strong scientific intuition — the ability to spot hidden assumptions and to look at familiar topics in totally new ways.

To be most effective, Smolin argues, science needs a mix of hill climbers and valley crossers. Too many hill climbers doing normal science, and you end up sooner or later with lots of them stuck on the tops of local hills, each defending their own territory. Science then suffers from a lack of enough valley crossers able to strike out from those intellectually tidy positions to explore further away and find higher peaks.

Bad parser?

Today someone I've known for a long time -- a former physicist who develops software in Silicon Valley -- mentioned to me that he has trouble parsing human speech. That is, there are times in normal conversation when his brain fails to recognize the specific words the other person is saying, even when he has no trouble hearing the actual sounds. I'm not sure whether this should be characterized as a problem with parsing (which is how he refers to it) rather than something like speech recognition, but it's not something I've ever encountered. My friend claims this condition made dating very difficult, and also makes social interactions difficult. Even physics talks were hard to understand; equations on the board made much more sense than what the speaker said out loud. Note it's different from autism or Asperger's syndrome. My friend has plenty of insight into human psychology and a good sense of humor -- he just can't tell what other people are saying some of the time! (Actually he's a bit on the geeky side but not autistic ;-)

Do any readers have this problem, or know someone who does? It reminds me a bit of prosopagnosia, or face blindness. I suspect both speech and face recognition utilize special modules in the brain, which could be subject to mild dysfunction.

A reader writes:

Saw your blog, I have that problem too - it usually happens to me when 1) tired, like at the end of an observing night or 2) at a party or dinner with lots of conversation around me.

The experience for me is that I hear the words clearly, but they don't connect to a symbol in my brain - someone will say, "would you like a roll" and I literally cannot place an image of what the sound "roll" is - this may happen more often than I realize for I know I have developed protocols to deal with the environment (like say no to all requests or limit the field of view)

From the comments: the condition is known as Auditory Processing Disorder (APD).

Freeman Dyson

The Times magazine has a long profile of Freeman Dyson this week. The article focuses mainly on his heretical stance on global warming, but there are some good tidbits about his childhood and main scientific contributions. For the latter, I suggest the book QED and the men who made it by S. Schweber. Dyson started as a mathematician, and obtained interesting results in number theory while a student and during the war. In a reference letter provided for his application to graduate school in physics he was characterized as the best mathematician in England at the time, though only 23 years of age.

Below is a sample of work produced by Dyson between the ages of 5 and 9.



The following is from a 2005 Dyson email; we later had an extended correspondence about whether the gravitational field need be quantized and whether black holes were the most efficient graviton detectors.

...Thank you very much for sending me your four papers. I read three of them and will soon read the fourth. All interesting. But to me the most interesting is the discrete Hilbert Space paper, especially your reference [2] proving that lengths cannot be measured with error smaller than the Planck length. I was unaware of this reference but I had reached the same conclusion independently.

From the Times profile:

NYTimes: ...During World War II, Dyson worked for the Royal Air Force at Bomber Command, calculating the most effective ways to deploy pilots, some of whom he knew would die. Dyson says he was “sickened” and “depressed” that many more planes were going down than needed to because military leadership relied on misguided institutional mythologies rather than statistical studies. Even more upsetting, Dyson writes in “Weapons and Hope,” he became an expert on “how to murder most economically another hundred thousand people.” This work, Dyson told the writer Kenneth Brower, created an “emptiness of the soul.”

Then came two blinding flashes of light. Dyson’s reaction to Hiroshima and Nagasaki was complicated. Like many physicists, Dyson has always loved explosions, and, of course, uncovering the secrets of nature is the first motivation of science. When he was interviewed for the 1980 documentary “The Day After Trinity,” Dyson addressed the seduction: “I felt it myself, the glitter of nuclear weapons. It is irresistible if you come to them as a scientist. To feel it’s there in your hands. To release the energy that fuels the stars. To let it do your bidding. And to perform these miracles, to lift a million tons of rock into the sky, it is something that gives people an illusion of illimitable power, and it is in some ways responsible for all our troubles, I would say, this what you might call ‘technical arrogance’ that overcomes people when they see what they can do with their minds.”

Eventually, Dyson would be sure nuclear weapons were the worst evil. But in 1945, drawn to these irreducible components of life, Dyson left mathematics and took up physics. Still, he did not want to be another dusty Englishman toiling alone in a dim Cambridge laboratory. Since childhood, some part of him had always known that the “Americans held the future in their hands and that the smart thing for me to do would be to join them.” That the United States was now the country of Einstein and Oppenheimer was reason enough to go, but Dyson’s sister Alice says that “he escaped to America so he could make his own life,” removed from the shadow of his now famous musical father. “I know how he felt,” says Oliver Sacks, who came to New York not long after medical school. “I was the fifth Dr. Sacks in my family. I felt it was time to get out and find a place of my own.”

In 1947, Dyson enrolled as a doctoral candidate at Cornell, studying with Hans Bethe, who had the reputation of being the greatest problem-solver in physics. Alice Dyson says that once in Ithaca, her brother “became so much more human,” and Dyson does not disagree. “I really felt it was quite amazing how accepted I was,” he says. “In 1963, I’d only been a U.S. citizen for about five years, and I was testifying to the Senate, representing the Federation of American Scientists in favor of the nuclear-test-ban treaty.”

After sizing him up over a few meals, Bethe gave Dyson a problem and told him to come back in six months. “You just sit down and do it,” Dyson told me. “It’s probably the hardest work you’ll do in your life. Without having done that, you’ve never understood what science is all about.” This smaller problem was part of a much larger one inherited from Einstein, among others, involving the need for a theory to describe the behavior of atoms and electrons emitting and absorbing light. Put another way, it was the question of how to move physics forward, creating agreement among the disparate laws of atomic structure, radiation, solid-state physics, plasma physics, maser and laser technology, optical and microwave spectroscopy, electronics and chemistry. Many were working on achieving this broad rapport, including Julian Schwinger at Harvard University; a Japanese physicist named Shinichiro Tomonaga, whose calculations arrived in America from war-depleted Kyoto on cheap brown paper; and Feynman, also at Cornell, a man so brilliant he did complex calculations in his head. Initially, Bethe asked Dyson to make some difficult measurements [calculations?] involving electrons. But soon enough Dyson went further.

The breakthrough came on summer trips Dyson made in 1948, traveling around America by Greyhound bus and also, for four days, in a car with Feynman. Feynman was driving to Albuquerque, and Dyson joined him just for the pleasure of riding alongside “a unique person who had such an amazing combination of gifts.” The irrepressible Feynman and the “quiet and dignified English fellow,” as Feynman described Dyson, picked up gypsy hitchhikers; took shelter from an Oklahoma flood in the only available hotel they could find, a brothel, where Feynman pretended to sleep and heard Dyson relieve himself in their room sink rather than risk the common bathroom in the hall; spoke of Feynman’s realization that he had enjoyed military work on the Manhattan Project too much and therefore could do it no more; and talked about Feynman’s ideas in a way that made Dyson forever understand what the nature of true genius is. Dyson wanted to unify one big theory; Feynman was out to unify all of physics. Inspired by this and by a mesmerizing sermon on nonviolence that Dyson happened to hear a traveling divinity student deliver in Berkeley, Dyson sat aboard his final Greyhound of the summer, heading East. He had no pencil or paper. He was thinking very hard. On a bumpy stretch of highway, long after dark, somewhere out in the middle of Nebraska, Dyson says, “Suddenly the physics problem became clear.” What Feynman, Schwinger and Tomonaga were doing was stylistically different, but it was all “fundamentally the same.”

Dyson is always effacing when discussing his work — he has variously called himself a tinkerer, a clean-up man and a bridge builder who merely supplied the cantilevers linking other men’s ideas. Bethe thought more highly of him. “He is the best I have ever had or observed,” Bethe wrote in a letter to Oppenheimer, who invited Dyson to the institute for an initial fellowship. There, with Einstein indifferent to him and the chain-smoking Oppenheimer openly doubting Dyson’s physics, Dyson wrote his renowned paper “The Radiation Theories of Tomonaga, Schwinger and Feynman.” Oppenheimer sent Dyson a note: “Nolo contendere — R.O.” If you could do that in a year, who needed a Ph.D.? The institute was perfect for him. He could work all morning and, as he wrote to his parents, in the afternoons go for walks in the woods to see “strange new birds, insects and plants.” It was, Dyson says, the happiest sustained moment in his life. It was also the last great discovery he would make in physics.

How China sees the world

I thought this was quite funny -- it's from the cover of the March 31 Economist (note the Foreclosure Sale sign; the version at the following link might be easier to read). From the article:

...Already a big idea has spread far beyond China: that geopolitics is now a bipolar affair, with America and China the only two that matter. Thus in London next month the real business will not be the G20 meeting but the “G2” summit between Presidents Barack Obama and Hu Jintao. This not only worries the Europeans, who, having got rid of George Bush’s unipolar politics, have no wish to see it replaced by a Pacific duopoly, and the Japanese, who have long been paranoid about their rivals in Asia. It also seems to be having an effect in Washington, where Congress’s fascination with America’s nearest rival risks acquiring a protectionist edge.

Vanderbilt

Sorry for the lack of posts! I've been at Vanderbilt since leaving Fermilab. I was pretty busy giving two talks and meeting with a lot of physics faculty during my visit. As always I am amazed at the variety of things people are working on in a single department. Vanderbilt has a beautiful campus :-)

I've collaborated with two Vanderbilt theorists: Tom Kephart and Bob Scherrer, but this was my first visit to the university.




I had a brief window of time to meet with psychology professors Camilla Benbow and David Lubinski, who co-direct The Study of Mathematically Precocious Youth (SMPY). The data set they've been accumulating is unique and valuable.

SMPY:

The Study of Mathematically Precocious Youth (SMPY) was founded by Julian C. Stanley, on 1 September 1971, at Johns Hopkins University. Camilla P. Benbow and David Lubinski co-direct SMPY at Peabody College of Vanderbilt University. They are planning to complete a 50-year longitudinal study of five cohorts, consisting of over 5,000 intellectually talented individuals, identified over a 25-year period (1972-1997). The aim of this research is to develop a better understanding of the unique needs of intellectually precocious youth and the determinants of the contrasting developmental trajectories they display over the lifespan. The Study of Mathematically Precocious Youth is a bit of a misnomer, however, because verbally precocious youth have been included for longitudinal tracking, and participants are now all adults. Nevertheless, "SMPY" has been chosen to be retained to maintain consistency.

Four of SMPY's five cohorts were identified by talent searches by age 13. These cohorts vary in ability level ranging from the top 3% to the top .01% in quantitative or verbal reasoning ability. A fifth cohort of 714 participants, identified as first- or second-year graduate students attending top U.S. math/science programs in 1992, complements the first four cohorts of talent search participants by, among other things, affording an opportunity to assess the generalizability of the talent search model for identifying scientific potential. A 10-year follow-up of these math/science graduate students is now available (Lubinski et al., 2006). For the first three SMPY cohorts (identified in 1972-1974, 1976-1978, & 1980-1983, respectively), their 20-year follow-ups are available (Benbow et al., 2000; Lubinski et al., 2006). SMPY either has or is planning to follow-up all four cohorts of talent search participants at ages 18, 23, 33, 50 and 65. Cohort 5, the math-science graduate students, will be followed-up at ages 35 (complete) as well as 50 and 65. So far, seven books and over 300 articles have been based on SMPY; many recent articles are on PDF files on Benbow and Lubinski's individual web sites. For further and more detailed information on SMPY's history, the selection criteria for each cohort, and major longitudinal findings, a recent monograph has just appeared (Lubinski & Benbow, 2006).

Fermilab fun

Robert Rathbun Wilson (March 4, 1914 – January 16, 2000). American physicist who was a group leader of the Manhattan Project, a sculptor, and an architect of Fermi National Laboratory (Fermilab), where he was also the director from 1967–1978.

Wilson was born in Frontier, Wyoming, in 1914. In 1932 he arrived at Ernest O. Lawrence's Radiation Laboratory at the University of California, Berkeley, which was at that time blossoming into the top American site for both experimental and theoretical physics due to the efforts of Lawrence and J. Robert Oppenheimer.

...In 1967 he took a leave of absence from Cornell to assume directorship of the not-yet-created National Accelerator Laboratory which was to create the largest particle accelerator of its day at Batavia, Illinois. In 1969, Wilson was called to justify the multimillion-dollar machine to the Congressional Joint Committee on Atomic Energy. Bucking the trend of the day, Wilson emphasized it had nothing at all to do with national security, rather:

It has only to do with the respect with which we regard one another, the dignity of men, our love of culture. It has to do with: Are we good painters, good sculptors, great poets? I mean all the things we really venerate in our country and are patriotic about. It has nothing to do directly with defending our country except to make it worth defending.

Thanks to Wilson's leadership—in a full-steam ahead style very much adopted from Lawrence, despite his firings—the facility was completed on time and under budget. Originally named the National Accelerator Laboratory, it was renamed the Fermi National Accelerator Laboratory (Fermilab for short) in 1974, after famed Italian physicist Enrico Fermi; the facility centered around a four-mile circumference, 400 GeV accelerator. Unlike most government facilities, Fermilab was designed to be aesthetically pleasing. Wilson wanted Fermilab to be an appealing place to work, believing that external harmony would encourage internal harmony as well, and labored personally to keep it from looking like a stereotypical "government lab", playing a key role in its design and architecture. It had a restored prairie which served as a home to a herd of American Bisons, ponds, and a main building purposely reminiscent of a cathedral in Beauvais, France. Fermilab's Central Laboratory building was later named Robert Rathbun Wilson Hall in his honor.

The New New Meme

The other day on Jay Leno, Obama said (video here ; @13 minutes in):

We need young people, instead of a smart kid coming out of school wanting to be an investment banker, we need them to decide they want to be an engineer, a scientist, a doctor or a teacher. If we are rewarding those kinds of things that actually contribute to making things and making peoples' lives better, that's going to put our economy on solid footing. We won't have this bubble and bust economy we've been caught up in in recent years.

I hope this meme takes off! I've made this kind of argument in the past, for example here in a 2006 post on financier pay, where I wrote

I'm anticipating reactions like "Well, of course they deserve it, their decisions have disproportionate impact on the economy, allocating massive resources. The market is efficient, after all!" All well and good if you can show that the 173,340 people (2006 BLS) working in investment banking really do produce better decisions than the people who would occupy those jobs in return for lower compensation. If not, there are some rents or inefficiencies hidden here :-)

Today in 2009 it should be abundantly clear that the market doesn't always know best :-(

Earlier related posts:

The best and brightest

Is the finance boom over?

A reallocation of human capital

A new class war



Some related comments from Brad DeLong below. I don't agree in detail with everything he writes, but you can see the same sentiment at work.

The engineers of Silicon Valley startups are significantly smarter and work a lot harder than do the traders of Wall Street. Some of the engineers of Silicon Valley make fortunes: they are compensated with relatively low salaries and large restricted equity stakes in the startup businesses they work for, and so if the businesses do well they do very well indeed--in the long run, in the five to ten years it takes to assess whether the business is in fact going to be a viable and profitable going concern. And the engineers of Silicon Valley have every incentive to use all their brains and all their hours to make their firm viable and successful: they get their cash only at the end of the process. They don't get big retention bonuses if they stick around until the end of a calendar year. They don't get big payouts if they report huge profits on a mark-to-market basis.

The traders of Wall Street, by contrast, get their money largely up front. If the mark-to-market position is good, they get paid--even though it is almost surely the case that nobody has tried to actually sell the entire position to somebody else. If the strategy produces short-run profits, they get paid--even though not nearly enough time has passed for anybody to be able to assess what the risks involved in the strategy truly are.

Spring break travel

Instead of hitting the beach next week during spring break I'll be visiting Fermilab and Vanderbilt University to give the following talks. No fair peeking if you are from one of those institutions!

Fermilab Theoretical Astrophysics Group: Curved space, monsters and black hole entropy

Vanderbilt University physics colloquium: Black holes, information and entropy

And a bonus talk on the financial crisis.


Los Geeks de la Playa

Below is an old spring break photo from back in the day -- Cozumel when it was a sleepy little island. In the picture are 3 Caltech grads, 3 MIT PhDs (two in theoretical astrophysics, one in plasma physics), 1 former quant (now back in academia), a managing director still on the Street and a developer of fMRI imaging software. No, none of us are gay -- that's just spring break giddiness you're looking at :-) The guy on the far left ate the worm. The geekiest guy of all didn't show up -- he went to the APS meeting or something at the last minute, I can't recall exactly. I think we were listening to La Isla Bonita the whole time! (Recent covers.)

AIG bailout: half trillion exposure for taxpayers

If I read this figure properly, US taxpayers could be on the hook for as much as $513 billion dollars of CDS insurance issued by its 377 person AIGFP (financial products) unit in London. Note also the compensation paid to the unit since 2001. Not bad! (Click for larger version; from NYTimes.)



Of course, half a trillion is a worst case scenario. So far, government bailout funds paid to AIG have been re-gifted as detailed below. Over $35 billion went to foreign banks. US taxpayers go the extra mile to save the financial system!

NYTimes: ...Financial companies that received multibillion-dollar payments owed by A.I.G. include Goldman Sachs ($12.9 billion), Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion), Citigroup ($2.3 billion) and Wachovia ($1.5 billion).

Big foreign banks also received large sums from the rescue, including Société Générale of France and Deutsche Bank of Germany, which each received nearly $12 billion; Barclays of Britain ($8.5 billion); and UBS of Switzerland ($5 billion).

AIGFP was headed by Joseph Cassano. See earlier post Clawbacks, fake alpha and tail risk for more details. So far I nominate Cassano as the king of fake alpha.

"It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.'' -- Joseph J. Cassano, a former A.I.G. executive, August 2007

The Best and Brightest

NYTimes writer Judith Warner objects to the characterization of Wall Street titans as the "best and brightest" :-) Of course, one interpretation is perfectly consistent with David Halberstam's original usage to describe JFK's team of whiz kids and their role in the tragic Vietnam war.

As usual the mainstream press gets it completely wrong and bemoans the reallocation of talent from law and medicine into finance, when in fact the real societal loss is from science, engineering, technology startups, etc.

Over the course of the past week or so, while I was interviewing child psychiatrists about the exciting new field of developmental neuroscience, the phrase “the best and the brightest” came up twice.

As in “I hope the brightest and the best kids will be doing this” — instead of going to work on Wall Street.

The first time I heard it, I didn’t say anything. I was laboring too intensely to keep up with phrases like “single nucleotide polymorphism.” But the second time, I was able to pause in note taking long enough to grouse, “I never had the impression that the best and brightest people went to Wall Street.”

“Maybe not in your day,” came the reply. “But in recent years they have.”

Let’s leave aside for a moment the concept that I could be old enough to have a “day” dating back to sometime in prehistory. And return to that phrase “the best and the brightest,” which got a great deal of airing last month when the Obama administration made the shocking decision to place limits on the compensation packages of executives whose banks received federal bailout funds.

A nice triple usage by Forbes.com columnist Susan Lee, in a piece on the proposed $500,000 compensation cap for top management, was typical: “This produced outraged shrieks from Wall Street that any pay cut would cause the best and brightest to head for the exits,” she wrote. “… But the big flaw here is that the best and brightest have nowhere to go … unless the best and the brightest want jobs as home-care attendants or third-grade teachers, there’s no place to jump.” ...

Two comments on the article (there are already over a hundred):

March 13, 2009
1:23 am

When I hear the term “best and brightest” associated with Wall Street, I don’t immediately think of the executives or the traders, but the mathematicians they employed. From what I’ve heard, over the past few years, there has been a significant drain of technical talent away from places like Silicon Valley and Boston, and to very well compensated careers creating new financial instruments.

I couldn’t care less where Gordon Gekko ends up, it’s the people who work for him that matter.

— Mike Douglas


31. March 13, 2009
1:29 am

Kudos for this piece. Having attended two colleges commonly thought as incubators of some of the “best and brightest” and graduating fairly recently (2005), I can attest that there was very little stigma attached to going to Wall Street. Even at Caltech, a powerhouse for future Nobel Prize winners in the sciences, more and more graduates were heading into finance — sometimes as “quants” and sometimes simply as traders and analysts. There was no sense of shame about wanting, purely and simply, to make piles of money.

It seems to me that something has gone awry in the system when even the “best and brightest” in the sciences and engineering — fields where job opportunities have not disappeared, where there purports to be high demand for innovation and intelligence — feel that there’s more reward on Wall Street than can be found in any labs. Finance hasn’t just siphoned away would-be doctors or lawyers; it’s siphoned off from would-be alternative-energy entrepreneurs, from innovators in many necessary fields.

Why? From the people I know who went into finance instead of science, most were drawn to the culture — the culture of supposedly being “the best and the brightest.” There’s tremendous ego involved in being smart enough to succeed at a place like Caltech (I wasn’t; I transferred), as well as tremendous ego destruction in realizing that the sciences are populated by some phenomenally brilliant people who are, on an IQ scale, truly and unquestionably “the best and the brightest.” Most of us can never compete with that, even those who spent their childhoods and teenage years being the smartest people in the room.

But send those scientists and engineers onto Wall Street and suddenly those egos are getting stroked! Suddenly they’re not nerds — they’ve got money to throw around, they feel more glamorous than their engineer friends, they get told that they’re the “best and the brightest” (even though they should know better), and, most importantly of all, they get to feel like the smartest person in the room again. It may sound like armchair psychology, but I’ve talked to a lot of people who have this attitude.

What’s the solution? Maybe we can make the sciences sexy again, as glamorous as they were during the space race — Obama seems to be on track, constantly referencing the centrality of science to his policy. There’d be a lot fewer MIT and Caltech alums on Wall Street if it were seen as a meeting ground of second-rate intellects.

— maria

Black holes and decoherence

New paper! http://arxiv.org/abs/0903.2258

The black hole information problem (Wikipedia entry) is considered one of the deepest puzzles in theoretical physics. It is a "respectable" area of research with connections to string theory, quantum gravity and quantum information theory. In contrast, quantum foundations -- for example, the measurement problem (see, e.g., the Wikipedia or Stanford encyclopedia of philosophy entry) -- is considered a fringe activity by many working physicists. I've never understood this view; perhaps the only justification for it is that quantum foundations are somehow not testable experimentally and therefore more properly in the domain of philosophy. In our paper we argue that experiments relevant to black hole information are actually harder than those which address foundational questions in quantum mechanics. In fact, both types of experiments hinge on the ability to detect or manipulate macroscopic superpositions -- i.e., Schrodinger's Cat states. If the measurement problem and wavefunction collapse belong in the realm of philosophy, then so does the black hole information problem.

As John Bell said, "I am a Quantum Engineer, but on Sundays I have principles"! Bell famously hid his interest in quantum foundations for many years, afraid of the opprobrium of his colleagues at CERN and elsewhere. The first question he would ask of others who approached him about research on such topics was "Do you have a permanent job?" Bell's Theorem has been called "the most profound discovery of science."


For people interested in this subject, some recommended reading.

Against 'Measurement' by J.S. Bell. This paper originated from a lecture he gave in Erice at the summer school (Ettore Majorana) in 1989. I was a student there just the following year, so I narrowly missed meeting him in person, something I will always regret! Bell's discussion of measurement following that of K. Gottfried (pp. 35-38; when does the pure state become a mixture?) is closest to the formulation in our paper.

A nice biographical article on Bell.

A book of essays in honor of Bell: Quantum [Un]speakables, edited by R. Bertlmann and A. Zeilinger, which contains fascinating material about his intellectual development, the Bell inequalities, their theoretical origins and experimental tests.

arXiv:0903.2258

Black holes, information and decoherence

Stephen D. H. Hsu, David Reeb

We investigate the experimental capabilities required to test whether black holes destroy information. We show that an experiment capable of illuminating the information puzzle must necessarily be able to detect or manipulate macroscopic superpositions (i.e., Everett branches). Hence, it could also address the fundamental question of decoherence versus wavefunction collapse.

Money geeks

The Times has a long piece on quants by Dennis Overbye. The usual suspects are interviewed, but Overbye doesn't really engage with the details of the financial crisis. No mention of CDOs, CDS or securitization; no mention of where quant careers are headed in the wake of the disaster. I agree with Andy Lo's sentiments at the end of the article, but it remains to be seen what portion of blame consensus will apportion to the geeks, and what degree of "math-risk-premia" will be assigned to complicated trading activities in the future.

They Tried to Outsmart Wall Street

...They are known as “quants” because they do quantitative finance. Seduced by a vision of mathematical elegance underlying some of the messiest of human activities, they apply skills they once hoped to use to untangle string theory or the nervous system to making money.

This flood seems to be continuing, unabated by the ongoing economic collapse in this country and abroad. Last fall students filled a giant classroom at M.I.T. to overflowing for an evening workshop called “So You Want to Be a Quant.” Some quants analyze the stock market. Others churn out the computer models that analyze otherwise unmeasurable risks and profits of arcane deals, or run their own hedge funds and sift through vast universes of data for the slight disparities that can give them an edge.

Still others have opened an academic front, using complexity theory or artificial intelligence to better understand the behavior of humans in markets. In December the physics Web site arXiv.org, where physicists post their papers, added a section for papers on finance. Submissions on subjects like “the superstatistics of labor productivity” and “stochastic volatility models” have been streaming in.

Quants occupy a revealing niche in modern capitalism. They make a lot of money but not as much as the traders who tease them and treat them like geeks. Until recently they rarely made partner at places like Goldman Sachs. In some quarters they get blamed for the current breakdown — “All I can say is, beware of geeks bearing formulas,” Warren Buffett said on “The Charlie Rose Show” last fall. Even the quants tend to agree that what they do is not quite science.

As Dr. Derman put it in his book “My Life as a Quant: Reflections on Physics and Finance,” “In physics there may one day be a Theory of Everything; in finance and the social sciences, you’re lucky if there is a useable theory of anything.”

...Physicists began to follow the jobs from academia to Wall Street in the late 1970s, when the post-Sputnik boom in science spending had tapered off and the college teaching ranks had been filled with graduates from the 1960s. The result, as Dr. Derman said, was a pipeline with no jobs at the end. Things got even worse after the cold war ended and Congress canceled the Superconducting Supercollider, which would have been the world’s biggest particle accelerator, in 1993.

...Dr. Derman said, “Nobody ever took these models as playing chess with God.”

Do some people take the models too seriously? “Not the smart people,” he said.

Quants say that they should not be blamed for the actions of traders. They say they have been in the forefront of pointing out the models’ shortcomings.

“I regard quants to be the good guys,” said Eric R. Weinstein, a mathematical physicist who helps run the Natron Group, a hedge fund in Manhattan. “We did try to warn people,” he said. “This is a crisis caused by business decisions. This isn’t the result of pointy-headed guys from fancy schools who didn’t understand volatility or correlation.”

...The recent debacle has only increased the hunger for scientists on Wall Street, according to Andrew Lo, an M.I.T. professor of financial engineering who organized the workshop there, with a panel of veteran quants.

The problem is not that there are too many physicists on Wall Street, he said, but that there are not enough. A graduate, he told the young recruits, can make $75,000 to $250,000 a year as a quant but can also be fired if things go sour. He said an investment banker had told him that Wall Street was not looking for Ph.D.’s, but what he called “P.S.D.s — poor, smart and a deep desire to get rich.”

He ended his presentation with a joke that has been told around M.I.T. for a long time, but seemed newly relevant; “What do you call a nerd in 10 years? Boss.”

Les Bienveillantes ; The Kindly Ones

I haven't read it yet, but I probably will. I was underwhelmed by Grossman's Life and Fate but perhaps this is better. Already I am fascinated by the controversy surrounding the book and by the statements of the author, Jonathan Littell, a 40 something American who writes in French.

Littell spent 5 years actively researching and writing the book, but 20 years thinking about the subject after seeing a photograph of Russian partisan Zoya Kosmodemyanskaya while still at Yale. Even Shoah director Claude Lanzmann acknowledges his mastery of the historical detail (though Lanzmann despised the book). Littell worked for NGOs for almost a decade, and reportedly dealt with real killers in places like Rwanda, Bosnia and Chechnya. He also understands the connection with America's experience in Vietnam. If nothing else he is a serious thinker.

From an interview / profile in Haaretz (read the comments as well!):

"Les Bienveillantes," Littell's first serious book (in 1989 he published what he calls an "amateurish" science fiction novel), sparked an immediate furor. Published in France in the summer of 2006, it became nothing short of a social phenomenon. Some critics hailed it as the "first masterpiece of the 21st century," others decried it as "the great hoax of the 21st century."

...The French press did not hesitate to speculate that Littell was not the real author and that the narrator-protagonist was a real person. Littell was compared with Proust, Stendhal and Flaubert, and also with the Marquis de Sade and Jean Genet - writers drawn to the portrayal of evil. The fact that the book was on the shortlist for the six most important literary prizes in France and became only the second book to win the Prix Goncourt and the French Academy prize simultaneously only intensified the hoopla.

While Michiko Kakutani of the Times savaged the book (there is no shortage of such reviews), Michael Korda extolls it here (again, good comments).

Below are some excerpts from another good interview of Littell.

... I am particularly fond of Margaret Atwood’s comment: “Wanting to meet an author because you like his work is like wanting to meet a duck because you like pate.”

... You can be sure you’re writing “literature” but actually fall short, or be tormented by doubts although literature has long been present. A book by a crazy person can prove to be literature when that of a great writer is not, for ambiguous and hard to explain reasons. One is always full of doubt. One doesn’t know. I think Tolstoy and Vasily Grossman were also full of doubt. Definitely Grossman, anyway. His stated ambition was to write as well as Tolstoy, but I’m sure he said to himself as he finished his book that he wasn’t worth Tolstoy’s little finger.

...A book is an experience. A writer asks questions as he tries to make his way through the darkness. Not towards the light, but further into the darkness, to arrive at a darkness even darker than his starting place. It is most certainly not the creation of a preconceived object. Which is why I have to write in one go. Writing is a throw of the dice. You never know what’s going to happen when you write. You try to set everything up as well as possible, and then you start. Once you’re at the writing stage, you think in words, not with your brain. It comes from a different place. The writing progresses, until you arrive at a place you never anticipated. That is why I am quite willing to accept the criticism that I made mistakes with this novel, that I did false or unacceptable things. Because I didn’t know what I was doing. I thought I did, beforehand, but the final result is something else entirely.

...When I started, I expected to find in the perpetrators’ testimonies things I could use. Between these and all the killers I had met in my professional life—in Bosnia when I worked on the Serbian side, in Chechnya with the Russian army, in Afghanistan with the Taliban, in Africa with the Rwandans and Congolese—I thought I would have something. But the more I read the perpetrators’ texts, the more I realized they were empty. I would never get anywhere by sticking with classic fictional recreation, with the omniscient author, mediating as Tolstoy does between good and evil. The only option was to put myself in the perpetrators’ shoes. And I knew that place. I had hung out with killers. I started with what I knew, which is to say myself, with my own ways of thinking and seeing the world, and decided to put myself in the shoes of a Nazi.

...Max Aue is a roving X-ray, a scanner. He is not, indeed, a plausible character. I was aiming not for plausibility but for truth. You cannot create a novel if you insist solely on plausibility. Novelistic truth is a different thing from historic or sociological truth. The issue of the perpetrator is the main issue the historians of the Shoah have been exploring for the last 15 years. The only remaining question is the motivation of the killers. Having read the works of the great researchers, it seems to me that they have hit a brick wall. This is very clear with Christopher Browning. He has created a list of potential motivations and has no way of arbitrating between them. Some prioritize anti-Semitism, others ideology. But in the end, they don’t know. The reason is simple. The historian works from documents, and so from the words of the perpetrators, which are themselves an aporia. And where can one go from there?

...When Claude Lanzmann comments that my perpetrator is implausible, and also unsavory, he is right. Except that there would never have been a novel if I had chosen an “Eichmann” as narrator. Lanzmann’s fear is that people’s only access to the Shoah will be through my book. The opposite is true. Sales of books by Raul Hilberg and Claude Lanzmann have increased since the publication of The Kindly Ones. Lanzmann and I start from the same question to arrive at different, irreconcilable conclusions. Both are true. Our discussion is not yet over.

Update: I've now read large sections of the book; it is brilliant in places and utterly absorbing -- I had to force myself to put it away each time.

Here is another good review with comments on Littell's historical and theoretical mastery of his subject. Also here.

MIT Technology Review

My blog is now syndicated (is that the right word? aggregated?) by MIT Technology Review. For this I am paid a modest fee, which I promise won't compromise the integrity of my writing. Apologies to Caltech alumni all over the world, but money talks ;-)

Last time I was on the MIT campus I had a nice tour of the Stata Center, home of their Computer Science and Artificial Intelligence Laboratory (CSAIL). Call me Sisyphus.

Expert predictions: Jon Stewart edition

Jon Stewart notices that financial experts know nothing (very funny):

The Daily Show With Jon StewartM - Th 11p / 10c

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Political Humor
Joke of the Day

Thanks to a reader (Dartmouth professor) for the link ;-)

The Times notices the same thing (more politely) about academic economists. Not only can they not predict in advance, but they have trouble adjusting after their priors are harshly contradicted by reality. Must be tough to be in a field that selects for overconfidence in dealing with complex systems and messy data.

Ivory Tower Unswayed by Crashing Economy

...That was before last fall’s crash took the economics establishment by surprise. Since then the former Federal Reserve chairman Alan Greenspan has admitted that he was shocked to discover a flaw in the free market model and has even begun talking about temporarily nationalizing some banks.

...Yet prominent economics professors say their academic discipline isn’t shifting nearly as much as some people might think. Free market theory, mathematical models and hostility to government regulation still reign in most economics departments at colleges and universities around the country. True, some new approaches have been explored in recent years, particularly by behavioral economists who argue that human psychology is a crucial element in economic decision making. But the belief that people make rational economic decisions and the market automatically adjusts to respond to them still prevails.

The financial crash happened very quickly while “things in academia change very, very slowly,” said David Card, a leading labor economist at the University of California, Berkeley. During the 1960s, he recalled, nearly all economists believed in what was known as the Phillips curve, which posited that unemployment and inflation were like the two ends of a seesaw: as one went up, the other went down. Then in the 1970s stagflation — high unemployment and high inflation — hit. But it took 10 years before academia let go of the Phillips curve. ...

More (and better) from UC Davis economist Greg Clark in the Atlantic.

Here's something I wrote in 2005 about "expertise" in certain, ahem, soft subjects. See also here, or under the label expert prediction.

Best podcasts ever

As I mention in my talk on the financial crisis, the best journalism I've seen on the topic has come from the public radio show This American Life. Their latest is a crystal clear report on the current status of the banking crisis, focusing on bank balance sheets and the question of nationalization. At the end there is a shorter segment illustrating how hard it will be at ground level to deal with individual foreclosures and bad mortgages. This has my highest recommendation: Bad Bank.

Their earlier show on the mechanics of the out of control mortgage industry is: The Giant Pool of Money. (My comments here.)

Below is a graph mentioned in the Bad Bank podcast, displaying total US household debt relative to GDP over time.



Thanks to multiple readers who alerted me to the new podcast!

Manhattan blues

I just returned from NYC. The mood there is pretty bleak :-(

It looks like people are deserting the city in droves. Entire areas of finance and banking are gone and won't return for many years. I heard some very detailed estimates of the carrying cost of supporting a family in Manhattan (see Times analysis here):

$500k per year (pre tax) for minimal high end lifestyle (2 kids in private school, nanny, 2000 square feet of living space; not counting big vacations or Hamptons rental)

$150-200k per year (pre tax) for minimal non-Manhattan life: kids in public schools, long commute to and from the city.

The problem is that $500k is the compensation cap figure, and $150-200k is the base salary number, which is all most people are getting these days. The phrase I heard several times is "I'm effectively paying to work here -- no f#%king way!"

The cost of living in Manhattan is going to drop precipitously in a nasty 1-2 year equilibration.

I also heard serious apocalyptic predictions about US hyper-inflation starting in a year or two.

This is what the money men have to look forward to -- the post 1920s finance bust will probably repeat:



See earlier post Is the finance boom over?

Dark radiation and dark energy

New paper!

http://arXiv.org/abs/0902.4699

Dark radiation as a signature of dark energy

Sourish Dutta, Stephen D. H. Hsu, David Reeb, Robert J. Scherrer

We propose a simple dark energy model with the following properties: the model predicts a late-time dark radiation component that is not ruled out by current observational data, but which produces a distinctive time-dependent equation of state $w(z)$ for $z < 3$. The dark energy field can be coupled strongly enough to Standard Model particles to be detected in colliders, and the model requires only modest additional particle content and little or no fine-tuning other than a new energy scale of order milli-electron volts.