Dick Cavett on Bobby Fischer

Dick Cavett, blogging in the Times, treats us to some recollections of and reflections on Bobby Fischer. Although I've read several biographies of Fischer, I doubt I've seen much live footage of him. The clip below is wonderful and a bit surprising -- it captures a moment, one we'll never see again.

Cavett's focus on Fischer's physical appearance (his height, eyes, even shoulders) is interesting, perhaps odd, but understandable given that celebrity itself is his (Cavett's) main expertise. Sylvia Nasar devoted an equivalent amount of attention to John Nash's appearance in A Beautiful Mind.

The comments on the original post are well worth reading -- many are from the generation that experienced Fischer's meteoric ascent firsthand. See here for a followup.

NYTimes: It must seem strange to people too young to remember that there was once a chess champion — of all things — who became arguably the most famous celebrity on earth. And that his long-anticipated match against the reigning Russian champion, Boris Spassky, was broadcast and watched worldwide as if it were the Super Bowl, except that chess drew a much bigger audience.

There was another element that added to the drama. With Fischer the American and Spassky the Russkie, the monumental match was seen as a Cold War battle.

The Russian chess champions considered themselves the undoubted best. Time out of mind the Soviet chess dynasty had reigned supreme, viewing themselves as a rightful symbol of Soviet superiority in all fields.

PBS broadcast the drama in sports fashion, complete with play-by-play commentary by Shelby Lyman, who himself became a household name. People stayed home from work, glued to their sets, and PBS got its highest ratings ever. The country and the world became chess-crazy. And Fischer-crazy. Chess sets, dusty on the shelves, suddenly sold in the millions.

We ordinary mortals can only try to imagine what it might feel like to be both young and so greatly gifted at a complex art. And to be better at it than any other living being, past or present. There are plenty of geniuses and lots of famous people, but few are both. Is anyone really capable of surviving such a double burden?

We assume that geniuses are blessed creatures who don’t have to work hard to achieve their goals. Hard for us, easy for them. But Bobby as a kid — IQ pushing 200 — put in 10 to 15 hours a day of brain power and heavy concentration that would kill an ordinary person. (Or at least me.)

The chess world was already well aware of this kid prodigy. But they were unprepared for him to suddenly go up against the acknowledged top player of the day in the United States Chess Championship. And win — at the age of thirteen. When asked what happened, he said, “I got better.”

What does such dedication to seemingly unreachable goals — until he reached them — do to the rest of you, the over-achiever? Touchingly, when he returned to my show after having disposed of Spassky, triumphant in the eyes of the world, he opined that he might be wise to try developing some of the rest of himself. He had begun to see that a life of nothing but chess was “kind of limited.” (He went to dinner in Reykjavik with friends. “Bobby couldn’t follow the conversation,” one said. “He sort of backed into the corner, got out his little pocket chess set and played with himself.”) He announced on my show that he was now “reading a lot of magazines, trying to keep up with what’s going on in the world.” He was still in his twenties.

Until the advent of Bobby Fischer, my image of a young chess genius was not flattering. I pictured a sort of wizened and unpopular youth, small of frame, reclusive, short, with messy hair, untended acne, thick glasses and shirt sticking out in back. And also perhaps, as the great V. Nabokov wrote in describing somewhat genderless piano prodigies with eye trouble, obscure ailments, “and something vaguely misshapen about their eunuchoid hindquarters.”

**********

Getting Fischer on my show that first time, before the big match, was considered a major catch at the time. If anyone in the audience shared my image of what a chess genius probably looked like, Bobby’s entrance erased it.

Here was no Nabokovian homunculus. There appeared, somewhat disconcerted, a tall and handsome lad with football-player shoulders, impeccably suited, a little awkward of carriage and unsure how to negotiate the unfamiliarity of the set, the bright lights, the wearing of make-up, the band music, the hand-shaking and the thundering ovation — all at the same time. I had hoped to avoid the cliché “gangling,” but Bobby gangled. He sort of lurched into his chair.

Once seated, he was something to behold. Six foot two (tall in those days), athletic in build, perfect in grooming, and with striking features. The face radiated intelligence. You couldn’t confuse him with anyone you’d ever seen.

And there were the eyes.

Cameras fail to convey the effect of his eyes when they were looking at you. A bit of Svengali perhaps, but vulnerable. And only the slightest hint of a sort of theatrical menace, the menace that so disconcerted his opponents.

Looking out over the audience, I could clearly see entranced women gazing at him as if willing to offer their hearts — and perhaps more — to the hunky chess master.

When I asked him about such matters, he said that the awful demands of his life — the global travel; the constant study, sometimes until dawn, followed by play; the punishing five-hour sessions at full concentration, day after day — all this made it “pretty hard to . . . [hesitates] . . . build up a relationship.” He seemed quite surprised with himself, as did friends watching, that he had allowed so revealing a moment. (That old Cavett magic, no doubt.)

One thing he said in that first appearance became famous. At one point I asked him what, in terms of thrills, the chess equivalent might be of, say, hitting a home run. His answer: “I like the moment when I break a man’s ego.” There was a trace of a chill in his laughter.

... I’ve sat for a while trying to figure out how to close. A faint glimmer of a bit of poetry had been swimming elusively in my head, just out of reach. And then it emerged.

It’s from E.E.Cummings’ famous poem about another lionized and legendary figure who, after triumph and glamour, also did not have “a good death”: Buffalo Bill.

With Cummings’ quirky punctuation, it’s a short poem, with no title but referred to by its first three words: “Buffalo Bill’s / defunct.”

Its closing lines somehow seem appropriate here. They are:

Jesus
he was a handsome man
and what I want to know is
how do you like your blue-eyed boy
Mister Death

From the comments:

... The finest thing about Bobby ...is that he made being smart, that is intellectualism, a cool thing. He was brilliant, knew it, was outwardly proud of it and not only could perform great feats with it but he said that he would and then did and did so far beyond the wildest dreams of anyone. So thank you Bobby and thank you Dick.

The truly great thing about Bobby Fischer was an audacious courage that for lack of a better comparison I mention Muhamid Ali and even though Bobby’s courage was on its own level there were similarities in the “not afraid of nothin” certainty with which they went about their business. Fischer’s march through the qualifying rounds of the world championship are simply unfathomable. Bobby the destroyer of ego was in full bloom and the completeness and ruthlessness was scary to watch even though I could not look away.

Even to people who play high level chess, the things he lay before the world were unbelieveable to see. It was watching that runup to the world championship that confirmed my inklings that a man could become mad in chess and accept it fully as more than reality and that here was such a man who not only possessed a fine and strong intellect but also the courage to throw it against or into the madness, the howling inferno that chess on that level can become. I was witnessing my own personal dark fear displayed on the largest stage and at a scale bigger than life in a man with one of the finest minds and the profound courage to risk it entirely. The outcome of the championship was certain to everyone by quarter finals.

Thank you so much Bobby and to borrow a few words to help express my love from Don McClane:

“but I could have told you Bobby, this world was never meant for one as beautiful as you”

Conrad Elledge

Humans bad at violence?

The Chronicle of Higher Ed interviews sociologist Randall Collins on his new book Violence: A Micro-Sociological Theory (Princeton University Press). I haven't read the book yet, but I find many of his points quite plausible. I always found the S.L.A. Marshall statistics (see below) that only about 25% of soldiers fire their guns in combat quite interesting -- believable, particularly for conscripts, but presumably correctable with training.

Collins notes that most people are generally quite reluctant to initiate violence. It's also true that very few people are competent (in a technical sense) at inflicting injury on others.

Violence, Up Close and Personal: A sociologist challenges prevailing theories of when, and why, people lash out

Randall Collins, a sociologist at the University of Pennsylvania, thinks human beings are bad at violence. Is the man mad? Any newspaper would seem to falsify his claim, offering up a bestiary of child killers, cross-tribal ethnic cleansers, and suicide bombers, not to mention military attacks sanctioned by law but still brutally sanguinary.

Collins, author of the new book Violence: A Micro-Sociological Theory (Princeton University Press), is not so naïve as to deny that the globe is drenched in blood. But he argues that to confront another human being and do him harm is far more psychologically difficult than most social scientists appreciate. "There is," he writes, "a palpable barrier to getting into a violent confrontation." And the resulting anxiety makes people lash out incompetently. Most people back down from fistfights after a bit of trash talking. And in war, more soldiers cower than attack the enemy effectively.

To make his case that we have no talent for violence, Collins adduces evidence ranging from the low casualty rates in most Greek and Roman battles to photographs documenting how few people in "violent" crowds on the West Bank are actually wreaking havoc. (Modern photojournalism has opened doors for this subfield of sociology, he argues.) He also includes his own voyeuristic accounts of confrontations on the streets of Philadelphia and other American cities, which tend to confirm that most showdowns peter out at the bluster stage.

In a discursive, 550-page book, Collins manages to fold into his theory such topics as domestic violence, British sports hooliganism, and the history of duels (a method of cabining violence to a scale where humans can stomach it). Along the way, he rips into some prevailing sociological theories, including the idea that much violence among disadvantaged groups amounts to a form of political "resistance." That theory, he suggests, has a "twisted quality," lauding thugs who are the violent exception and who prey mostly on members of their own low socioeconomic groups.

He also has few kind words for the reigning evolutionary-psychological interpretation of violence, which sees it as a holdover from a long prehistory in which men competed ruthlessly for status and mates. Collins does not reject biology but cites a different Darwinian drive: the human desire to form social bonds. A visceral aversion to throwing a punch, even if the recipient richly deserves it, he writes, "is the evolutionary price we pay for civilization."

The seed of the book, Collins says, lay in his 1975 book, Conflict Sociology, which examined the competition among various economic, ethnic, and cultural groups. "After having written that, I realized it was about conflict, all right, but nobody ever did anything to each other," he says. "There was no real fighting in it."

He's remedied the omission — and then some. Now he is so immersed in real violence that it will spill over into a sequel, which will encompass topics given short shrift in Violence: A Micro-Sociological Theory, including rape and decisions by states to go to war.

[Interview follows] ...

A lot of people would say that nature is red in tooth and claw and all that — that modern violence is a carry-over from the evolutionary past. What's wrong with that picture?

If you look at the history of fighting, you find that primitive people are actually not very good at fighting. We do have some anthropological films of tribes in wars, and it looks almost like a dance routine. You'll get 100 or so men of the tribe shouting and chanting and waving their spears and bows and arrows, and out of that group a few — six or eight — will run up toward the front line. One or two will dash across the line, throw a spear, then turn around and run and come back in. This may go on for a while until someone gets a spear — usually in the back — when they run away. Then they decide to stop.

Early in the book you put a lot of weight on the finding of the military historian S.L.A. Marshall that only something like 15 percent to 25 percent of American infantrymen fired their weapons in combat. Have his figures held up? And is that figure still true in current conflicts?

There's been controversy about that. At the time of the Second World War and the Korean War, some officers, typically higher officers, said they didn't believe [that figure] — it was just an insult to the troops. Other officers said they thought it was approximately right. It's generally thought now that Marshall was sort of giving a ballpark figure. Surveys from the Vietnam War show generally much higher figures if you ask them whether they ever fired their guns. If you ask them if they are doing a lot of firing, it starts looking more like Marshall's figures: Twenty to 25 percent are really gung ho and do lot of firing, and most of the others fire some of the time, but they aren't very enthusiastic about it.

You talk about panic firing during military combat, and firing among troops. And in an analogy you draw, you also find a lot of panicked firing and incompetent shooting among gang members, and only a few people taking part.

We've got sort of a sieve that goes down by two levels. The first level is whether people are actually engaged in the violence, whether it's shooting guns or throwing punches. Then there's the second level of how competent they are at it: whether they actually hit what they intended, whether they hit anything. … That's true in the case of cops and robbers — both sides — as well as in the Army. U.S. forces have been trained to try to overcome this nonfiring problem [by doing] a huge amount of firing, and so it's not too surprising that in that situation bystanders get hit.

... How is it ugly in one-on-one situations?

In one-to-one situations, it's usually not ugly so much as it is boring. There's a really strong tendency for people to jaw at each other, and then eventually the fight winds down because it becomes so repetitive. It's not difficult to keep fights from escalating as long as it's one on one. All you have to do is be really boring. They will keep on trying to escalate the fight, but you just stay at the same level.

Bore your opponent into submission. I think I could handle that.

You can actually see in videotapes people say the same thing over and over and over again, 10, 20 times. That's actually quite distinctive of conflict talk.

What if people are violent and want to be violent, but they also don't want to be hurt, so they need to get themselves pumped up or otherwise push themselves forward into violence? Couldn't that be another explanation for what you've observed?

We can actually take a fair amount of pain if it's not in a conflictual type of situation. People in disasters tend to behave quite heroically; people in medical situations who are under a lot of pain tend to behave surprisingly well. Soldiers are put through painful body-stressing exercises. But the same people seem to have trouble with the notion of actually hitting somebody else in a combat situation or even in a fistfight. It looks as though people have more trouble inflicting violence on other people than taking it.

New Yorker on behavioral economics

Elizabeth Kolbert reviews two recent books on behavioral economics. She even notes the negative consequences of "irrationality" for democracy.

NewYorker: ...Over the years, Tversky and Kahneman’s initial discoveries have been confirmed and extended in dozens of experiments. In one example, Ariely and a colleague asked students at M.I.T.’s Sloan School of Management to write the last two digits of their Social Security number at the top of a piece of paper. They then told the students to record, on the same paper, whether they would be willing to pay that many dollars for a fancy bottle of wine, a not-so-fancy bottle of wine, a book, or a box of chocolates. Finally, the students were told to write down the maximum figure they would be willing to spend for each item. Once they had finished, Ariely asked them whether they thought that their Social Security numbers had had any influence on their bids. The students dismissed this idea, but when Ariely tabulated the results he found that they were kidding themselves. The students whose Social Security number ended with the lowest figures—00 to 19—were the lowest bidders. For all the items combined, they were willing to offer, on average, sixty-seven dollars. The students in the second-lowest group—20 to 39—were somewhat more free-spending, offering, on average, a hundred and two dollars. The pattern continued up to the highest group—80 to 99—whose members were willing to spend an average of a hundred and ninety-eight dollars, or three times as much as those in the lowest group, for the same items.

This effect is called “anchoring,” and, as Ariely points out, it punches a pretty big hole in microeconomics. When you walk into Starbucks, the prices on the board are supposed to have been determined by the supply of, say, Double Chocolaty Frappuccinos, on the one hand, and the demand for them, on the other. But what if the numbers on the board are influencing your sense of what a Double Chocolaty Frappuccino is worth? In that case, price is not being determined by the interplay of supply and demand; price is, in a sense, determining itself.

...A few weeks ago, the Bureau of Economic Analysis released its figures for 2007. They showed that Americans had collectively amassed ten trillion one hundred and eighty-four billion dollars in disposable income and spent very nearly all of it—ten trillion one hundred and thirty-two billion dollars. This rate of spending was somewhat lower than the rate in 2006, when Americans spent all but thirty-nine billion dollars of their total disposable income.

According to standard economic theory, the U.S. savings rate also represents rational choice: Americans, having reviewed their options, have collectively resolved to spend virtually all the money that they have. According to behavioral economists, the low savings rate has a more immediate explanation: it proves—yet again—that people have trouble acting in their own best interests. It’s worth noting that Americans, even as they continue to spend, say that they should be putting more money away; one study of participants in 401(k) plans found that more than two-thirds believed their savings rate to be “too low.”

...Like neoclassical economics, much democratic theory rests on the assumption that people are rational. Here, too, empirical evidence suggests otherwise. Voters, it has been demonstrated, are influenced by factors ranging from how names are placed on a ballot to the jut of a politician’s jaw. A 2004 study of New York City primary-election results put the advantage of being listed first on the ballot for a local office at more than three per cent—enough of a boost to turn many races. (For statewide office, the advantage was around two per cent.) A 2005 study, conducted by psychologists at Princeton, showed that it was possible to predict the results of congressional contests by using photographs. Researchers presented subjects with fleeting images of candidates’ faces. Those candidates who, in the subjects’ opinion, looked more “competent” won about seventy per cent of the time.

When it comes to public-policy decisions, people exhibit curious—but, once again, predictable—biases. They value a service (say, upgrading fire equipment) more when it is described in isolation than when it is presented as part of a larger good (say, improving disaster preparedness). They are keen on tax “bonuses” but dislike tax “penalties,” even though the two are functionally equivalent. They are more inclined to favor a public policy when it is labelled the status quo. In assessing a policy’s benefits, they tend to ignore whole orders of magnitude. In an experiment demonstrating this last effect, sometimes called “scope insensitivity,” subjects were told that migrating birds were drowning in ponds of oil. They were then asked how much they would pay to prevent the deaths by erecting nets. To save two thousand birds, the subjects were willing to pay, on average, eighty dollars. To save twenty thousand birds, they were willing to pay only seventy-eight dollars, and to save two hundred thousand birds they were willing to pay eighty-eight dollars.

What is to be done with information like this? We can try to become more aware of the patterns governing our blunders, as “Predictably Irrational” urges. Or we can try to prod people toward more rational choices, as “Nudge” suggests. But if we really are wired to make certain kinds of mistakes, as Thaler and Sunstein and Ariely all argue, we will, it seems safe to predict, keep finding new ways to make them. (Ariely confesses that he recently bought a thirty-thousand-dollar car after reading an ad offering FREE oil changes for the next three years.)

Les Grandes Ecoles

This Times article on the elite world of French business has some interesting facts about Ecole Polytechnique and Ecole Nationale d'Administration (ENA). In physics, we typically encounter graduates of Ecole Normale Superieure ("normaliens"), which boasts 9 Fields Medalists and at least 8 Nobel Laureates in physics. 15 years ago a normalien friend complained to me that the ENArques were getting the upper hand, but it appears from the article the polytechniciens are hanging tough! The greatest polytechnicien of all time might be Poincare, but then again there are also Cauchy and Ampere and Poisson and Navier...

An earlier post on Les Grandes Ecoles. I must say, these schools, with their strictly meritocratic admissions policies, sound a lot more like Caltech than like Harvard.

NYTimes: ...AT least half of France’s 40 largest companies are run by graduates of just two schools, the École Polytechnique, which trains the country’s top engineers, and ENA, the national school of administration. That’s especially remarkable given that the two schools together produce only about 600 graduates a year, compared with a graduating class of 1,700 at Harvard.

...Rather than a rigid class system, it was Mr. Fourtou’s and Mr. Bébéar’s admission into the École Polytechnique that assured their place in the elite. And that is one of the great ironies of the French establishment: while it enjoys the privileges associated with the elites of the United States, entry is, if anything, much more rigorously meritocratic, based on exams and ever-narrowing selection from an early age.

Indeed, getting into Harvard, which accepted 9 percent of its applicants last year, is a breeze compared with getting into the École Polytechnique.

Out of 130,000 students who focus on math and science in French high schools each year, roughly 15 percent do well enough on their exams to qualify for the two- to three-year preparation course required by the elite universities. Of those who make it through that, 5,000 apply to École Polytechnique, which is commonly called simply “X,” and just 400 are admitted from France.

Admission is based strictly on exam grades; there isn’t even an essay requirement or interview. And there are no legacy admissions, sports scholarships or other American-style shortcuts for getting into X.

“You can be the president’s nephew and it won’t help you get in,” says Bernard Oppetit, a 1978 graduate of X who later worked for BNP Paribas before starting Centaurus Capital, a London investment fund with $4 billion under management.

The École Polytechnique was founded in 1794, during the French Revolution, to train the country’s military engineers, and it officially remains under the umbrella of the French ministry of defense. Not only is the school free, but students also receive a stipend from the government to cover their expenses.

“We call it l’élitisme démocratique,” says Pierre Tapie, dean of Essec, a leading French business school. “These are places where you meet extraordinary people who are there because they worked hard and are among the most brilliant of a generation.”

Although the school teaches high-end fare like physics, engineering, and computer sciences, its broader goal is to create a leadership cadre that shares an ordered, prioritized view of the world, says Xavier Michel, the president of the École Polytechnique and an active-duty general in the French armed forces.

In France, this is known as the Cartesian system, after the mathematician and philosopher René Descartes, and Mr. Michel says the school encourages its students “to modelize” the world. And when they eventually become chief executives, he says, “they understand what are the capabilities of their companies. They understand what they can do and what they can’t do.”

Until, of course, models run off the rails — as they so often do in the business and financial worlds, regardless of what country devises them.

Housing bubble: dynamics of a bust

The first figure is from today's WSJ and incorporates data from Q4 2007. The second figure appeared in the Economist some time ago and was discussed previously on this blog. Does anyone care to predict the future for bubble states like California, Florida and Arizona using the Japanese data as a guide?

Lower interest rates will not re-inflate the housing bubble (although they may affect the rate at which it deflates; note the BOJ dropped real interest rates below zero in the wake of their bust). People understand now, as they did not just a few years ago, that home prices can go down. This change in ape psychology (try putting that in your macro model!) makes all the difference.

Below is historical data compiled by Yale economist Robert Shiller showing that home prices have not on average provided attractive real returns (right hand axis is inflation adjusted returns for same house sales over time; previously discussed here -- the real rate of return was 0.4% between 1890 and 2004). This is yet another example in which market participants (home buyers) made decisions based on faulty assumptions that might have been easily corrected by a modest amount of research. So much for efficient markets!



Here's some detailed data from Case-Shiller and OFHEO indices (also from WSJ; note OFHEO only tracks conforming mortgages so has less sensitivity to the high end of the market):



Finally, it is worth noting that the subprime mortgage meltdown is merely a symptom of the real estate bubble. If home prices continue to fall we will see (as we are already beginning to) higher default rates in so-called "prime" as well as subprime mortgages.

WSJ: ...I assumed, for the sake of calculations, that California prices fell 8% last quarter from the third quarter, a huge number by historic measures but not out of line with Zillow's data. For Florida and Arizona I assumed declines of 5% and 5.5%. You could use other, more modest estimates for the recent declines: They won't change the outcomes much. I also assumed personal incomes in these states rose in line with recent and historic averages."

The results? In all three markets, the prices are well off their peaks when compared to incomes. But they remain far above historic averages.

Median prices in California peaked in 2006 at 13.3 times per capita incomes. Hard to believe, but true. They may be down now to about 11.1 times.

But that's still way above the ground. Throughout most of the 80s and 90s they ranged between six and seven times incomes.

Just to get down to seven times incomes, prices would have to fall 37% tomorrow.

Those who bought at the peak of the cycle may be pinning their hopes instead on "incomes catching up" instead. But they had better be patient. Even if house prices stayed exactly where they are, it would take around 10 years for rising incomes to bring the ratios back into any sort of alignment.

The exponential curve for genome sequencing

Below is an update on progress towards less expensive gene sequencing. At the moment you can have your genome sequenced for $350k, but we might hit the $1k mark within just a few years. This progress is funded by a combination of taxpayer and venture capital dollars. The rate of technological advance would slow to a snail's pace without sophisticated capital markets, intellectual property rights and plain old human greed and ambition.

For a cost per base pair curve extending up to 2005, see here. As the cost nears $1k per genome we will see a tremendous explosion in detailed genetic data across all major population groups.

NYTimes: A person wanting to know his or her complete genetic blueprint can already have it done — for $350,000.

But whether a personal genome readout becomes affordable to the rest of us could depend on efforts like the one taking place secretly in a nondescript Silicon Valley industrial park. There, Pacific Biosciences has been developing a DNA sequencing machine that within a few years might be able to unravel an individual’s entire genome in minutes, for less than $1,000. The company plans to make its first public presentation about the technology on Saturday.

Pacific Biosciences, or PacBio, is just one entrant in a heated race for the “$1,000 genome” — a gold rush of activity whose various contestants threaten to shake up the current $1-billion-a-year market for machines that sequence, or read, genomes. But the company has attracted some influential investors. And some outside experts say that if the technology works — still a big if — it would represent a significant advance.

“They’re the technology that’s going to really rip things apart in being that much better than anyone else,” predicted Elaine R. Mardis, the co-director of the genome center at Washington University in St. Louis.

If the cost of sequencing a human genome can drop to $1,000 or below, experts say it would start to become feasible to document people’s DNA makeup to tell what diseases they might be at risk for, or what medicines would work best for them. A DNA genome sequence might become part of each newborn’s medical work-up, while sequencing of cancer patients’ tumors might help doctors look for ways to attack them.

To spur such advances, the federal government has awarded about 35 grants totaling $56 million to companies and universities for development of technology that could put the $1,000 genome sequence within reach. PacBio has received $6.6 million from that program.

The nonprofit X Prize Foundation, meanwhile, is offering $10 million to the first group that can sequence 100 human genomes in 10 days, for $10,000 or less per genome. Six companies or academic groups — although not PacBio — have signed up for the competition so far.

Computerized sequencing machines use various techniques to determine the order of the chemical units in DNA, which are usually represented by the letters A, C, G and T. Humans have three billion such units, or six billion if one counts the second copy of each chromosome pair.

The industry has long been dominated by Applied Biosystems, which sold hundreds of its $300,000 sequencers to the publicly financed Human Genome Project and to Celera Genomics for their sequencing of the first two human genomes, which were announced in 2000. But two newcomers — Solexa and 454 Life Sciences — have already started to cut into Applied Biosystems’ sales with machines that are faster and less costly per unit of DNA sequenced. Solexa is now owned by Illumina and 454 Life Sciences by Roche.

Applied Biosystems, which is a unit of Applera, recently started selling its own new type of sequencer, which it obtained by buying Agencourt Personal Genomics for $120 million in 2006. Helicos BioSciences, a newly public company, announced its first order on Friday. It has said its machine might be able to sequence a human genome for $72,000, with further improvements to come.

“We can look somebody in the eye and say, ‘This instrument is going to get you to the $1,000 genome,’ ” said Steve Lombardi, the president of Helicos, which is based in Cambridge, Mass.

Intelligent Bio-Systems, a privately held company in Waltham, Mass., says it will introduce a machine by the end of the year that might reduce the cost of a genome to $10,000. Other contenders include the privately held companies NABsys of Providence, R.I., VisiGen Biotechnologies of Houston and Complete Genomics of Mountain View, Calif.

Some contestants say that they might try for the X Prize as early as next year and that the $1,000 genome is as little as three years away. But other experts are more conservative. ...

Money:Tech

O'Reilly Media, Feb. 6-7, NYC

So far I've met several participants who read this blog!

schedule

Books and IQ

Here's some research which correlates books with the IQs of their readers :-) Now you can check quantitatively whether you have highbrow or lowbrow taste! The method attempts to estimate the midpoint IQ of people who list a particular book as their favorite, using Facebook and university SAT data. It craps out at the really highbrow end, due to low statistics; see below.

Many of the books appearing at the center of the distribution are typically assigned as required reading (A Farewell to Arms, On the Road, A Tale of Two Cities, etc.), hence are likely to be mentioned by low-scoring students who don't read very many books. Their ranking here is probably deceptively low.

List of schools ranked by SAT (Caltech #1, of course), with links to 10 most frequent Facebook "favorite books" at that university. Click the image below for a bigger one.

Some notable results:

Harry Potter is the most popular book. The Bible is the second most popular book. At least among college students, Harry Potter is, like the Beatles, indeed bigger than Jesus. Harry Potter still wins even if you add "The Bible" and "The Holy Bible" together.

Although I had no idea at the beginning of this project, I was ever so pleased to discover that Caltech is the smartest school in the country (on average).

The smartest religious book is "The Book of Mormon". The dumbest religious book is "The Holy Bible". I'm sure this pleases the Mormons immensely.

The dumbest philosophy book is "The Five People You Meet In Heaven" and the smartest philosophy book is "Atlas Shrugged".

"Lolita" is the smartest book.

The top/bottom 20 books are remarkably stable. I tried 5 different weighting algorithms and their only variation was in the middle. The dumbest books were always at the bottom, and the smartest books were always on top. This is even further corroborated by the fact that the extremes change remarkably little with increasing m.

Do people with SAT >= 1400 just not read books? Yes, they do read books. Just look at those schools' facebook profiles! However, there often aren't enough schools with high SATs to have reliable statistics for these high-ringing books. So it goes.

Methodology:

Get a friend of yours to download, using Facebook, the ten most frequent "favorite books" at every college (manually -- as not to violate Facebook's ToS).

These ten books are indicative of the overall intellectual milieu of that college.

Download the average SAT/ACT score for students attending every college.

Presto! We have a correlation between books and dumbitude (smartitude too)!

Books <=> Colleges <=> Average SAT Scores

Plot the average SAT of each book, discarding books with too few samples to have a reliable average.

Post the results on your website, pondering what the Internet will think of it.

Yes, I'm aware correlation ≠ causation. The results are hilarity incarnate regardless of causality. You can stop sending me email about this distinction. Thanks.

The soldier-monks of Societe Generale

Vive les moines-soldats!

NYTimes: ...The derivatives group started in the 1980s as a small team of highly trained and highly regarded engineers and mathematicians from the best schools. They quickly became known as “les moines-soldats,” the soldier-monks. And as their importance inside the bank grew, their confidence, even arrogance, grew with it.

Like the devout and disciplined fighters they were named for — the monks who fought in the Crusades — the soldier-monks of Société Générale prided themselves on rising above the passions that moved the masses.

Similarly, Société Générale’s soldier-monks believed that they could manage both the risk inherent in betting on the markets — through complex computer models — and the ardor of their regular traders, through controls.

Their hubris was having too much faith in their power to do either.

But they were dedicated to making Société Générale a world-class power in derivatives and, like the knights of old, they were fiercely competitive, both on and off the trading floor.

“We considered it a mission,” recalled Antoine Paille, who recruited Jean-Pierre Mustier, now the head of Société Générale’s corporate and investment bank. It was Mr. Mustier who ultimately confronted Mr. Kerviel after his fraud was discovered on Jan. 18. ...


A Red Flag Cited

Mr. Kerviel was never viewed as soldier-monk material. He was a provincial from decidedly middle-class stock — the son of a hairdresser and a metal- shop teacher — but he possessed an advantage that his better-bred superiors did not.

In his five years toiling in the back office before being promoted to Delta One in 2005, he had become expertly familiar with the proprietary system Société Générale used to book trades, known as Eliot inside the bank. While the risk-control department did monitor the bank’s overall positions very closely, it did not verify the data Mr. Kerviel entered into Eliot. And Mr. Kerviel knew the timing of the nightly reconciliation of the day’s trades by Eliot, so he was able to expertly delete and then re-enter his unauthorized transactions without being caught.

Mr. Kerviel’s method of entering trades was one red flag cited by Eurex in its initial warning, along with questions about two “large” positions — one net short position in DAX futures and one net long position in Euro Stoxx 50 futures. In the same letter, they asked what his investment strategy was and why these transactions were often entered through a London-based Société Générale subsidiary called FIMAT Futures Limited. Eurex even inquired whether Mr. Kerviel had entered the transaction automatically or manually.

“Please explain the background for this procedure,” two Eurex officials wrote to Xavier de la Maisonneuve, a compliance officer at Société Générale who has been questioned by investigators.

Vincent Duclos, another compliance officer in the equity derivatives division, not yet questioned by the police, provided the Nov. 20 and Dec. 10 responses to Eurex. His replies in part were based on accounts provided by Mr. Kerviel and his supervisor, as well as a compliance officer at FIMAT, said Jean Veil, a lawyer for Société Générale. Mr. Kerviel’s “supervisor had signaled that there was no anomaly whatsoever,” Mr. Veil said.

Mr. De la Maisonneuve, who received the initial query on Nov. 7, said the bank gets 15 to 20 queries from different exchanges each year, many of them from Eurex.

In a telephone interview Monday night, he insisted his team had been in telephone contact with Eurex after their two letters in November to ensure it would fully answer their queries.

“Their questions were based purely on strategy and procedure,” he said. “At no moment of these conversations was there any mention of abnormal volumes. They considered our second written response adequate and satisfying.”

He added that Eurex did not take up Société Générale’s offer of a conference call to further discuss the matter after the Dec. 10 letter.

A top official at Société Générale, who insisted on anonymity because of the sensitivity of the matter, said that in the weeks after the Eurex warning, Mr. Kerviel was shaken, and took additional steps to cover his tracks. He tried to manipulate areas of the internal risk-control system he was unfamiliar with, which ultimately led to the discovery of his suspected fraud in mid-January.

In his testimony to the police, however, Mr. Kerviel identified two members of the Delta One team he said were familiar with his activities going back to last April. These colleagues, according to lawyers familiar with the case, were Martial Rouyère, head of the Delta One trading desk, and his deputy, Eric Cordelle. Mr. Rouyère has since been questioned by the French authorities. Mr. Veil said he expected Mr. Kerviel’s “entire hierarchy,” including Mr. Mustier, to eventually be questioned by the police. ...

Dating by algorithm

In this post NYTimes science reporter John Tierney, who writes the blog Tierny Lab, does a little experiment on the dating site eHarmony. eHarmony uses a complicated algorithm to match couples based on a lengthy personality questionnaire. Tierney seems surprised that the algorithm doesn't match him up with his wife, even when restricted geographically to his NYC zip code and even after further tweaking of their survey responses and consultation with eHarmony's chief scientist.

What Tierney doesn't seem to understand is that, under almost any algorithm for matching (including the "correct" algorithm that would predict happiness in his case), it is highly unlikely that the wife he found is actually optimal :-) Within a 10 mile radius (in NYC) there are dozens (hundreds? thousands?) of better matches he unfortunately never met. It's unromantic but true that chance played a bigger role in his marriage choice than optimality.

On a related note, I wonder whether social networking and online dating are gradually increasing the overall quality of marriages. It seems much easier to meet compatible partners than it was in the pre-Internet dark ages.

L'Affaire Kerviel: the mystery persists

Recent reports note that Kerviel was up over a billion Euros at the end of 2007. It is impossible for him to have made such a large profit without exceeding his limits, so if his superiors knew about his profits they should have known something fishy was going on. It has been reported that Kerviel asked for a 600k Euro bonus in 2007. To justify this bonus he must have pointed to significant trading profits. Things don't quite add up...

WSJ:

Sharing the blame: "I cannot believe that my superiors did not realize the amount I was risking. It is impossible to generate such profit with small positions. That's what leads me to say that while I was positive [in the black], my supervisors closed their eyes on the methods I was using and the volumes I was trading. A trader can't generate so much cash on a daily basis with standard activities."

On his bonus targets: "For 2007, I tried to negotiate a bonus of €600,000." He added that a supervisor "led me to understand that I couldn't hope for more than €300,000." (Mr. Kerviel's lawyer said her client hadn't been paid any bonus.)

More background on elitism at Societe Generale:

WSJ: Kerviel Felt Out of His League

January 31, 2008; Page C1

In 2005, Jérôme Kerviel got the biggest break of his career: a promotion out of Société Générale SA's lowly back office -- a place so uncool it was dubbed "the mine" -- and into a coveted job as a trader at the powerful bank.

But if clawing your way up from the mailroom wins you a badge of honor in the U.S., not so within in the rigid class system that defines the upper ranks of French finance. Mr. Kerviel's effort to impress his colleagues now appears to be a motivating factor behind his disastrous trading spree, which burned a €4.9 billion ($7.3 billion) hole in Société Générale's books.

"I was held in lower regard than the others because of my educational and professional background." Mr. Kerviel told prosecutors over the weekend. His comments were from a transcript and confirmed by prosecutors and his lawyer.

Trading might not be rocket science, but Société Générale has a tradition of drawing its star traders from France's most elite schools. Many have doctorates in disciplines such as astrophysics or nuclear science. They are known as "quants" for the complex "quantitative" mathematical trading formulas they develop. They pull down the biggest paychecks.

The bank's top brass, including investment-banking head Jean-Pierre Mustier, is from the engineering school Polytechnique, the M.I.T. of France. Chief Executive Daniel Bouton graduated from the prestigious Ecole Nationale d'Administration, a school known for churning out high-level government functionaries that run the country.

"If you graduated from ENA or Polytechnique, you have an absolute tenure; if not, you miss out on all the good job opportunities," according to a former Société Générale executive. "This rift exists all over the bank."

French authorities placed Mr. Kerviel under formal investigation Monday on charges of forgery, breach of trust and breaking into computer systems. He was released but barred from leaving the country. Société Générale has accused him of fraudulent trading that at one point left the bank exposed by €50 billion.

"His career path made him sort of an exception," says Mr. Mustier.

It hasn't always been this way. Société Générale's current corporate culture is a byproduct of the bank's transformation in the late 1980s from a conventional retail bank to a major player on the global financial stage, according to Michel Marchet, a representative of one of the bank's labor unions and 40-year employee. When he started, Mr. Marchet recalls, even employees without college degrees could build successful careers.

Suddenly, they found themselves overshadowed by new recruits plucked from France's top-notch schools. The rise of a new "elite" class, Mr. Marchet says, also meant "fewer working-class people were joining the bank."

The high-pressure atmosphere has taken its share of victims. In June, a trader in his 30s who worked on the same floor as Mr. Kerviel jumped to his death from a footbridge near Société Générale's towering headquarters in the La Défense suburb of Paris. Moments before his death, Mr. Marchet says, a supervisor had interrogated the trader for losing about €9 million in unauthorized trades. "He took his bag, left Société Générale and jumped off a bridge," Mr. Marchet says.


A spokeswoman at Société Générale declined to comment on social tensions at the bank. She confirmed that an employee committed suicide last year.

That death came in the wake of two other suicides in recent years. In 2005, a trader jumped to his death from a ninth-floor window at the bank's headquarters, Mr. Marchet said. A year later, a back-office employee jumped in front of a train commuting between La Défense and the center of Paris.

The trading desk where Mr. Kerviel landed, the "Delta One" unit, deals with trades aimed at making small profits with stock-market fluctuations. Mr. Kerviel, who hails from a small town in Brittany and graduated from a little-known university, suggested in his statement to prosecutors that he hoped to curry favor with people who counted.

Mr. Kerviel's job was to invest by simultaneously taking opposite bets on the direction of the markets. The bets were supposed to mostly offset each other in what is typically a low-risk way to make a small profit. But starting in November 2005, Mr. Kerviel started placing bets only in one direction, hoping for far bigger gains.

To hide his strategy, he created a set of parallel fake bets in the other direction to give his supervisors the illusion that his books were correctly balanced.

When his supervisors asked him about unusual transactions, Mr. Kerviel would rely on simple tricks to evade their inquiries. "I fabricated a fake mail using a feature in our in-house messaging system, a function which allows you to reuse the electronic letterhead I had received and change the body of the text," he said.

At first, Mr. Kerviel's strategy paid off -- too well, in fact. His gains snowballed so quickly that, at some point, he had locked in a gain of €1.6 billion, about a third of the bank's overall net profit in 2006.

At that moment, "I don't know what to do," Mr. Kerviel told investigators. "I am happy, proud, but I don't know how to justify my gains."

What seemed to disappoint Mr. Kerviel was that his trading prowess wasn't being acknowledged. He told prosecutors that he believes managers were aware of his methods but never spoke up as long as things were going well.

"I cannot believe that my superiors did not realize the amount I was risking," he said in the interrogation. "It is impossible to generate such profit with small positions. That's what leads me to say that while I was [in the black], my supervisors closed their eyes on the methods I was using and the volumes I was trading.

Societe Generale: a proud giant laid low

The initial reports are confirmed; Kerviel used hacking to hide his trades: stolen passwords, fake accounts, deep knowledge of the risk management systems. The Times correctly reports (unlike, e.g., the network news this weekend) that although SocGen's losses in closing out the positions totaled around $7 billion, the size of the actual positions was an order of magnitude larger.

Below is some background on Societe Generale, the second largest bank in France, originally established by Napoleon. Their equity derivatives business accounts for 20 percent of total profits and employs 3,500 people. (As I mentioned in a previous post, none of the U Oregon honors college students I polled knew what a derivatives trader was. France on the other hand is traditionally strong in mathematics and finance.) Legendary figure Jean-Pierre Mustier helped pioneer the derivatives business in Europe.

NYTimes: Mr. Mustier, a native of Clermont-Ferrand in the Auvergne region of France, has become the bank’s point man on the scandal, shepherding reporters through the details of Mr. Kerviel’s trades while frequently conferring with his boss, Daniel Bouton, the bank’s chief executive.

And as a former student at two of France’s most elite engineering schools — the École Polytechnique and the École des Mines — Mr. Mustier, 47, exhibits the cool, disciplined style that alumni of those institutions are known for.

When asked what his personal reaction was to the rogue trades, he said, “It was not the time for personal feelings, but for actions.”

Although the local cemetery that abuts Société Générale’s mirrored headquarters on the outskirts of Paris might give more superstitious employees pause, the bank’s traders have long been known for the cockiness that comes with high salaries and pedigrees from France’s best engineering schools. (In fact, Mr. Kerviel’s salary of roughly 100,000 euros, or $147,000, would have put him at the low end of the bank’s pay scale for traders.)

And Société Générale traditionally has shown more boldness than other, more conservative giants of French industry. When French banks were privatized in the 1980s, Société Générale was the first to emerge from government control, starting in July 1987. Mr. Mustier’s innovative derivatives trade on the Paris Bourse, in fact, took place just two months afterward, in September 1987.

Mr. Mustier was recruited to the bank by Antoine Paille, a fellow whiz kid who graduated from the École Nationale de la Statistique et de l’Administation Economique, before starting the bank’s derivatives desk in the mid-1980s.

With French banks still sleepy after decades of state control and far behind their more aggressive foreign counterparts in global capital markets, the two men set out to make Société Générale a world leader in the emerging field of derivatives.

And by hiring young mathematicians and quantitative analysts, or quants, from the Grandes Écoles, the country’s prestigious and highly elitist state schools, to help them create complex formulas that are the bedrock of the trade, they managed to do that.

From just 25 people in 1990, the equity derivatives division at the bank now employs 3,500 people. (Mr. Paille has since left the bank and is a derivatives executive at Commerzbank of Germany.)

In 2006, Société Générale earned 5.2 billion euros in net income. Its corporate and investment unit contributed 2.3 billion euros to the bank’s profit.

Profit in the field pioneered by Société Générale mounted as swiftly as one of the graphs in of their elegant mathematical models. Over all, the bank’s derivatives unit accounts for an estimated 20 percent of the bank’s total profit, according to various estimates by analysts.

And until the fraudulent trades, the company’s shares had outperformed those of its European peers, including bigger rivals like Deutsche Bank and BNP Paribas, for six of the last eight years.

According to a Merrill Lynch report from December, Société Générale expected a 10 percent growth in its equity derivatives business this year thanks to retail customers and emerging markets growth. What is more, because it relies so much on computer programs and systems, rather than on manpower, the business is highly profitable.

Mr. Mustier and Mr. Bouton will be spending the coming days answering questions about how Mr. Kerviel could possibly have wagered more than $70 billion without being detected — and whether he had indeed acted alone, as they both insist. But broader questions are likely to be asked about the safety of the derivatives business and whether French banks have placed too many of their bets on it.

“What used to be an excellent management team sitting on an enviable retail franchise and a global leadership position in derivatives is now a management under pressure suffering from a lack of confidence,” the Merrill Lynch analysts Antonio Guglielmi and Alberto Segafredo said in a recent report.

Fake alpha, tail risk and compensation in finance

I highly recommend this essay in the Financial Times. It notes that current banking and money management compensation schemes create incentives for taking on tail risk (which is really beta) and disguising it as alpha. The proposed solution: holdbacks or clawbacks of bonus money. This would probably be a big improvement over the status quo (although how long would one have to wait to be sure that risk was properly priced on a group of thirty year loans?). When will shareholders smarten up and enforce this kind of compensation scheme on management at public firms? Clawbacks already happen in VC when early success turns into losses for a fund.

A minor quibble with what is written about VCs: in many cases "activism" is too strong a characterization -- it is the inventor/entrepreneur who does all the work.

FT: Bankers’ pay is deeply flawed

By Raghuram Rajan

Published: January 8 2008 18:04 | Last updated: January 9 2008 16:21

Summary: Raghuram Rajan says bogus alpha is created by hiding long-tail risks, as with structured products linked to subprime mortgages. A solution would be to hold in escrow a big chunk of bonuses until the full risks play out, meaning only true alpha gets jumbo rewards and reducing the hidden risks in the financial system.


Banks have recently been acknowledging enormous losses, yet those losses are barely reflected in employee compensation. For example, Morgan Stanley announced a $9.4bn charge-off in the fourth quarter and at the same time increased its bonus pool by 18 per cent. The justification was that many employees had a banner year and their compensation should not be held hostage to mistakes that were made in the subprime market. The chief executive, John Mack, however, assumed some responsibility and agreed to take no bonus for 2007 – although he got a $40m payout for 2006.

Even so, most readers would suspect something is not right here. Indeed, compensation practices in the financial sector are deeply flawed and probably contributed to the ongoing crisis.

The typical manager of financial assets generates returns based on the systematic risk he takes – the so-called beta risk – and the value his abilities contribute to the investment process – his so-called alpha. Shareholders in asset management firms, such as commercial banks, investment banks and private equity or insurance companies are unlikely to pay the manager much for returns from beta risk. For example, if the shareholder wants exposure to large traded US stocks she can get the returns associated with that risk simply by investing in the Vanguard S&P 500 index fund, for which she pays a fraction of a per cent in fees. What the shareholder will really pay for is if the manager beats the S&P 500 index regularly, that is, generates excess returns while not taking more risks. Hence they will pay for alpha.

In reality, there are only a few sources of alpha for investment managers. One of them comes from having truly special abilities in identifying undervalued financial assets. Warren Buffett, the US billionaire investor, certainly has it, yet this special ability is, by definition, rare.

A second source of alpha is from what one might call activism. This means using financial resources to create, or obtain control over, real assets and to use that control to change the payout obtained on the financial investment. A venture capitalist who transforms an inventor, a garage and an idea into a fully fledged, profitable and professionally managed corporation creates alpha.

A third source of alpha is financial entrepreneurship or engineering – creating securities or cash flow streams that appeal to particular investors or tastes. As long as the investment manager does not create securities that exploit investor weaknesses or ignorance (and there is unfortunately too much of that), this sort of alpha is also beneficial, but it requires constant innovation.

Alpha is quite hard to generate since most ways of doing so depend on the investment manager possessing unique abilities – to pick stocks, identify weaknesses in management and remedy them, or undertake financial innovation. Such abilities are rare. How then can untalented investment managers justify their pay? Unfortunately, all too often it is by creating fake alpha – appearing to create excess returns but in fact taking on hidden tail risks, which produce a steady positive return most of the time as compensation for a rare, very negative, return.

For example, an investment manager who bought AAA-rated tranches of collateralised debt obligations (CDO) in the past generated a return of 50 to 60 basis points higher than a similar AAA-rated corporate bond. That “excess” return was in fact compens ation for the “tail” risk that the CDO would default, a risk that was no doubt perceived as small when the housing market was rollicking along, but which was not zero. If all the manager had disclosed was the high rating of his investment portfolio he would have looked like a genius, making money without additional risk, even more so if he multiplied his “excess” return by leverage. Similarly, the management of Northern Rock followed the old strategy of taking on tail risk, borrowing short and lending long and praying that the unlikely event of a liquidity shortage never materialised. All these strategies essentially earn the manager a premium in normal times for taking on beta risk that materialises only infrequently. These premiums are not alpha, since they are wiped out when the risk materialises.

True alpha can be measured only in the long run and with the benefit of hindsight – in the same way as the acumen of someone writing earthquake insurance can be measured only over a period long enough for earthquakes to have occurred. Compensation structures that reward managers annually for profits, but do not claw these rewards back when losses materialise, encourage the creation of fake alpha. Significant portions of compensation should be held in escrow to be paid only long after the activities that generated that compensation occur.

The managers who blew a big hole in Morgan Stanley’s balance sheet probably earned enormous bonuses in the past – Mr Mack certainly did. If Morgan Stanley managed its compensation correctly those bonuses should be clawed back and should be enough to pay those who did well this year without increasing the bonus pool. At the very least, shareholders deserve better explanations. More generally, unless we fix incentives in the financial system we will get more risk than we bargain for. Unless bankers offer these better explanations, their enormous pay, which has been thought of as just reward for performance, will deservedly come under scrutiny.

The writer is a professor of finance at the Graduate School of Business at the University of Chicago and former chief economist at the International Monetary Fund

L'Affaire Kerviel and a rogues' gallery of rogue traders

Societe Generale's L'Affaire Kerviel is unbelievable, and I suspect we'll be learning some interesting details in the coming days. A unique aspect of his case is that he started in the back office before making it to the trading desk, and used his knowledge of SocGen's systems to mask his positions. But why did he do it? If his trades had been successful I don't see how he could have profited personally. As a junior trader he couldn't walk up to his boss and say "See, I made you 4 billion Euros, where is my bonus?" -- he would have been fired right away for taking the positions in the first place. And, despite his back office acumen I don't see how he could have gotten the profits out of the bank without anyone knowing. It almost seems as if his goal from the beginning was to bring down the bank.

NYTimes: A Spiral of Losses by a ‘Plain Vanilla’ Trader

PARIS — On the elite trading floors here, where France’s brightest minds devise some of the most complex instruments in global finance, few people noticed Jérôme Kerviel.

He was lucky to be there at all. Many of his colleagues had been plucked from the prestigious Grandes Ecoles — the Harvards and M.I.T.’s of France — and wielded advanced degrees in math or engineering. Mr. Kerviel arrived from business school and started out shuffling paper in the back office.

But on Thursday the world came to know Mr. Kerviel, 31, as the most dangerous accused rogue trader ever, a young gambler who found himself sucked into a spiral of losses that left a $7.2 billion hole in Société Générale, one of France’s largest and most respected banks.

While Société Générale executives maintained that he had acted alone, many questioned how that was possible given the scope of the losses.

“There are plenty of excellent brains at Société Générale, consequently I find it hard to believe the risk management systems and all the auditors did not indicate anything at any level,” said Hélyette Geman, a professor of mathematical finance at ESSEC, a leading French business school, as well as professor at the University of London.

It is a remarkable turn of events for Société Générale, which since the mid-1980s has built itself into a global powerhouse in trading derivatives like futures and options.

“In France we considered Société Générale a magic bank,” Ms. Geman said.

Until now Société Générale, unlike many Wall Street banks, had seemingly sailed through the turmoil in the financial markets with its reputation intact. The January issue of Risk, a monthly magazine about risk management and derivatives, named the bank its “Equity Derivatives House of the Year.”

But Mr. Kerviel, described by bank executives as a shy junior trader, did not fit the mold at Société Générale. The bank lures its top talent from the country’s premier science and engineering schools in Paris. Mr. Kerviel grew up in Brittany, in western France, and attended the University of Lyon. He joined Société Générale in 2000 as what was effectively a clerk, processing and recording the trades made on the trading floor.

By 2006, Mr. Kerviel had worked his way up to the trading floor, where he specialized in arbitrage, or making bets on small difference between various European stock market indexes such as the CAC in France and DAX in Germany.

A senior banker at Société Générale described Mr. Kerviel “as a very junior trader, not a star.” As far as his superiors knew, this banker said, “he was starting to work on a small portfolio. He’s more of a shy person than an extrovert.”

All the same, covering the billions in market positions would have taken considerable skill. “Hiding it was a full-time job because you needed to know exactly what do,” this banker said.

The chief executive of Société Générale’s corporate and investment banking unit, Jean-Pierre Mustier, insisted that the bank’s own investigation showed what they termed the rogue trader to have acted without the knowledge or cooperation of his superiors.

“We’ve been going through the positions for four days,” Mr. Mustier said. “The research we have made has not shown any link with anyone else at Société Générale.”

Mr. Kerviel’s bad bets in the markets came to light a week ago. According to bankers familiar with the situation who asked for anonymity because the investigation was continuing, risk control specialists at the bank first discovered the suspicious trades on Friday. After combing through trading records all day Saturday, the executives discovered the extent of the fraud.

Mr. Mustier returned to Paris from London to oversee the investigation at Société Générale’s headquarters over the weekend. Mr. Kerviel was summoned and was questioned there Saturday night.

Among financial veterans of other trading floors as well as financial experts across Europe on Thursday, there was widespread incredulity that a junior employee like Mr. Kerviel could have racked up such huge losses without the knowledge of his superiors.

Like Nick Leeson, the trader who brought down Barings bank by making huge secret bets on Asian markets in 1995, Mr. Kerviel was something of an anomaly on Société Générale’s trading floor.

“I had students who have a hard time getting jobs at top French banks because of this elite system we have in France,” said Ms. Geman. “In the U.K. and U.S., it’s less of a club based on where you went to school when you were 19 or 20.”

According to officials at the bank, Mr. Kerviel’s losses came from bets made on what they termed “plain vanilla products,” relatively simple futures tied to major European stock indexes.

He had made bullish bets, a senior banker said, which were gradually unwound over the first three trading days of this week. The banker insisted that the closing of those positions had not contributed to the huge losses on European bourses Monday and Tuesday.

Adding to the mystery is the conclusion by Société Générale executives that Mr. Kerviel had not profited from his trades.

“We have no explanation for why he took these positions, and we have no reason to believe he benefited from a financial point of view,” the banker said. “We don’t understand why he took such a massive position.”

The Journal has a bit more; looks like a bit of hacking + rogue trading. A new combination?

WSJ: ...Société Générale's computer systems are considered some of the most complex in banking for handling equity derivatives, that is, investment contracts whose value moves with the value of other assets. Officials of the bank believe Mr. Kerviel spent many hours of hacking to eliminate controls that would have blocked his super-sized bets. Changes he is said to have made enabled him to eliminate credit and trade-size controls, so the bank's risk managers couldn't see his giant trades on the direction of indexes.

Mr. Citerne said the bank didn't notice the unauthorized trading until last week because the trader had "intimate and malicious" knowledge of its procedures and knew at what dates checks were conducted. "Each time he took a position one way, he would enter a fictitious trade in the opposite direction to mask the real one," Mr. Citerne said. According to one person familiar with the situation, Mr. Kerviel used the computer log-in and passwords of colleagues both in the trading unit and the technology section.

According to one person familiar with events, the bank's controls did red-flag an outside trading partner of the bank, whose account showed unusually high finance levels. The client, when asked by the bank about the account's finances, denied knowing of it. Pursuing this matter ultimately led to Mr. Kerviel.

Executives called him in for questioning on Saturday, said Mr. Bouton. The interrogation took a good part of the day because Mr. Kerviel had convinced himself that he had mastered a new way to trade stock-index futures, according to a person familiar with the situation. For a while, he went in circles while justifying the trading strategy, this person said, but finally on Saturday night he broke down and admitted the trades.

Wikipedia has an entry on largest trading losses. I don't really think of John Meriwether of LTCM (or even, I guess, Brian Hunter) as a rogue trader, although I suppose their investors didn't know exactly what they were up to.

Name Amount Lost Citizenship Employer Source of Loss Year

Jérôme Kerviel[1] US$7.1 billion France Société Générale European Index futures 2008

Brian Hunter[2] US$6.5 billion Canada Amaranth Advisors Gas futures 2006

Giancarlo Paretti[3] US$5.0 billion Italy Crédit Lyonnais Loans to Hollywood Studios 1990

John Meriwether[4] US$4.6 billion United States Long Term Capital Management Interest Rate and Equity Derivatives 1998

Yasuo Hamanaka US$2.6 billion Japan Sumitomo Corporation Copper futures 1996

Wolfgang Flöttl, Helmut Elsner US$2.5 billion Austria BAWAG Currency- and interest swaps 2006

Robert Citron US$1.7 billion United States Orange County Interest Rate Derivatives 1994

Heinz Schimmelbusch US$1.6 billion Germany Metallgesellschaft Oil Futures 1993

Nick Leeson US$1.4 billion United Kingdom Barings Bank Nikkei Futures 1995

"No scientific basis for race"

Note Added in response to 2020 Twitter mob attack which attempts to misrepresent my views:

This is not my research. The lead author affiliation for the paper discussed below is Harvard Medical School. I do not work on population structure or group differences in genomics.

This paper is from 2007. At the time even the capability to deduce ancestry ("race") from DNA was controversial. Now the technology is highly developed and used by millions of people (23andMe, Ancestry). The second part of the blog post discusses phenotype differences, not genetic causes of those differences. Genetic causes for phenotype differences could not yet be studied in 2008 and only now (circa 2020) is becoming an area of research that generates more light than heat.

Racist inferences based on the results of the paper are the fault of the reader, not the authors of the paper or of this blog.


##############################################


"It's just a social construction" -- a picture is worth a million words...




Caption: Each point is an individual, and the axes are two principal components in the space of genetic variation. Colors correspond to individuals of different European ancestry. (Via gnxp.)

The figure is from the following paper, reporting on a study of over 4000 individuals. The researchers can group most Europeans into a geographical cline (NW vs SE, that's the red band in the lower right of the figure; there are two clusters but also individuals who are in-between) + Ashkenazim (the pink isolated cluster in the upper left) using a few hundred markers. I'm sure even better resolution can be obtained with more loci.

Discerning the Ancestry of European Americans in Genetic Association Studies

Abstract: European Americans are often treated as a homogeneous group, but in fact form a structured population due to historical immigration of diverse source populations. Discerning the ancestry of European Americans genotyped in association studies is important in order to prevent false-positive or false-negative associations due to population stratification and to identify genetic variants whose contribution to disease risk differs across European ancestries. Here, we investigate empirical patterns of population structure in European Americans, analyzing 4,198 samples from four genome-wide association studies to show that components roughly corresponding to northwest European, southeast European, and Ashkenazi Jewish ancestry are the main sources of European American population structure. Building on this insight, we constructed a panel of 300 validated markers that are highly informative for distinguishing these ancestries. We demonstrate that this panel of markers can be used to correct for stratification in association studies that do not generate dense genotype data.

The money paragraph: "...Here we mine much larger datasets (more markers and more samples) to identify a panel of 300 highly ancestry-informative markers which accurately distinguish not just northwest and southeast European, but also Ashkenazi Jewish ancestry. This panel of markers is likely to be useful in targeted disease studies involving European Americans."

For previous discussion of genetic clustering of human populations, see here and here. It has been known for some time that major continental groups ("races") form distinct clusters. Improved data allow for much finer exploration of clusters within clusters.

This post is getting a lot of traffic from metafilter, and judging from the comments people are confused. I offer the following from the second link in the paragraph above:

...no matter what genetic markers you choose: SNPs, STRs, no matter how you choose them: randomly or based on their "informativeness", it is relatively easy to classify DNA into the correct continental origin. Depending on the marker types (e.g., indel vs. microsatellite), and their informativeness (roughly the distribution differences between populations), one may require more or less markers to achieve a high degree of accuracy. But, the conclusion is the same: after a certain number of markers, you always succeed in classifying individuals according to continental origin.

Thus, the emergent pattern of variation is not at all subjectively constructed: it does not deal specifically with visible traits (randomly chosen markers could influence any trait, or none at all), nor does it privilege markers exhibiting large population differences. The structuring of humanity into more or less disjoint groups is not a subjective choice: it emerges naturally from the genomic composition of humans, irrespective of how you study this composition. Rather than proving that race is skin-deep, non-existent, or unimportant, modern genetic science is both proving that it is in fact existent, but also sets the foundation for the study of its true importance, which is probably somewhere in between the indifference of the sociologists and the hyperbole of the racists.

One thing commenters seem particularly confused about is the difference between phenotypic and genetic variation. The clustering data show very clearly that, in certain subspaces, the genetic variation within a particular population cluster is less than between clusters. That is, the genetic "distance" between two individuals within a cluster is typically much less than the distance between clusters. (Technical comment: this depends on the number of loci or markers used. As the number gets large the distance between clusters becomes much larger than the individual cluster radius. For continental clusters, if hundreds or thousands of markers are used the intercluster distance dominates the intracluster size. Further technical comment: you may have read the misleading statistic, spread by the intellectually dishonest Lewontin, that 85% percent of all human genetic variation occurs within groups and only 15% between groups. The statistic is true, but what is often falsely claimed is that this breakup of variances (larger within group than between group) prevents any meaningful genetic classification of populations. This false conclusion neglects the correlations in the genetic data that are revealed in a cluster analysis. See here for a simple example which shows that there can be dramatic group differences in phenotypes even if every version of every gene is found in two groups -- as long as the frequency or probability distributions are distinct. Sadly, understanding this point requires just enough mathematical ability that it has eluded all but a small number of experts.) Update: see here for an explanation in pictures of Lewontin's fallacy. I also edited the paragraph above for clarity.

On the other hand, for most phenotypes (examples: height or IQ, which are both fairly heritable, except in cases of extreme environmental deprivation), there is significant overlap between different population distributions. That is, Swedes might be taller than Vietnamese on average, but the range of heights within each group is larger than the difference in the averages. Nevertheless, at the tails of the distribution one would find very large discrepancies: for example the percentage of the Swedish population that is over 2 meters tall (6"7) might be 5 or 10 times as large as the percentage of the Vietnamese population. If two groups differed by, say, 10 points in average IQ (2/3 of a standard deviation), the respective distributions would overlap quite a bit (more in-group than between-group variation), but the fraction of people with IQ above some threshold (e.g., >140) would be radically different. It has been claimed that 20% of all Americans with IQ > 140 are Jewish, even though Jews comprise only 3% of the total population.

...The imbalance continues to increase for still higher IQ’s. New York City’s public-school system used to administer a pencil-and-paper IQ test to its entire school population. In 1954, a psychologist used those test results to identify all 28 children in the New York public-school system with measured IQ’s of 170 or higher. Of those 28, 24 were Jews.

There is no strong evidence for specific gene variants (alleles) that lead to group differences (differences between clusters) in behavior or intelligence, but progress on the genomic side of this question will be rapid in coming years, as the price to sequence a genome is dropping at an exponential rate.

What seems to be true (from preliminary studies) is that the gene variants that were under strong selection (reached fixation) over the last 10k years are different in different clusters. That is, the way that modern people in each cluster differ, due to natural selection, from their own ancestors 10k years ago is not the same in each cluster -- we have been, at least at the genetic level, experiencing divergent evolution. In fact, recent research suggests that 7% or more of all our genes are mutant versions that replaced earlier variants through natural selection over the last tens of thousands of years.

A higher intelligence at Goldman

Michael Lewis (Bloomberg) has some interesting comments on Goldman Sachs' vastly superior performance during the subprime meltdown. In an earlier post we discussed the $4 billion they made by shorting the major CDO indices. (See here for another close reading of the WSJ story that uniquely sheds some partial light on what happened.) It really boils down, as I mentioned earlier, to the huge proprietary trading component at Goldman. They apparently don't hesitate to take positions against other business units at the firm.

What Does Goldman Know That We Don't?
2008-01-17 09:00 (New York)

Commentary by Michael Lewis

Jan. 17 (Bloomberg) -- In retrospect, the most intriguing subplot in the collapse of the subprime mortgage market has been not the size of the losses but their distribution.

Wall Street firms have a talent for getting themselves into trouble together. They all were long Internet stocks when Internet stocks collapsed and they'll all be long North Korean credit-default swaps whenever North Korea gets hot and then crashes.

What's odd about the subprime crash is Goldman Sachs Group Inc. A single firm took a position contrary to the rest of Wall Street. Giant Wall Street firms are designed for many things, but not, typically, to express highly idiosyncratic views in the market.

Even more surprising is how little Wall Street seems to have dwelled on how and why Goldman Sachs made its killing. There are insane conspiracy theories -- for instance, that former Goldman chief executive officer and current U.S. Treasury Secretary Henry Paulson tipped his old pals, etc. (But then, how did HE know?)

There is also the widely held opinion that people who work at Goldman Sachs are just smarter than ordinary people -- hence the lust to hire former Goldman employees to run other Wall Street firms, as Merrill Lynch & Co. did. (But why would any trader who could systematically beat the market waste his time at Goldman Sachs?)

So far as I can tell, there has been only one attempt to explain this strange event, and that was by a journalist, Kate Kelly of the Wall Street Journal.

[... skip recap of WSJ article ...]


Rolling Heads

All across Wall Street risk managers are being fired, reassigned or hovering under a cloud of contempt and suspicion. Heads must roll, and after the CEO, these guys are the most plausible to guillotine.

But at the same time it's pretty clear that a lot of these so-called risk managers never really had the power to manage risk. They had to consider the feelings, for example, of the guys who ran subprime mortgages. Morgan Stanley conceded as much when it said recently it was considering changing things around so that the risk manager reported to the CFO, rather than the heads of individual businesses.

But at Goldman there were two intelligences at work: one, the ordinary Wall Street intelligence, which was allowed to get itself in trouble, just as at every other Wall Street firm; the other, more like an extremely smart hedge fund that made its living off the idiocy of big Wall Street firms, including its own people.

A Higher Intelligence

And this second, higher intelligence was allowed to make a mockery of the labors of the first. I can't think of another example of a big Wall Street firm saying so clearly through its trading positions as Goldman Sachs did over the past year that it thinks the rest of its industry, including its own people, is a bunch of idiots. They have obviously designed their firm to take into account their idiocy -- without ever having to put too fine a point on it.

From now on, the ordinary traders and salesmen at Goldman Sachs can beaver away knowing that their opinions and judgments about the markets in which they operate are basically irrelevant. The guys at the top of the firm are making the market calls, and if the guys at the top disagree with them, well, they'll just take the other side of their trades. But then, why do you need the traders? And what happens when the guys at the top of the firm are wrong?

So long, Bobby

I like to remember how you began, not how you ended...

NYTimes: There may be only three human activities in which miraculous accomplishment is possible before adulthood: mathematics, music and chess. These are abstract, almost invented realms, closed systems bounded by rules of custom or principle. Here, the child learns, is how elements combine and transform; here are the laws that govern their interactions; and here are the possibilities that emerge as you play with signs, symbols, sounds or pieces. Nothing else need be known or understood — at least at first. A child’s gifts in such realms can seem otherworldly, the achievements effortlessly magical. But as Bobby Fischer’s death on Thursday might remind us, even abstract gifts can exact a terrible price.

In 1956 Mr. Fischer, at 13, displayed powers that were not only prodigious but also uncanny. A game he played against Donald Byrne, one of the top 10 players in the United States, became known as “the Game of the Century,” so packed was it with brilliance and daring (and Mr. Fischer’s sacrifice of a queen). “I just got good,” he explained — as indeed he did, winning 8 of the 10 United States Championship tournaments held after 1958 and then, of course, in 1972, breaking the long hold that Soviet chess had on the international championship.

“All I want to do, ever,” he said, “is play chess.” And many thought him the best player — ever. Garry Kasparov once said that he imagined Mr. Fischer as a kind of centaur, a human player mythologically combined with the very essence of chess itself.

But of course accompanying Mr. Fischer’s triumphs were signs of something else. His aggressive declarations and grandiose pronouncements were once restricted to his chosen playing field. (“Chess is war over the board. The object is to crush the opponent’s mind.”) Eventually, they grew in scope, evolving into ever more sweeping convictions about the wider world.

Honors college survey

I was invited to address a class this morning in the Clark Honors College at U Oregon. The Honors College is like a small, select, liberal arts college within the university that requires special admission. It's one of the oldest honors colleges in the country and has (I'm told) a very good reputation. Most of its students could probably have been accepted at elite private colleges, but are getting a less expensive education here.

At the end of the class I took a survey. I was particularly interested in the level of interest in science and science careers, and the level of awareness about the kinds of elite career paths that are common for Ivy League students. As I mentioned in an earlier post, about 50% of Harvard graduates now head into finance. It was my hypothesis (confirmed by the survey results) that even top students at public universities are generally unaware of these relatively new career options, as opposed to traditional high status jobs in fields like law, science and medicine.

Studies of a previous generation of students showed, after controlling for SAT score, little difference in lifetime earnings between graduates of elite and non-elite universities. I doubt that will be true for this generation -- some essential social capital is missing from the public school experience, in particular, knowledge of the very existence of the most lucrative career options. (Of related interest: David Wessel of the WSJ comments on the finance bubble and the NYTimes on how the legal and medical professions have lost allure.)

Survey

25 participants, roughly equal numbers of seniors and juniors and a smaller number of sophomores. About 1/3 of the students were science majors. Some of the numbers below are estimates, as I had to quickly count the number of raised hands.

Number of frequent MySpace users: 3/25
Number of frequent FaceBook users: 25/25

Would you be unhappy if your annual salary never exceeds $100k per annum (in today's dollars)? only 3/25 said yes -- amazing!

Do you feel you have a good understanding of / do you think it is important to understand :

DNA and evolution 16 / 16
special relativity 3 / 7
internet technology 3 / 6
the operation of a nuclear bomb 3 / 6

Have you ever written a computer program of > 100 lines not required for a class? 0 / 25 (!!!)

Can you give a job description for the following:

management consultant 1 / 25
investment banker 5 / 25
derivatives trader 0 / 25
venture capitalist 7 / 25

Can you tell me what fraction of a normally distributed population is >4 standard deviations above the mean? 0 / 25 (a few knew it was a small fraction, but no one gave an estimate within an order of magnitude)