Carlos Slim in the New Yorker

There's a great profile of Carlos Slim in the New Yorker this week. Slim is one of the richest men in the world and recently took a big stake in the financially troubled New York Times. Unfortunately, the online version is subscriber only. Here is a brief summary of the article (excerpts from the summary below).

There are a lot of similarities between Slim and Warren Buffet: early interest in investing and business, modest lifestyle, patriotic nationalism, humility, even a Graham and Dodd value style of investing in distressed assets. Slim taught linear programming while still an engineering student at UNAM (Autonomous National University of Mexico) and discovered compound interest at age 10. (He learned that at a 10 percent annual rate of return his money would double in 7 years, not 10 :-)

Near the end of the article the writer describes a meeting between Slim and one of his most visible critics, Denise Dresser, a Princeton-trained academic (Instituto Tecnológico Autónomo de México) and political analyst. I suspect a look through Dresser's work might be of interest for those who want to disentangle the political economy of Mexico.

... The foundation of his empire is Telmex, the telecommunications company, which he acquired in 1990, and the cell-phone business, América Móvil, which is now the third-largest company in Latin America. Although Slim has often been described as a merciless predator, he has never been caught in one of the scandals that periodically spill onto the front pages of Mexican newspapers. His nationalism, humility, and relatively modest personal habits stand as a kind of rebuke to the image that Mexicans typically have of their oligarchs. Tells about Slim’s father, Khalil, who emigrated to Mexico from Lebanon and became a successful merchant. Describes Slim’s childhood and his early interest in numbers and money. He invested from a youthful age and abandoned engineering to go into business. Discusses Slim’s visit to the 1964 World’s Fair and its influence on his interest in technology. Writer gives a brief history of the Times’s recent economic difficulties and considers why Slim would be interested in the paper. Also tells about David Geffen’s bid for the Times. Writer chronicles the growth of Slim’s business holdings from the mid-sixties to his acquisition of Telmex. Slim has often used recessions as an opportunity to buy businesses at reduced prices. Writer interviews Randall Stephenson [current AT&T CEO], who worked for Slim in the nineties. “He’s probably the most intelligent businessman I’ve met,” Stephenson says. ...

Vernon Smith at Caltech

I've been fascinated by economist Vernon Smith since participating in paid economics experiments as a student at Caltech. Smith was the pioneer in this type of research. From the 2002 Nobel report on his prize:

Human decision-making deviates in one way or another from the standard assumptions of the rationalistic paradigm in economics. If such deviations from rationality and self-interest were small and purely idiosyncratic, they would on average cancel out, and economic theory would not be too wide off the mark when predicting outcomes for large aggregates of agents. Following the lead of Vernon Smith, early studies of alternative market mechanisms by experimental economists can be viewed as tests of the hypothesis of idiosyncratic deviations from standard economic theory. If deviations from rationality and self-interest were systematic, however, this would call for a revision of economic theory itself.

It's amusing that Smith, who is autistic, played a major role in promoting more realistic ideas about human behavior among economists! See article and video interview, MSNBC:

...now Nobel Laureate Vernon Smith has decided to speak openly about what he calls the deficiencies and the selective advantages of Asperger's.

“I can switch out and go into a concentrated mode and the world is completely shut out,” he said in a recent interview. “If I'm writing something, nothing else exists.”

Smith says his capacity for deep concentration contributed to his ability to win the Nobel Prize.

“Perhaps even more importantly, I don't have any trouble thinking outside the box,” he said. “I don't feel any social pressure to do things the way other people are doing them, professionally. And so I have been more open to different ways of looking at a lot of the problems in economics."

CNBC: Did you feel like you seemed strange in the eyes of other people?

SMITH: Oh, yes.

CNBC: How so?

SMITH: Sometimes I'm described as "not there" in a social situation. You know, a social situation that lasts for a couple of hours I find it to be a tremendous amount of strain, so I've been known just to go to bed and read.

Perhaps most interesting to me, Smith was an undergraduate physics major at Caltech. The excerpt below is from Smith's Nobel autobiography. See also his recently published memoir, and this podcast interview on Econtalk.

...neither I, nor my parents, or anyone in my family, or any neighbor or friend, had any idea how to go about choosing a college. So, I went to the city library, found a book on choosing a college, and learned among other things that the 'best' college in the United States was Caltech. Being naïve and impetuous I decided that I should prepare myself to enter Caltech, as, without preparation, my 'C' average in High School would not even qualify me to take the entrance exam. A serious Quaker College, Friend's University, was located near my home in West Wichita. I enrolled in physics, chemistry, calculus, astronomy and literature courses for one year, earned top grades, and sat for the entrance exams for Caltech.

...Caltech was a meat grinder like I could never have imagined. I studied night, day, weekends and survived hundreds of problems, but what a joy to take freshman chemistry from Linus Pauling, hear physics lectures by J. Robert Oppenheimer on his frequent visits to Caltech, attend a visiting lecture by Bertrand Russell, and regularly see von Karman, Anderson, Zwicky, Tolman, Millikan and other legendary figures of that time, on campus.

I was majoring in physics, but switched to electrical engineering, which was in the same division (Mathematics, Physics and EE) as a senior. In this way I did not have to take the dreaded "Smyth's course," required for physics majors, but not EE, and received my BS on schedule in 1949. At the time I relished the unbending facts and mathematics of physics/engineering. Then, as a senior, I took an economics course and found it very intriguing - you could actually learn something about the economic principles underlying the claims of socialism, capitalism and other such 'isms.' Curious about advanced economics, I went to the Caltech library, stumbled upon two books, Samuelson's Foundations, and von Mises' Human Action. From the former, it was clear that economics could be done like physics, but from the latter there seemed to be much in the way of reasoning that was not like physics. I also subscribed to the Quarterly Journal of Economics, and one of the first issues had a paper by Hollis Chenery on Engineering Production Functions. So, economics was also like engineering! I had not a hint then as to how much those first impressions would be changed in my thinking over the decades to follow. ...

For micro I supplemented with courses Samuelson taught down the Charles River at MIT. After Caltech, Harvard seemed easy, and I got virtually straight A's. ...Graduate school is an endurance test, but was not that demanding for me after having survived the undergraduate meat grinder.

In his memoir he adds the following interesting comments (p. 123-124):

The first thing to which one has to adapt is the fact that no matter how high people might sample in the right tail of the distribution for "intelligence," ... that sample is still normally distributed in performing on the materials in the Caltech curriculum. The second thing you learn, if you were reared with my naive background, is the incredible arrogance that develops in conjunction with the acquisition of what you ultimately come to realize is a really very, very small bit of knowledge compared with our vast human ignorance. ... the difference between Harvard and Caltech: "At Harvard they believe they are the best in the world; at Caltech they know they are the best in the world."

Fermi problems

Princeton University Press sent me a copy of Guesstimation: Solving the World's Problems on the Back of a Cocktail Napkin, by professors Lawrence Weinstein and John A. Adam. The book is a compendium of Fermi problems -- that is, problems which are simply stated and whose answers can be estimated at the order of magnitude level through simple logic from a few factual inputs.

The classic Fermi problem is: How many piano tuners are there in Chicago?

When I took my oral exam as a first year graduate student at Berkeley, theoretician Geoff Chew (a former student of Fermi's) asked me:

1. How many blades of grass are on your front lawn?

2. What is the ratio of paved to unpaved surface area in Iowa? (He had earlier asked where I grew up.)

Luckily I got them both right. The experimentalist in the examining pair, Paul Richards, held up a cylindrical metal device of some sort and asked me what it was. He let me hold it; it was heavy. I stared at him blankly. To this day, I still don't know what the gizmo was :-) I suppose I was destined to be a theorist!

Physicists are constantly solving Fermi problems in the course of their work, because it's the first step in sizing up any potential project, theoretical or experimental. When I talk about entrepreneurship I emphasize the same kinds of problem solving in business or technology: how many servers will we need? how fast will sales grow? how much capital should we raise? ...

Watching someone work out a Fermi problem in real time reveals a lot about their brainpower. Wall Street firms, consultancies like McKinsey, Microsoft, and even small startups have been known to ask these kinds of questions of job applicants. This book discusses similar problems in a business context.

The difficulty of most Fermi problems is limited, unless the problem requires some specialized knowledge. But I like them slightly better than puzzles or brain teasers which rely on esoteric tricks that the solver either gets or doesn't get. A former collaborator of mine came up with the following (slightly broadening the genre) one evening while I was visiting U Chicago:

1. If the sun stopped radiating energy, what temperature would the surface of the Earth cool to?

2. In the above scenario, could humans survive using current technology if given enough time to prepare?


Weinstein and Adam's book is a nice collection. None of the problems require any specialized knowledge of math or physics; the level is appropriate for a bright kid or moderately technical reader.

Conquest: David Day

Another book recommendation. I've never understood the fundamental moral or ethical justification for international law or national sovereignty in contested geographies, other than what Australian historian David Day calls Right of Conquest -- Might Makes Right, followed by propaganda, myth making and "history" written by the victors.

The War Nerd puts it succinctly:

"I don't live this double life, benefiting from the fact that my house is built on some other tribe's land and then pretending to regret that. I'll always remember having to study Bury My Heart at Wounded Knee, and everyone sobbing for the poor Indians, but nobody's gonna give them the land back. I mean, one way or the f*#king other: either you give them the land back, or you admit you're a predator and you eat meat."

[Note: I am not endorsing imperialism or genocide here. I am criticizing hypocrisy and self-deluding moralizers. By all means give them their land back, or at least try harder to make things right, before lecturing other nations about international law or human rights.]

Podcast interview with the author. In the interview Day notes that the idea for the book came from the contrasting attitudes of Churchill and Australian Prime Minister Menzies during the second world war. Churchill seemed confident that Britain as a nation and people could survive a defeat by the Germans, whereas Menzies feared that the European presence in Australia could not survive a Japanese victory.

Conquest: How Societies Overwhelm Others

The history of the world has been the history of peoples on the move, as they occupy new lands and establish their claims over them. Almost invariably, this has meant the violent dispossession of the previous inhabitants. Whether it is the Normans in England, the Chinese in Tibet, the Germans in Poland, the Indonesians in West Papua, or the British and Americans in North America, the claiming of other people's lands and the supplanting of one people by another has shaped the history of societies from the ancient pastto the present day. David Day tells the story of how this happened - the ways in which invaders have triumphed and justified conquest which, as he shows is a bloody and often prolonged process that can last centuries. And while each individual conquest is ultimately unique, nevertheless they often share a number of qualities, from the re-naming of the conquered land and the invention of myth to justify what has taken place, to the exploitation of the conquered resources and people, and even to the outright slaughter of the original inhabitants. Above all, as Day shows in this hugely bold and ambitious book, conquest can have deep and long-lasting consequences - for the conquered, the conquerors, and for the wider course of world history.

Reviewer comments:

In Conquest David Day poses the question fundamental to all studies of imperial expansion by all societies: ‘how does a society that moves onto the land of another make that place its own?’ To find an answer he examines ten common strategies, ranging from striking a legal claim to colonization. This is a highly original approach. It demonstrates a spectacular knowledge of contrasting situations across the globe and forces the reader to rethink old certainties. It should be read by all students of ‘supplanting societies’ of all races and in all continents.

Emeritus Professor David Fieldhouse, author of The Colonial Empires


David Day's thesis is simple but controversial: it is that no nation or people now exists who have been in continuous occupation of the land which they regard as their own, and that there is none that did not seize the land on which they live from some previous possessors by force of conquest.

This deceptively simple, indeed obvious, conclusion based on wide reading has profound implications for the ways in which we view the exercise of power, the notion of ‘just war’, the theoretical underpinnings of any modern nation's right to exist. It also profoundly challenges the basic polarity of postcolonial studies, that between colonizer and colonized.

Judges' comments, Gleebooks Prize

Gillian Tett at LSE

Highly recommended: FT journalist Gillian Tett, a PhD in social anthropology, discusses her book on the financial crisis: Fool's Gold, at an LSE public lecture.

I haven't read the book yet, but it's on my list :-) Here are two nice excerpts that appeared in the FT. She does a great job of covering the birth and development of credit derivatives, CDOs, etc.

Genesis of the debt crisis

How panic gripped the world's biggest banks

Below is a discussion of correlation from the first excerpt.

The problem with correlation

Demchak was acutely aware that modelling the risks involved in credit derivatives deals had its limits. One of the trickiest problems revolved around the issue of “correlation”, or the degree to which defaults in any given pool of loans might be interconnected. Trying to predict correlation is a little like working out how many apples in a bag might go rotten. If you watch what happens to hundreds of different disconnected apples over several weeks, you might guess the chance that one apple might go rotten – or not. But what if they are sitting in a bag together? If one apple goes mouldy, will that make the others rot too? If so, how many and how fast?

Similar doubts dogged the corporate world. JP Morgan statisticians knew that company debt defaults are connected. If a car company goes into default, its suppliers may go bust, too. Conversely, if a big retailer collapses, other retail groups may benefit. Correlations could go both ways, and working out how they might develop among any basket of companies is fiendishly complex. So what the statisticians did, essentially, was to study past correlations in corporate default and equity prices and program their models to assume the same pattern in the present. This assumption wasn’t deemed particularly risky, as corporate defaults were rare, at least in the pool of companies that JP Morgan was dealing with. When Moody’s had done its own modelling of the basket of companies in the first Bistro deal, for example, it had predicted that just 0.82 per cent of the companies would default each year. If those defaults were uncorrelated, or just slightly correlated, then the chance of defaults occurring on 10 per cent of the pool – the amount that might eat up the $700m of capital raised to cover losses – was tiny. That was why JP Morgan could declare super-senior risk so safe, and why Moody’s had rated so many of these securities triple-A.

The fact was, however, that the assumption about correlation was just that: guesswork. And Demchak and his colleagues knew perfectly well that if the correlation rate ever turned out to be appreciably higher than the statisticians had assumed, serious losses might result. What if a situation transpired in which, when a few companies defaulted, numerous others followed? The number of defaults required to set off such a chain reaction was a vexing unknown. Demchak had never seen it happen, and the odds seemed extremely long, but even if there was just a minute chance of such a scenario, he didn’t want to find himself sitting on $100bn of assets that could conceivably go bust. So he decided to play it safe, and told his team to look for ways to cut their super-senior liabilities again, irrespective of what the regulators were saying.

That stance cost JP Morgan a fair amount of money, because it had to pay AIG and others to insure the super-senior risk, and those fees rose steadily as the decade wore on. In the first such deals with AIG, the fee had been just 0.02 cents for every dollar of risk insured each year. By 1999, the price was nearer 0.11 cents per dollar. But Demchak was determined that the team must be prudent.

Matter and Antimatter, Angels and Demons

[Slides, audio and video for the talk here.]

Next week I'm giving a public lecture on the science behind the latest Dan Brown blockbuster, Angels and Demons. Sony Pictures and the US LHC collaboration have coordinated similar talks across the country.

The illuminati have resurfaced, and are threatening to blow up the Vatican with an antimatter bomb stolen from CERN ;-)

What can I say? It's a good chance to talk to the general public about antimatter, particle physics and cosmology. I'll post my slides and video of the talk.

One point I'll make in the talk is that Dan Brown has accessed some powerful symbolism here -- contrasting the Catholic church and Vatican with modern particle physics and the massive detectors at the LHC.



The Atlas detector at LHC (click for larger version).



Director Ron Howard talking about the science vs religion aspect of the film.

The marshmallow experiment

A simple test administered to four year olds has impressive predictive power for later life outcomes. Are we talking about an IQ test? No, a test of self-discipline, or the ability to delay gratification.

As described in Wikipedia:

In the 1960s, a group of four year olds were given a marshmallow and promised another if they could wait 20 minutes before eating the first one. Some children could wait and others could not. The researchers then followed the progress of each child into adolescence, and demonstrated that those with the ability to wait were better adjusted and more dependable (determined via surveys of their parents and teachers), and scored an average of 210 points higher on the Scholastic Aptitude Test.

See also this update on the research in the New Yorker.

...Footage of these experiments, which were conducted over several years, is poignant, as the kids struggle to delay gratification for just a little bit longer. Some cover their eyes with their hands or turn around so that they can’t see the tray. Others start kicking the desk, or tug on their pigtails, or stroke the marshmallow as if it were a tiny stuffed animal.

...Mischel and his colleagues continued to track the subjects into their late thirties—Ozlem Ayduk, an assistant professor of psychology at the University of California at Berkeley, found that low-delaying adults have a significantly higher body-mass index and are more likely to have had problems with drugs—but it was frustrating to have to rely on self-reports. “There’s often a gap between what people are willing to tell you and how they behave in the real world,” he explains. And so, last year, Mischel, who is now a professor at Columbia, and a team of collaborators began asking the original Bing subjects to travel to Stanford for a few days of experiments in an fMRI machine. ...The scientists are hoping to identify the particular brain regions that allow some people to delay gratification and control their temper. They’re also conducting a variety of genetic tests, as they search for the hereditary characteristics that influence the ability to wait for a second marshmallow.

It seems to me that the ability to delay gratification (future orientation), as tested in the experiment, is only moderately correlated with IQ. We all know high IQ slackers and diligent people of average intelligence. The data also show that IQ is highly correlated with income but much less so with accumulated wealth.

Both diligence and intelligence are necessary for success in life, which is why the tried and true inputs used in college admissions are high school grades and SAT score. The former are somewhat more correlated with diligence than the latter, so between the two we get a metric which is sensitive to both psychological factors.


Here are the original papers on the marshmallow study, kindly provided to me some time ago by the Shoda Lab:

Mischel, Shoda and Peake (1988)
Mischel, Shoda and Rodriguez (1989)
Shoda, Mischel and Peake (1990)


Time orientation (like other personality factors) and IQ are heritable traits. The dreaded issue of group differences is mentioned briefly in the New Yorker piece.

...Mischel soon grew interested in a different project. He lived in a part of the island that was evenly split between people of East Indian and of African descent; he noticed that each group defined the other in broad stereotypes. “The East Indians would describe the Africans as impulsive hedonists, who were always living for the moment and never thought about the future,” he says. “The Africans, meanwhile, would say that the East Indians didn’t know how to live and would stuff money in their mattress and never enjoy themselves.”

Mischel took young children from both ethnic groups and offered them a simple choice: they could have a miniature chocolate bar right away or, if they waited a few days, they could get a much bigger chocolate bar. Mischel’s results failed to justify the stereotypes—other variables, such as whether or not the children lived with their father, turned out to be much more important—but they did get him interested in the question of delayed gratification.

Darwin's Nightmare

This is one of the great documentaries of all time -- it's beautiful and tragic and all too real. The entire 2 hours is available on Google video (click below).

See also this interview with the filmmaker.

Darwin's Nightmare

Some time in the 1960's, in the heart of Africa, a new animal was introduced into Lake Victoria as a little scientific experiment. The Nile Perch, a voracious predator, extinguished almost the entire stock of native fish species. The new fish multiplied so fast that its white fillets are today exported all around the world. Huge hulking ex-Soviet cargo planes come daily to collect the latest catch in exchange for their southbound cargo… Kalashnikovs and ammunition for the uncounted wars in the dark center of the continent. This booming multinational industry of fish and weapons has created an ungodly globalized alliance on the shores of the world’s biggest tropical lake: an army of local fishermen, World Bank agents, homeless children, African ministers, EU-commissioners, Tanzanian prostitutes and Russian pilots.

Capitalization of largest banks 1999-2009

A correspondent sent me this graphic from the Financial Times, which lets you see the 20 largest banks in the world by capitalization, and how the list changed over the last 10 years.

The first figure below shows the rankings in 1999 -- mostly US banks, with some Japanese, Swiss and UK firms as well. Guess who dominates the rankings today (second figure)?

Guess how much top executives at Citi were paid over the last decade to run the bank into the ground? Robert Rubin, where are you? See earlier post Clawbacks, fake alpha and tail risk.

WolframAlpha: W|A

If you are attuned to the geek universe, you've probably already heard the rumors about WolframAlpha, the "computational knowledge engine" from Steve Wolfram, the creator of Mathematica. The service is scheduled to launch this weekend, and media hype has already reached a frenzy -- see, e.g., this NYTimes article.

Curious to find out more, I emailed a former theoretical physicist who works (remotely) for Wolfram Research but sits just down the hall from me. Years ago I had lobbied for an office for him because, although he isn't primarily in physics research any more, he's a brilliant guy and was bound to end up doing something interesting. (Wanting to take advantage of the opportunity to work remotely at Wolfram he had researched the best places to live and ended up choosing Eugene.) Little did I know he's been leading the W|A project from here! He stumbled into my office yesterday to answer my questions and tell me that he's knee deep in reviewing code commits and getting ready for the launch :-)

My experience has confirmed over and over again that big brains tend to do interesting things. Whenever I meet someone who is "scary smart" (there are not so many in the world), I keep an eye out for what they do later in life.

Here is what AI researcher Doug Lenat wrote about W|A:

...At its heart is a formal Mathematica representation. Its inference engine is basically a large number of individually hand-engineered scripts for tapping into data which he and his team have spent the last several years gathering and "curating". For example, he has assembled tables of historical financial information about countries' GDP's and about companies' stock prices. In a small number of cases, he also connects via API to third party information, but mostly for realtime data such as a current stock price or current temperature. Rather than connecting to and relying on the current or future Semantic Web, Alpha computes its answers primarily from his own curated data to the extent possible; he sees Alpha as the home for almost all the information it needs, and will use to answer users' queries.

In an important sense, Alpha is a logical extension of Mathematica: it extends the range of types of information for which significant power can be gained by manually, and exhaustively, enumerating a large set of cases: airplane designs, cities, currencies, etc. I.e., Alpha extends what Mathematica has done previously for things like chemical compounds, geometric surfaces, topological configurations, arithmetic series, trigonometric ratios, and equations. In the new cases, as Mathematica did in those abstract math cases, Alpha excels at not just retrieving the stored data but performing various appropriate numeric calculations on the data, and displaying the results in beautiful graphs and easily comprehended tables for the user.

The resulting mosaic covers a large portion of the space of queries that the average person might genuinely want to ask, in the course of their day. The interface is not exactly natural language, but can be treated by the user as though it were -- just as users of browsers can treat them as though they parsed sentences even though they don't. A better way to think of it is a DWIMM ("do what I might mean"), so if you type in something like "gdp France / Germany", it calculates and returns a graph of the relative fraction of France's annual GDP to Germany's GDP, over the last 30 years or so. If you just type in "gdp", it looks up your local host and (in my case) displays the GDP of the USA over the last 30 years, plus various pieces of information about what gross domestic product is, from a mathematical formula perspective but not from a semantic one. It does not have an ontology, so what it knows about, say, GDP, or population, or stock price, is no more nor less than the equations that involve that term.

See also this video of a lecture by Wolfram about W|A.

Is there a China model?

Speaking of interesting conferences, check out this one hour documentary on a recent meeting between Chinese and Western intellectuals. I found this while searching for an interview with Azar Gat, whose book War in Human Civilization I am now reading.

The two most outspoken Chinese professors, Cui (Tsinghua) and Wang (CUHK), are fairly aggressive in stating their view that the Chinese government is pragmatic and highly competent. However, they didn't fully address the issue of legitimacy in the absence of elections. Reliance on polls and performance indicators presupposes that they are instituted in an honest and effective way.

It's odd that all the Chinese academics seem to agree on the main points -- I am sure it would not have been difficult for the organizers to find some dissident perspectives, highlighting problems like corruption, misallocation or resources, social unrest, etc. Still, the overall impression is that few China experts doubt the stability of the current system.

At one point Cui notes that (extrapolating current trends) by 2020 the per capita GDP of 300 million urbanites on the eastern seaboard may equal that of Portugal, accounting for a total GDP roughly that of the EU. His numbers seem a bit aggressive, but not totally crazy; see here and here.

Is there a China model? -- a video documentation of a China-West Intellectual Summit.

...Can we now speak of a Chinese model, an authoritarian capitalism, which perhaps can even inspire others, in particular now when the crisis that has emanated from the USA drives many people to a critical view of the West?

Glasshouse Forum assembled prominent academics from China and the West at Maison Louis Carré outside Paris on 23-24 February 2009 to an intellectual summit on the theme “Is there a China model?” In the video documentation which Glasshouse Forum has produced in cooperation with the production company Edinim, we can follow the occasionally tense debate, moderated by Gideon Rachman of the Financial Times, on the issue of whether there is such a model and whether the rest of the world, including the West, might have something to learn from it.

It is significant that no one at the meeting subscribed to Fukuyama’s theory on the end of history. No one saw any signs of China adopting liberal democracy. It was also evident that the Chinese participants considered China to have good prospects to overcome the global economic crisis.

This documentation gives fascinating and thought-provoking insights into what may become the political landscape of the future.

The participants in the film are: Gideon Rachman, moderator of the summit and Chief foreign affairs columnist for the Financial Times, Timothy Garton Ash, Oxford University, Daniel A. Bell and Zhiyuan Cui of the Tsinghua University in Beijing, Azar Gat, Tel Aviv University, Simon Long, Asia editor for The Economist, Vivienne Shue, Oxford University, Shaoguang Wang, Chinese University of Hong Kong, Feng Zhang, The Foreign Policy Centre in London, Wei-Wei Zhang, Centre for Asian Studies in Geneva and Fudan University in Shanghai, and Yongnian Zheng, National University of Singapore.

Gideon Rachman described the meeting as follows (comments are also good):

Chinese views of the crisis

February 25, 2009 11:11am

I have just spent a fascinating couple of days, closeted with some Chinese academics in a house outside Paris, at a seminar organised by Sweden’s “Glasshouse Forum“.

Several of the assembled profs were members of China’s “new left” - people like Zhiyuan Cui, an economist from Tsinghua University and Shaoguang Wang of Hong Kong university. I was surprised by how confident they seemed. The consensus seemed to be that China would weather the global economic crisis better than most - and that the Chinese political system is sufficiently robust to withstand higher unemployment and slower growth. One of the participants pointed out that in the late 1990s, 60m Chinese people had been thrown out of work in the aftermath of the Asian economic crisis and the restructuring of China’s state-owned enterprises. But the country’s long-term trajectory remained ever upwards.

Another participant joked that China had discovered that whatever country it models itself on is doomed. In the 1950s China had modelled itself on the Soviet Union; in the 1980s there was a fashion for imitiating Japan; and more recently, there has been a fascination with American capitalism.

It was a nice joke that I think contained a broader insight. Western analysts tend to measure China’s economic and political progress by asking - are they becoming more or less like us? More democratic, more free-market; or more authoritarian and state-directed?

The Chinese participants seemed to be arguing that their country was finding its own unique way to modernity. Zhiyuan Cui was keen on the idea of a “socialist market economy”, which allowed space for both private enterprise and for a large and profitable state sector. The new left generally believe that socialism remains a genuine ideal in China - and not just a rhetorical hangover from a bygone age. Others, in particular, Daniel Bell - a Canadian who teaches philosophy at Tsinghua - reckoned that the Confucian tradition was increasingly important in modern China.

And Zhang Wei-Wei, who used to be Deng Xiaoping’s translator and is now a professor at Fudan University, argued that the idea that legitmacy is conferred on a government by elections is a western-obsession. The Chinese believe in “performance legitimacy”. If the government governs well, it is percieved as legitimate.

I am sufficiently western to find this not entirely convincing. And I am not sure what kind of results the Chinese government will be able to produce, in the face of a world-wide slump.

See also this related LSE discussion (podcast), particularly Chen Jian's comments in the last 20 minutes or so:

Rising Asia in the World Crisis

Asia’s rise has brought about profound changes to the international system and the current world crisis presents the continent with both opportunities and challenges. The initiatives and responses by Asian countries, China and India in particular, have the potential to define the world’s path of development now and in the future.

Chen Jian holds the Philippe Roman Chair in History and International Affairs at LSE IDEAS for 2008-09 and is the Michael J Zak Chair of the History of US China Relations at Cornell University. Danny Quah is head of department and professor of economics at LSE. Athar Hussain is director of the Asia Research Centre, LSE.

Economics, ant farmers and free will theorems

Wow, it's been almost a week since my last post. I was pretty busy at the Perimeter Institute -- my brain is occupied trying to digest all the new things I've learned :-)

The conference had its origins in an essay Can science help solve the economic crisis? written by several of the organizers. The essay received responses from several prominent thinkers, and led to an exchange between Stanford economist Paul Romer and mathematician turned quant Eric Weinstein (see further down the page at the link above). Romer agreed to debate Weinstein, but then failed to show up! [Note added: in a private communication to me, Paul Romer writes that there was a misunderstanding and he never agreed to participate in a debate.]

The meeting went full speed from 9 AM until late at night for four days. The attendees were a mix of theoretical physicists (with particle physics and complexity theory, especially the Santa Fe Institute, well represented), practitioners from Wall St. (often from a math or physics background), academic economists (Barkley Rosser, Richard Freeman, etc.) and evolutionary biologists. See here for video recordings of talks. There were many good talks but I especially recommend Doyne Farmer's for the physicist's complex systems view of economics.

Too much ground was covered for a short summary, but one area of interest for almost all attendees was the possibility of going beyond the neoclassical paradigm via simulations of interacting agents. Examples of such simulations were discussed in several of the talks, including by Santa Fe "ant farmers" Bruce Sawhill and Jim Herriot, who used agents to model air traffic for the ambitious DayJet startup (see here and here).

The technology is certainly there to do some massive, quasi-realistic simulations of an actual economy (as opposed to an isolated financial market or sub-economy). The main problem, which wasn't given as much attention as I might have liked, is that the results are limited by the quality of the individual agents, who must have at least rudimentary learning capabilities to be realistic. Hence one is led full circle back to problems related to AI, machine learning and even psychology or cognitive science.


When I wasn't at the conference I managed to have several interesting physics discussions. Below are links to some recent work by John Conway and Simon Kochen that came up in two separate conversations I had at Perimeter -- one with Rob Spekkens (he and I were discussing related issues, although he didn't mention these papers specifically) and with Nima Arkani-Hamed, who was visiting from IAS.

The Free Will Theorem

http://arxiv.org/abs/quant-ph/060407

On the basis of three physical axioms, we prove that if the choice of a particular type of spin 1 experiment is not a function of the information accessible to the experimenters, then its outcome is equally not a function of the information accessible to the particles. We show that this result is robust, and deduce that neither hidden variable theories nor mechanisms of the GRW type for wave function collapse can be made relativistic. We also establish the consistency of our axioms and discuss the philosophical implications.

See also the Strong Free Will theorem.

I feel the name of the theorem is a bit misleading, but inevitably so as it is quite difficult to define free will. The main feature of the papers is the great clarity of thought and presentation. In content, they are not so different from the older GHZ result which was formulated in terms of what the authors called local realism. To be honest I don't quite agree with Conway and Kochen's interpretation of their own results -- it's obvious that the results are easily consistent with many worlds quantum mechanics, which does not (at least from my spacetime perspective) allow for free will.

Here are 6 lectures on the theorem and related topics, given by Conway recently at Princeton. See also 'tHooft's response to their result.

Financial crisis meeting at Perimeter

Some snapshots from the conference The Economic Crisis and its Implications for The Science of Economics. I overcame my fear of H1N1 and decided to make the trip anyway. Let's hope all that hand washing pays off :-)

The first photo is the morning panel discussion. From left to right, Eric Weinstein, Nouriel Roubini, Richard Freeman and Nassim Taleb.

The second photo is of Emanuel Derman's talk. In the upper right hand corner you can see Doyne Farmer of Santa Fe.

The third photo is of Mike Brown, former Microsoft CFO and former NASDAQ Chairman telling some amusing stories which involve Bill Gates, Bernie Madoff and simulations of ant traders :-)

The talks today were for a general audience -- my favorite was Andy Lo's. I hope the next two days of the meeting will be a bit more technical.

Life path integral

I think this web cartoon by Abstruse Goose is hilarious! (Thanks to DB for sending it to me :-)

Who is the artist? I did a quick search and didn't find anything -- is he/she deliberately anonymous (other than the Chinese characters on the upper left)?

For the perplexed: see earlier post path integrals.

Pandemics

Hmm... should I cancel my travel tomorrow to the Perimeter Institute? What exactly is the cost benefit analysis of flying to Toronto from Eugene (via Denver) right now to meet with possibly virus bearing economists and physicists from around the world? How much do those activities elevate my chances of catching H1N1, or, even worse, infecting my family?

I have no answers, although some years ago I wrote a paper on epidemics with collaborator A. Zee of KITP in Santa Barbara. That research was inspired by SARS, not H1N1, but it does have a certain timeless quality to it ;-) Astute readers will note that the bi-linear diagonalization in equation (6) resembles the transformation used on mass matrices in particle physics.

Global Spread of Infectious Diseases

http://arxiv.org/abs/cond-mat/0306628

S. Hsu, A. Zee

We develop simple models for the global spread of infectious diseases, emphasizing human mobility via air travel and the variation of public health infrastructure from region to region. We derive formulas relating the total and peak number of infections in two countries to the rate of travel between them and their respective epidemiological parameters.

From the conclusions:

One interesting conclusion from our models is that typical international mobility – the probability per unit time of international travel for a given infected individual, estimated at mi→j ∼ 10^−5 per week – is still sufficiently small that a country with well-developed public health infrastructure (effectively, a negative eigenvalue λ) can resist an epidemic even when other more populous countries experience complete saturation. In the quasi-realistic simulation 1 (figures (1),(2)), of order 10^5 infections occur in country 2, even though the disease has swept completely through country 1. In reaching this conclusion, we kept the mobility parameter fixed during the outbreak, and did not assume any draconian quarantine on international travellers arriving in country 2. Such measures would reduce the number of infections in country 2 considerably. Of course, this conclusion assumes that the public health infrastructure in country 2 remains robust during the outbreak. In the nonlinear simulation 3 (figures (6), (7)), we see that a breakdown in the medical system can lead to grave consequences.

In the case of two countries, one of which is a “reservoir” with positive eigenvalue λ_i and the other with negative eigenvalue λ_j , a good rule of thumb arising from equation (11) is that the ratio of total number of infections in the two countries is given by the fraction of infected individuals who migrate in a timescale |λ_j|^−1 , which is the “halving” time for the epidemic in country j . In our simulation 1, this timescale is about two months, and the fractional mobility over that period is ∼ 10^−4, leading to 10^5 infections in country 2 if the entire 10^9 population of country 1 is infected. The maximum number of infections at any given time in the simulation is 5 10^3 (figure (2)). If the medical system of country 2 can treat this number of patients without breaking down (entering the nonlinear regime), it can prevent a larger outbreak.

US Human Development Indices

I was struck by this table of Human Development Index values for different groups in the US. It looks like three different countries when broken out this way! There is one group clustered at 7.5 (Asians), another around 5.5 (Whites) and another around 3.5 to 4 (Blacks, Hispanics, Native Americans).

The indices are computed by this project, using US government data. See here for more, including a nice visualization with results by state, district, etc. Can the life expectancy of Native American and Latino women really be higher than for White women? Latino males also seem to have longer life expectancy than White males.



More on life expectancies of different regional and ethnic groups in the US here. (The researchers define 8 different Americas by race and geography or class.)

The gap between the life expectancy of the 3.4 million black males in high-risk urban areas in America 8 and the life expectancy for the 5.5 million Asian females in America 1 in 2001 was 20.7 y. Within the sexes, the gap between the best-off and the worst-off groups was 15.4 y for males (Asians versus blacks in high-risk urban areas) and 12.8 y for females (Asians versus low-income southern rural blacks). These gaps are 2.4 and 2.8 times those between white and black life expectancies for the nation as a whole for males and females, respectively. ...

The 12.8-y gap in life expectancy between females in Americas 1 and 7 is approximately the same as the gap between Japan, with the highest national life expectancy for females in 2001 (84.7 y), and Fiji, Nicaragua, and Lebanon [34]. Asian females in the US have a life expectancy that is 3 y higher than that of females in Japan [34]. For males, the 15.4-y gap in life expectancy between Asians (America 1) and high-risk urban blacks (America 8) is the same as between Iceland, with the highest national male life expectancy in 2001 (78.2 y), and Sao Tome, Belarus, and Uzbekistan [34]. In other words, millions of Americans, distinctly identified by their sociodemographic characteristics and place of residence, have life expectancies that are similar to some low-income developing countries (see also Figure 4B).

Neuroenhancement

Hmm... do we need drug testing for neuroenhancers?

I wouldn't be surprised to find that there are individuals who naturally function in the kind of state induced by Adderall or Provigil. Think of those hyper-productive people who start companies, write lots of books and papers and still manage to have hobbies and a social life. If a little pill helps the average guy achieve that level of capability, why not?

Provigil (modafinil) is used by the militaries of several countries, for example by fighter and bomber pilots.

New Yorker: ...The BoredAt Web sites—which allow college students to chat idly while they’re ostensibly studying—are filled with messages about Adderall. Posts like these, from the BoredAtPenn site, are typical: “I have some Adderall—I’m sitting by room 101.10 in a grey shirt and headphones”; “I have Adderall for sale 20mg for $15”; “I took Adderall at 8 p.m., it’s 6:30 a.m. and I’ve barely blinked.” On the Columbia site, a poster with an e-mail address from CUNY complains that her friends take Adderall “like candy,” adding, “I don’t want to be at a disadvantage to everyone else. Is it really that dangerous? Will it fuck me up? My grades weren’t that great this year and I could do with a bump.” A Columbia student responds, “It’s probably not a good idea if you’re not prescribed,” but offers practical advice anyway: “Keep the dose normal and don’t grind them up or snort them.” Occasional dissents (“I think there should be random drug testing at every exam”) are drowned out by testimonials like this one, from the BoredAtHarvard site: “I don’t want to be a pusher or start people on something bad, but Adderall is AMAZING.”

...Zack, who has a book being published this summer, called “The Neuro Revolution,” said, “We live in an information society. What’s the next form of human society? The neuro-society.” In coming years, he said, scientists will understand the brain better, and we’ll have improved neuroenhancers that some people will use therapeutically, others because they are “on the borderline of needing them therapeutically,” and others purely “for competitive advantage.”

Zack explained that he didn’t really like the term “enhancement”: “We’re not talking about superhuman intelligence. No one’s saying we’re coming out with a pill that’s going to make you smarter than Einstein! . . . What we’re really talking about is enabling people.” He sketched a bell curve on the back of a napkin. “Almost every drug in development is something that will take someone who’s working at, like, forty per cent or fifty per cent, and take them up to eighty,” he said.

...Paul Phillips was unusual for a professional poker player. When he joined the circuit, in the late nineties, he was already a millionaire: a twenty-something tech guy who had started off writing software, helped found an Internet portal called go2net, and cashed in at the right moment. He was cerebral and, at times, brusque. His nickname was Dot Com. ...Most unusual of all, Phillips talked freely about taking prescription drugs—Adderall and, especially, Provigil—in order to play better cards.

He first took up the game in 1995, when he was in college, at U.C. San Diego. He recalled, “It was very mathematical, but you could also inject yourself into the game and manipulate the other guy with words”—more so than in a game like chess. Phillips soon felt that he had mastered the strategic aspects of poker. The key variable was execution. At tournaments, he needed to be able to stay focussed for fourteen hours at a stretch, often for several days, but he found it difficult to do so. In 2003, a doctor gave him a diagnosis of A.D.H.D., and he began taking Adderall. Within six months, he had won $1.6 million at poker events—far more than he’d won in the previous four years. Adderall not only helped him concentrate; it also helped him resist the impulse to keep playing losing hands out of boredom. In 2004, Phillips asked his doctor to give him a prescription for Provigil, which he added to his Adderall regimen. He took between two hundred and three hundred milligrams of Provigil a day, which, he felt, helped him settle into an even more serene and objective state of mindfulness; as he put it, he felt “less like a participant than an observer—and a very effective one.” Though Phillips sees neuroenhancers as essentially steroids for the brain, they haven’t yet been banned from poker competitions.

Last summer, I visited Phillips in the high-desert resort town of Bend, Oregon, where he lives with his wife, Kathleen, and their two daughters, Ivy and Ruby. Phillips, who is now thirty-six, seemed a bit out of place in Bend, where people spend a lot of time skiing and river rafting. Among the friendly, faithfully recycling locals, he was making an effort to curb his caustic side. Still, when I first sent Phillips an e-mail asking him to explain, more precisely, how Provigil affected him, he couldn’t resist a smart-ass answer: “More precisely: after a pill is consumed, tiny molecules are absorbed into the bloodstream, where they eventually cross the blood-brain barrier and influence the operation of the wetware up top.”

In person, he was more obliging. He picked me up at the Bend airport driving a black convertible BMW, and we went for coffee at a cheery café called Thump. Phillips wore shorts and flip-flops and his black T-shirt displayed an obscure programming joke. “Poker is about sitting in one place, watching your opponents for a long time, and making better observations about them than they make about you,” he said. With Provigil, he “could process all the information about what was going on at the table and do something about it.” Though there is no question that Phillips became much more successful at poker after taking neuroenhancers, I asked him if his improvement could be explained by a placebo effect, or by coincidence. He doubted it, but allowed that it could. Still, he said, “there’s a sort of clarity I get with Provigil. With Adderall, I’d characterize the effect as correction—correction of an underlying condition. Provigil feels like enhancement.” And, whereas Adderall made him “jittery,” Provigil’s effects were “completely limited to my brain.” He had “zero difficulty sleeping.”

...Drugs like Ritalin and Adderall work, in part, by elevating the amount of dopamine in the brain. Dopamine is something you want just enough of: too little, and you may not be as alert and motivated as you need to be; too much, and you may feel overstimulated. Neuroscientists have discovered that some people have a gene that leads the brain to break down dopamine faster, leaving less of it available; such people are generally a little worse at certain cognitive tasks. People with more available dopamine are generally somewhat better at the same tasks. It makes sense, then, that people with naturally low dopamine would benefit more from an artificial boost.

...Zack Lynch, of NeuroInsights, gave me a rationale for smart pills that I found particularly grim. “If you’re a fifty-five-year-old in Boston, you have to compete with a twenty-six-year-old from Mumbai now, and those kinds of pressures are only going to grow,” he began. Countries other than the U.S. might tend to be a little looser with their regulations, and offer approval of new cognitive enhancers first. “And if you’re a company that’s got forty-seven offices worldwide, and all of a sudden your Singapore office is using cognitive enablers, and you’re saying to Congress, ‘I’m moving all my financial operations to Singapore and Taiwan, because it’s legal to use those there,’ you bet that Congress is going to say, ‘Well, O.K.’ It will be a moot question then. It would be like saying, ‘No, you can’t use a cell phone. It might increase productivity!’ ”

...Paul McHugh, a psychiatrist at Johns Hopkins University, has written skeptically about cosmetic neurology. In a 2004 essay, he notes that at least once a year in his private practice he sees a young person—usually a boy—whose parents worry that his school performance could be better, and want a medication that will assure it. In most of these cases, “the truth is that the son does not have the superior I.Q. of his parents,” though the boy may have other qualities that surpass those of his parents—he may be “handsome, charming, athletic, graceful.” McHugh sees his job as trying to get the parents to “forget about adjusting him to their aims with medication or anything else.”

...Of course, the idea behind mind-hacking isn’t exactly new. Fortifying one’s mental stamina with drugs of various kinds has a long history. Sir Francis Bacon consumed everything from tobacco to saffron in the hope of goosing his brain. Balzac reputedly fuelled sixteen-hour bouts of writing with copious servings of coffee, which, he wrote, “chases away sleep, and gives us the capacity to engage a little longer in the exercise of our intellects.” Sartre dosed himself with speed in order to finish “Critique of Dialectical Reason.”

New York Times nearing bankruptcy

They need some real business leadership, and they need it now. The Grey Lady is going down for the count thanks to the internet, craigslist and the recession. Will there be a bailout?

BusinessInsider: As expected, the New York Times's business operations began burning cash this quarter (until now, they had remained cash-flow positive). The company has recently made several wise moves that have postponed the date at which it will run out of cash. But the situation is still critical.

At the current rate of cash consumption, assuming no one-time expenses (highly unlikely), we estimate that the company will max out its current borrowing capacity in 4 quarters. At that point, it will owe about $1.2 billion in debt. This estimate does not include any payments on the company's $600+ million pension and benefit obligation, of which $181 million is due next year.

The bottom line: The New York Times Company remains on the brink of insolvency. There are also at least $1.5 billion of claims ahead of common shareholders of the company's assets should it file for bankruptcy. ...

Financial crisis and economics at Perimeter

I'll be attending an interdisciplinary conference at the Perimeter Institute, May 1-4: The Economic Crisis and its Implications for The Science of Economics. It should be a combustible mix of personalities ;-)

I give the economists credit for entering the lion's den of theoretical physicists. Here is how J. DOYNE FARMER, of the Santa Fe Institute and Prediction Company, described a meeting of this type that occurred 20 years ago.

With some justification, many economists think that the entry of physicists into their world reflects merely audacity, hubris, and arrogance. Physicists are not known for their humility, and some physicists have presented their work in a manner that plays into this stereotype. The cultural barrier between the two groups will be difficult to overcome. This schism was already evident at a conference held at the Santa Fe Institute in 1988 titled “The Economy as an Evolving Complex System.” Roughly half the participants were economists and the other half physicists. Although many of the physicists were largely ignorant of economics, that did not prevent them from openly criticizing the economists. At one point, Nobel laureate Phil Anderson said, “You guys really believe that?” At another point, Larry Summers (now Secretary of the Treasury) accused physicists of having a “Tarzan complex.” This was not just a turf war. Whether due to nature or nurture, this conference clearly showed that there is a deep epistemological divide between physicists and economists that is difficult to cross.

The first day talks are listed below. Perimeter is usually good about putting their talks online, so you can probably enjoy them yourself without schlepping all the way to Canada :-)

9:15 - 10:00 Eric Weinstein Conference Overview

10:00 - 10:45 Nouriel Roubini

11:10 - 11:55 Nassim Taleb

11:55 - 12:40 W. Brian Arthur Neoclassical Economics and its Policy Biases: Is there an alternative?

12:40 - 1:00 Panel Discussion with Speakers

1:00 - 2:30 Lunch Break

2:30 - 3:15 Emanuel Derman Scientists, Sciensters, Anti-Scientists & Economics

3:15 - 4:00 Andrew Lo The Adaptive Markets Hypothesis and Financial Crisis

4:15 - 5:00 Richard Alexander

5:00 - 6:00 Panel Discussion with Speakers and Wrap Up

50 years of John Searle at Berkeley

To find a 90 minute podcast of this gathering, which is remarkable for the quality of the speeches given in honor of philosopher John Searle, search under "searle 50 berkeley" at iTunes U (or follow this link).

John Searle’s 50 Years at Berkeley—A Celebration

A celebration of John Searle’s 50 years of distinguished service to the UC Berkeley campus, with reflections by Tom Nagel, Barry Stroud, Robert Cole, Alex Pines, Peter Hanks, and Maya Kronfeld.

While I disagree strongly with Searle's most famous philosophical construct -- the so called Chinese room argument against strong AI (see also here) -- I've always found his writing and argumentation to be exceptionally clear, at least for a philosopher ;-)

See also Paul Graham against philosophy.

The Quiet Coup

How the financial industry captured our government, and how that capture continues unabated despite the crisis. Author Simon Johnson is a former chief economist at the IMF. To him, America's situation is the all too familiar one of a banana republic that has been run aground by its oligarchs.

I doubt Johnson will be making millions of dollars per year consulting for a hedge or private equity fund anytime soon, the way that Larry Summers or Bill Clinton or GHWB have, or that Obama someday will.

The Atlantic: ...In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry’s ascent. Paul Volcker’s monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.


...Of course, the U.S. is unique. And just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy.

In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.

Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.

These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. It has become something of a tradition for Goldman Sachs employees to go into public service after they leave the firm. The flow of Goldman alumni—including Jon Corzine, now the governor of New Jersey, along with Rubin and Paulson—not only placed people with Wall Street’s worldview in the halls of power; it also helped create an image of Goldman (inside the Beltway, at least) as an institution that was itself almost a form of public service.

Wall Street is a very seductive place, imbued with an air of power. Its executives truly believe that they control the levers that make the world go round. A civil servant from Washington invited into their conference rooms, even if just for a meeting, could be forgiven for falling under their sway. Throughout my time at the IMF, I was struck by the easy access of leading financiers to the highest U.S. government officials, and the interweaving of the two career tracks. I vividly remember a meeting in early 2008—attended by top policy makers from a handful of rich countries—at which the chair casually proclaimed, to the room’s general approval, that the best preparation for becoming a central-bank governor was to work first as an investment banker.

A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true. Alan Greenspan’s pronouncements in favor of unregulated financial markets are well known. Yet Greenspan was hardly alone. This is what Ben Bernanke, the man who succeeded him, said in 2006: “The management of market risk and credit risk has become increasingly sophisticated. … Banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks.”

Of course, this was mostly an illusion. Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn’t. AIG’s Financial Products division, for instance, made $2.5 billion in pretax profits in 2005, largely by selling underpriced insurance on complex, poorly understood securities. Often described as “picking up nickels in front of a steamroller,” this strategy is profitable in ordinary years, and catastrophic in bad ones. As of last fall, AIG had outstanding insurance on more than $400 billion in securities. To date, the U.S. government, in an effort to rescue the company, has committed about $180 billion in investments and loans to cover losses that AIG’s sophisticated risk modeling had said were virtually impossible.

Wall Street’s seductive power extended even (or especially) to finance and economics professors, historically confined to the cramped offices of universities and the pursuit of Nobel Prizes. As mathematical finance became more and more essential to practical finance, professors increasingly took positions as consultants or partners at financial institutions. Myron Scholes and Robert Merton, Nobel laureates both, were perhaps the most famous; they took board seats at the hedge fund Long-Term Capital Management in 1994, before the fund famously flamed out at the end of the decade. But many others beat similar paths. This migration gave the stamp of academic legitimacy (and the intimidating aura of intellectual rigor) to the burgeoning world of high finance.

As more and more of the rich made their money in finance, the cult of finance seeped into the culture at large. Works like Barbarians at the Gate, Wall Street, and Bonfire of the Vanities—all intended as cautionary tales—served only to increase Wall Street’s mystique. Michael Lewis noted in Portfolio last year that when he wrote Liar’s Poker, an insider’s account of the financial industry, in 1989, he had hoped the book might provoke outrage at Wall Street’s hubris and excess. Instead, he found himself “knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share. … They’d read my book as a how-to manual.”

James Yang graphic art

A colleague introduced me to the artist James Yang, whose work seems to have a special appeal for geeky scientists like me. Below are a couple of nice images from his portfolio, with my own suggested captions :-)


"Physics department" (Peter Galison: ''My question is not how different scientific communities pass like ships in the night,'' he wrote in Image and Logic. ''It is rather how, given the extraordinary diversity of the participants in physics -- cryogenic engineers, radio chemists, algebraic topologists, prototype tinkerers, computer wizards, quantum field theorists -- they speak to each other at all.'' :-)




"Discovering China"



"The biotech century"

Quantum books

Two book recommendations, covering recent developments in quantum physics.

1) A popular book by first time author Louisa Gilder (daughter of futurist George Gilder), who began as a physics major at Dartmouth, but switched to English after two years. Nevertheless she retained her interest in quantum physics and arranged an independent study on the topic of entanglement that led (seven or so years later) to The Age of Entanglement. The book is excellent and covers important topics of the last 50 years that have not yet made their way into historical treatments of quantum mechanics: Bohmian mechanics, Bell's theorem, entanglement, quantum cryptography and teleportation, etc. I picked it up in the bookstore not expecting very much, but a casual glance at the later chapters convinced me it was worth reading. While none of the physics was new to me, many of the human stories behind the developments were not just new, but fascinating.

Here is a nice interview with Gilder.

One of my favorite quotes from the book is from experimentalist Anton Zeilinger: The boundary of classical and quantum is just a question of money. If we can create superpositions of buckyballs today will we someday do it with live viruses? :-)

Amazingly, there is no mention of decoherence or Everett's work in the book, despite a long discussion concerning Bell and the Against Measurement debate! (See related links here.)

2) For serious quantum mechanics who want to understand modern theoretical and experimental developments related to entanglement, decoherence and macroscopic superpositions, I recommend the book Exploring the Quantum by S. Haroche and J.-M. Raimond.

The counter-intuitive aspects of quantum physics have been for long illustrated by thought experiments, from Einstein's photon box to Schrodinger's cat. These experiments have now become real, with single particles--electrons, atoms or photons--directly unveiling the weird features of the quantum. State superpositions, entanglement and complementarity define a novel quantum logic which can be harnessed for information processing, raising great hopes for applications. This book describes a class of such thought experiments made real. Juggling with atoms and photons confined in cavities, ions or cold atoms in traps, is here an incentive to shed a new light on the basic concepts of quantum physics. Measurement processes and decoherence at the quantum-classical boundary are highlighted.

Life magazine photos

Have a look at this amazing repository of classic photographs at Life.com. Below are a few that came up when I searched under Oppenheimer, von Neumann and Stalingrad. The caption for the bottom photograph is "1st February 1943: German commander of the 6th Army, Field Marshal Friedrich von Paulus (1890 - 1957), surrendering after his troops were besieged at Stalingrad."

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.