Radio Stories

I spend a lot of time in the car driving to and from school, so I end up listening to a lot of podcasts (mainly This American Life, Radio Lab, Fresh Air, and Planet Money). I was catching up recently and wanted to point out a few highlights.

Last week on Fresh Air, Terry Gross interviewed Scott Patterson, author of The Quants, and Ed Thorp, mathematician,  inventor of blackjack card counting (or, at least, the first person to publish his methods), and, according to the book, also the inventor of the market-neutral hedge fund. These are some of Thorp’s comments (around 24:20):

“As far as you can tell now, how are quants being used on Wall Street? Are these mathematical models being relied on as heavily now after the stock market crash as they were before?”

“My impression is: pretty much. There’s a giant industry now; many thousands of people who otherwise would have gone into engineering and science have gone over to Wall Street to work on these things because the pay is better and it’s fun. They’re still there — they have a vested interested in staying there — and I think a lot of people think that we’re just going to go back to business as usual in this country, that this is all going to blow over and we’re not going to have any significant increase in regulation, we’re not going to have any significant listing of off-the-book derivatives on exchanges like the commodity futures exchanges, and that we’ll set ourselves up for another big fall. That’s what I’m afraid will happen.”

“So, how is that affecting how much you want to have invested in the market?”

“Well, it’s tough. The question is where do you go. We only have one world we live in. If they  had a market on Mars, I might think about going there. But I think it’s going to be very difficult. I personally find it hard to guess exactly when some bad thing will happen and how long it will take and what will trigger it, just like in this last crash. You know something bad’s going to happen; you just don’t know when or how.”

A few weeks back, Planet Money had an interview with MIT finance professor Andrew Lo, where he repeated his call for a financial industry equivalent to the National Transportation Safety Board, which investigates airline crashes and recommends new procedures to protect against crashes in the future. Lo also gave a reasonable explanation and defense of proprietary trading. But the unsatisfying thing was that his main argument for proprietary trading was that it provides liquidity (beginning around 9:30), which Alex Blumberg calls him out on. Even after Lo explains it, though, he doesn’t explain why we need large banks’ proprietary trading desks to provide liquidity. After all, isn’t that what hedge funds do? How much liquidity do we need, and how much of that is supplied by institutions with banking licenses? And at the least, couldn’t the large banks at least spin off their internal hedge funds? Then you would have just as much trading, but less of it would be backed up by government guarantees.

I finally got around to listening to Planet Money’s interview with Russ Roberts from December. Russ Roberts and I are pretty sure to disagree on almost any actual policy question. But what I liked about his interview was that he basically admitted that policy questions cannot be settled by looking at the empirical studies. On whether the minimum wage increases or decreases employment for example, he says that he can poke holes in the studies whose conclusions he doesn’t agree with, but other people can poke holes in the studies he agrees with. In Roberts’s view, people’s policy positions are determined by their prior normative commitments.

I don’t completely agree. I don’t think that these questions, like the one about the minimum wage, are inherently unanswerable in the sense that the answer does not exist. But I agree that empirical studies are unlikely to get to the truth, particularly on a politically charged question, because there are so many ways to fudge an empirical study. As one of my professors said, there are a million ways you can screw up a study, and only one way to do it right. But I agree with the general sentiment. We are living in an age of numbers, where people think that statistics can answer any question. Statistics can answer any question, but they can answer it in multiple ways depending on who is sitting at the keyboard.

By James Kwak

15 thoughts on “Radio Stories

  1. Well, if the true answer exists but is unattainable by us, then that’s as good as its not really existing.

    At any rate, it’s relegated to the realm of the ding an sich, a truly useless concept.

    I think William James and Nietzsche had it right, we use our senses and the evidence we can amass to get as close as possible to what both matches the evidence and is useful, and call that “truth.”

  2. If you want a good (and possibly more neutral accounting of the current events affecting the market) two good podcasts are No Agenda (I linked it as the website here) and Dvorak-Horowitz Unplugged. They’re intellectually stimulating and easily keep your attention.

    And no I’m not a spam bot, I read this blog regularly but just as rarely comment.

  3. I consider myself objective. And yet, I am always surprised at how few people I meet whom I consider to be objective. So, am I really objective or not?

    As to wages, income disparity has become so great as to throw our culture completely out of kilter. This imbalance is the very core of our economic collapse. Working people can no longer afford to pay their bills. It’s not that we need fewer rich people. On the contrary: Poor people need to be richer in order for our society to work.

  4. James Kwak is quite correct in his conclusion that statistical appeals reap ambiguity, hence are easily enrolled to support policy preconceptions. A similar phenomenon show up in political polling, especially “issue” polling. Given a politically passive population, polls can prove just about anything, depending on the phrasing of the questions and context.

  5. I heard that interview also. Ms Gross is good at many subjects but this is one where she only wanted one answer and repeated the same question twice to see if she could get the two experts to agree with her answer. I would like to see something more in depth from a journalist who knows the financial game ala Michael Lewis. The Quants did not hand out $400,000 mortgages to waitresses and janitors. That was done by the mortgage originators who have already admitted to falsifying many documents to make their little cut. You could argue that the AIG scam was run by Quants but I have doubts anyone there cared one way or another.

  6. Stefan, see Russ’s comments above. I would say we might need to ditch the word objective as well since it seems to always be used in ways, that when you dig underneath the surface, supposes a ding an sich, a thing-in-itself, as it is, prior to any interpretive judgement. Let’s just pretend that we’re not having an argument, let’s both remain silent, and then literally (and I mean literally) wait for the data to to speak with an actual voice and say “Sorry Russ, Mr. Kwak is right.” Or vice-versa.

    Not that I would always raise a ruckus about any use of the word objective. In so far as it means just following the generally accepted standards of your profession, I’m all on board with labeling things objective or non-objective.

    But in so far as objective means, let’s just put aside all our biases, and if we manage to succesfully do so, then surely us honest people desirous of the truth will come to agreement, I don’t think that get’s us anywhere. Based on the little bit references, I think Russ Roberts would agree that detailed debate generally, between equally honest debaters of opposing viewpoints, tends to enlarge the gap between opposing viewpoints, not shrink it.

  7. From an operations management point of view metrics (aka statistics) only show you where to start looking and digging. Statistics don’t prove anything since they cannot infer causality.

  8. One of the things that makes me nuts is how difficult it is to find raw trending data the gives an indication of where we are versus where we started. I have yet to find foreclosure and pre-forclosure rates by month without paying for it (without knowing whether the site really will provide or not). Where are we with those “toxic” assets – how much of the losses have been taken, how much is left to take (the numbers don’t need to be absolutely accurate, merely relatively accurate)? What’s the dollar amount of new derivatives being issued each month? etc. etc.

  9. The problem with empirical studies — even if they’re done perfectly — is that they will not convince people whose self interest runs counter to the study. No spread sheet, logic, or moral argument will move a man who is in line for a $10 million bonus. And the men who make the big bonuses are the one who make large contributions to senators, something minimum wage workers seldom do.

  10. “Whenever a theory appears to you as the only possible one, take this as a sign that you have neither understood the theory nor the problem which it was intended to solve.”
    — Karl Popper, Objective Knowledge: An Evolutionary Approach (1972)

  11. I don’t know how much evidence an intelligent person needs to conclude that OTC derivatives are nothing but a scam to collect rents on behalf of a financial sector that produces nothing and destabilizes everything. What we hear from proponents are ideological myths about efficiency and innovation and risk dispersion. Our society has abandoned any pretense of a moral basis and we are made slaves to mathematical nonsense. All we really need to ask is: who benefits?

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