Monday, January 11, 2016

Page Turners: Fiction and Non

Last week I read Dan Brown's latest, Inferno.  I wouldn't recommend it, too formulaic and dependent on plot gimmicks.  I'm probably cured from wanting to read any more page turner fiction, at least for the time being.  But it does raise some questions that people should ask themselves once in a while.  In a bit I will discuss some of those.  Yesterday we went to see The Big Short, which though the story is preposterous and at a macro level already is completely familiar based on the events of the last decade, is mainly true and a fairly compelling, if disturbing, tale.  The book by Michael Lewis on which the movie is based is non-fiction.  This movie also raises some interesting issues, especially if you ask whether any of those apply outside the financial arena.  I will get to those as well.  In the process, I will try to connect the stories in the issues they raise.

Without giving away any of the plot, Inferno has as its basis the issue of overpopulation and whether the imperative taught to us in Genesis, "Be fruitful and multiply" is no longer applicable because we've reached the limits implied by the Malthusian Hypothesis.  Indeed, we may already be beyond those limits.  The question is whether individuals and their families being fruitful is consistent with the species, homo sapiens, being fruitful.  If you took the species perspective, of if you prefer the perspective of future generations beyond our own and our children's generation, what view of population would you hold?

The naive Malthusian Hypothesis has a more modern day counterpart in the Simon- Ehrlich wager.  Ehrlich, as people my generation will remember, authored The Population Bomb.  Simon was actually on the faculty in the Economics Department when I started at Illinois.  He is also well known for encouraging airlines to overbook their flights and then pay people to take a later flight when in fact there are more passengers at the gate than there are seats on the plane.  In the bet with Ehrlich Simon's argument is that substitutes would emerge, so that Hotelling's model of extraction of a non-renewable resource would not give an accurate prediction of real-world resource prices.

If I can add my own little bit of analysis here, none of these arguments tell us how long it should take to observe these consequences of scarcity, nor do they tell us how macro-economic business cycle effects should be accounted for in this discussion.  OPEC scared everyone in the 1970s, so people were prone to embrace the Ehrlich argument then.  But the second oil price hike, coupled with Volker's tight money policy to wrest inflation out of the economy induced a recession, certainly in the U.S.,  perhaps worldwide.  That reduced demand for all non-renewables near term.

In any event, I think it better to consider the issue more one of demography than overpopulation per se and thus consider many different dimensions of the issue.  These include the age distribution of the population, the geographic distribution of the population, and the income distribution of the population, among other possible dimensions of the issue (literacy seems to me to be a big one, the religiosity of people another big one).   With this one can begin to ask whether we as individuals can modify our behavior in ways that will improve the welfare of the species and what sort of modifications that would take?  Alternatively, we might posit that each of us is so wrapped up in our own little universe that it will be impossible to expect that sensible changes in our behavior will emerge and that quite the contrary should be predicted.

This is a good point in my piece to segue to The Big Short.  It is first and foremost a story about venality and utter disregard for our fellow human beings.  This is then coupled with cluelessness or not-so-benign neglect.  The story is about the workings on Wall Street and its relationship with the housing market.  It is a story which confirms that money is the root of all evil.   As I've written about the macroeconomics previously in a post called Comments on Inside Job, let me talk about what is fundamentally new in Lewis' book.  The people who discovered early on that the housing market would fail are the ones who played the big short.  In other words, they capitalized on their knowledge by making a financial killing, as the overall market and the economy as a whole completely tanked.

At issue is how these people were able to learn these things early why policy makers remained completely in the dark, or if not that, why the policy makers did essentially nothing to ward off the disaster ahead of time.  Related to this is how the big banks, motivated by greed, exacerbated the problem to such a degree as to push the system beyond the brink.  Alternatively, banks took such a hands off approach with their own traders that they couldn't insulate themselves from colossal bonehead investments.  In the movie version of the story, the few people who played the big short successfully did so because they looked at the situation for what it was and disregarded the conventional wisdom when it clearly ran afoul of reality.  In contrast, most people simply trusted the conventional wisdom, ultimately to their own detriment.

One wonders why that was, more generally why contrarians seem to be so few in number, and what it might take for it to be otherwise.  In the movie, the contrarians were motivated by two things.  First, they wanted to make a lot of money by playing the market, if they could.  Second, they were armed with a fundamental belief that sometimes the market misvalues assets.  Those instances, if they can be identified ahead of time, are where a lot of money can be made.  (This is true on average, not in each particular instance.  The trick is to find low downside risk high upside return situations and play those repeatedly.)  These two, in conjunction, provided the impetus for looking.

I have done this sort of looking twice in my career as an administrator.  The first time the task was hoist upon me.  The SCALE grant had promised that ALN (elearning) would raise retention (meaning how many students who start a class end up completing it).  It turned out that my campus was not a good place to test this proposition, because retention was already quite high.  Alas, I only learned this after SCALE had made this promise.  So there was a bit of eating humble pie there.  But at least we didn't subsequently devote resources to evaluation work on the retention issue.

The other time was when I was associate dean in the College of Business and I encouraged the college to purchase room scheduling software, in advance of moving into the new Business Instructional Facility.  I wrote about that experience here, so I won't belabor it now.  But I do want to point out how it differed from the prior experience.  With that SCALE project we had to put in a special request to the campus data stewards to be able to look at the issue.  With the COB project, all the data were publicly available for anyone to see.  They just weren't in a very usable form as they are normally presented.  My contribution was to download the data and enter it into an Excel spreadsheet in a way where it could be usefully aggregated.  Indeed it turned out that each department had this sort of data already in this format at the departmental level.  But nobody thought to do the same thing at the college level.

So in this case, which is the one I want to focus on, there was some effort in the looking and some intelligence (not a lot but some) in organizing the data in a way where it made finding things more evident.  This latter bit is potentially a teachable skill, but to my knowledge we don't do that.  The one example that I can recall from high school is learning about the Periodic Table.   Mendeleev's representation is a stroke of genius.  But at the time it was treated as an isolated inspiration.  I did subsequently learn about the 'method of successive differences' which can be used to predict the next number in a finite sequence of natural numbers, a useful skill for doing standardized math tests though probably not otherwise.  Otherwise, I don't recall learning about pattern recognition and the course where you might think this happens, statistics, doesn't do the trick.  When Freakonomics originally appeared it did create a craze for a while, but that seems to have died out.  (Ironically, the copyright year for Freakonomics is 2005, the time when the events in The Big Short first take place.)  My sense is that most people don't try to look for patterns in data, even when the evidence is right in front of them, because they don't know how and/or they implicitly prefer the narrative they are currently operating under rather than have that narrative challenged by the available data.

This is not a happy thought on which to conclude, but then again The Big Short makes no pretension about giving us a happy ending.  All the root causes that created the housing bubble still seem to be in place.  There is now, of course, Dodd-Frank and the Consumer Financial Protection Bureau, which may be viewed as progress.  But The Big Short makes clear that both private sector regulation of the financial sector via the ratings agency and public regulation of the financial sector via the Securities and Exchange Commission became non-functional during the previous decade.  If there is no will to do the right thing or to enforce the law greed will rule and likely in quite a destructive way.

I wish I could find some other sector of the economy where it seems to go the other way, that people do look carefully at the evidence and care about that rather than about following the crowd.  But I don't see it.  The field that I knew best while I was still working, educational technology, seems to me guilty of quite a lot of groupthink.  There are those who satirize the ed tech universe (for instance, consider this post by Roger Schank) but such commentary does nothing to change the direction of the field itself.  The inertia is so great that it seems only a true disaster will force reconsideration of what is being done, and maybe not even then.

We are not ostriches.  Once in a while we should be thinking about issues like this.  I appreciate the page turners for forcing me to do that.

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