Archive for December, 2011

Crappy modeling

I’m here to vent today about crappy modeling I’m seeing in the world of finance. First up is the 14% corrections of home sales from 2007 to 2010 we’ve been seeing from the National Association of Realtors. From the New York Times article we see the following graph:

Supposedly the reason their models went so wrong was that they assumed a bunch of people were selling their houses without real estate agents. But isn’t this something they can check? I’m afraid it doesn’t pass the smell test, especially because it went on for so long and because it worked in their favor, in that the market didn’t seem as bad as it actually was. In other words, they had a reason not to update their model.

Here’s the next on our list, namely unemployment projections from the Fed versus actual unemployment figures, brought to us by Rortybomb:

Again we see outrageously bad modeling, which is always and consistently biased towards good news. Is this better than having no model at all? What kind of model is this biased? At the very least can you shorten your projection lengths to make up for how inaccurate they are, kind of like how weather forecasters don’t predict out past a week?

Finally, I’d like to throw in one last modeling complaint, namely about weekly unemployment filings. It seems to me that every December for the past few years, the projected unemployment filings have been “surprising” economists with how low they are, after seasonal adjustment.

First, seasonal adjustment is a weird thing, and was the subject of one of my earliest posts. We effectively don’t really know what the numbers mean after they are seasonally adjusted. But even so, we can imagine a bit: they look at past years and see how much the filings typically dip or surge (sadly it looks like they typically surge) at the end of the year, and assume the same kind of dip or surge should happen this year.

Here’s my thing. The fact that the filings surge less than expected the fourth or fifth year of an economic slump shouldn’t surprise anyone. These are real people, losing their real jobs with real consequences, right before Christmas. If you were a boss, wouldn’t you have made sure to have already fired someone in the early Fall or be willing to wait til after the holidays, especially when they know the chances of getting hired again quickly are very slim? Bosses are people too. I do not have statistically significant evidence for this by the way, just a theory.

Categories: data science, finance

Need your vote

December 22, 2011 1 comment

Footnoted needs your vote on the most outrageous handout to executives in 2011. Here are the candidates:

  • MF Global agreeing to pay then-CEO Jon Corzine a $1.5 million retention bonus months before the company imploded.
  • Clear Channel Media Holdings paying $3 million a year to a company controlled by Bob Pittman so that Pittman can fly in a Mystere Falcon 900 that Pittman owns for both business and personal use.
  • Leo Apotheker collecting around $25 million in severance and other benefits from Hewlett-Packard, including relocation back to France or Belgium after less than a year on the job.
  • IBM’s outgoing CEO Samuel Palmisano becoming eligible for as much as $170 million in retirement benefits, just by waiting until he was past 60 to announce his retirement.
  • Nabors Industries agreeing to pay outgoing CEO Eugene Isenberg $100 million in severance on his way out the door.

Vote here.

Also, please read a letter to Jamie Dimon that I enjoyed, from the Reformed Broker blog. From the letter:

So please, do us all a favor and come to the realization that the loathing you feel from your fellow Americans has nothing to do with your “success” or your “wealth” and it has everything to do with the fact that your wealth and success have come at a cost to the rest of us.  No one wants your money or opportunities, what they want is the same chance that their parents had to attain these things for themselves.  You are viewed, and rightfully so, as part of the machine that has removed this chance for many – and that is what they hate.

Categories: #OWS, finance, news

Why work?

In his recent Vanity Fair article, Joseph Stiglitz puts forth the following theory about why the Great Depression was inevitable (and in particular wouldn’t have been prevented by the Fed loosening monetary policy). Namely, that our society was transitioning from an agrarian society to something else- which turned out to be a manufacturing society, kicked off in earnest at the beginning of World War II. He goes on to say that we are now going through another great transition, from manufacturing to something else- he calls it service. And he also says there’s no way monetary policy will fix this trauma either- we need to invest heavily in infrastructure in order to prepare ourselves for the coming service society we will be.

Take a few steps back, and we see this picture: a hundred years ago we got so efficient at farming that we didn’t need everyone to farm to be well fed. Then we figured out how to make things so efficiently that we don’t need to worry about having enough stuff. So now, what are we all working for exactly? If service means we take care of each other (medical stuff) and we educate each other, that is fine, but not everyone is a doctor or a teacher. If service means we spend all our time making video games and entertaining each other, than it seems like we need to rethink this plan.

There are two essays I’ve read about the nature of this change that I think will help us rethink work and how our society values work and how it doles it out. First, there’s this highbrow essay on the language of work. From the essay:

Work deploys a network of techniques and effects that make it seem inevitable and, where possible, pleasurable. Central among these effects is the diffusion of responsibility for the baseline need to work: everyone accepts, because everyone knows, that everyone must have a job. Bosses as much as subordinates are slaves to the larger servomechanisms of work. In effect, work is the largest self-regulation system the universe has so far manufactured, subjecting each of us to a panopticon under which we dare not do anything but work, or at least seem to be working, lest we fall prey to a disapproval all the more powerful for its obscurity. The work idea functions in the same manner as a visible surveillance camera, which need not even be hooked up to anything. No, let’s go further: there need not even be a camera. Like the prisoners in the perfected version of Bentham’s utilitarian jail, workers need no overseer because they watch themselves. When we submit to work, we are guard and guarded at once.

What is less clear is why we put up with this demand-structure of a workplace, why we don’t resist more robustly. As Max Weber noted in his analysis of leadership under capitalism, any ideology must, if it is to succeed, give people reasons to act. It must offer a narrative of identity to those caught within its ambit, otherwise they will not continue to perform, and renew, its reality. As with most truly successful ideologies, the work idea latches on to a very basic feature of human existence: our character as social animals forever competing for relative advantage.

The author Mark Kingwell makes a pretty convincing case that people have bought into work just as they buy into other cultural norms. It underlines the real audacity of the #Occupy Wall Streeters who dared to do something with their time than be baristas at Starbucks.

Paired with the Stiglitz view of our culture and its future, though, it makes me think about the extent to which we’ve synthesized work. Mark Kingwell points out that one of the major outputs of workplaces is more work, a kind of purely synthetic made-up idea which we all need to believe in as long as we are all convinced about this work-as-cultural imperative.

The quintessential example of work-creating-work comes from finance, of course, where there isn’t even really a product at the end of the day. It’s essentially all completely made up, pushing around numbers on a spreadsheet.

What happens when people question this industry and its associated maniacal belief in work as moral? I say “maniacal” based on the number of hours people put in at most financial firms, sacrificing their families and even their internal lives, not to mention their associated martyred attitudes at having worked so hard.

This article from Bloomberg addresses the issue indirectly. In it, Richard Sennett talks about what bonds people to their colleagues and their workplace. He compares manufacturing jobs in 1970’s Boston to the recent financial services industry, and notes that people nowadays in finance have no loyalty to each other or to their workplace, and also have very little respect for the bosses. He blames this on unthoughtful hierarchical structures and the fact that bosses are essentially incompetent and everybody knows it. He concludes his article as follows:

These employees were relentless judges of their bosses, always on the lookout for details of conversation or behavior to suggest that the executives didn’t deserve their powers and perks. Such vigilance naturally weakened the bosses’ earned authority. And it didn’t make the people judging feel good about themselves either, as they were stuck in the relationship. On the contrary, it was more likely to be embittering than a cause for secret satisfaction.

Even for those workers who have recovered quickly, the crash isn’t something they are likely to forget. The front office may want to get back as quickly as possible to the old regime, to business as usual, but lower down the institutional ladder, people seem to feel that during the long boom something was missing in their lives: the connections and bonds forged at work.

Although those are fine reasons to dismiss loyalty, as I know from experience, I’d like to suggest another reason we are seeing so much disloyalty, namely that people see through the meaningless of their job, and are wondering why the system has even been set up this way in the first place.

In other words, I don’t think a better hierarchy and super smart bosses in finance is going to make back office people gung-ho. I think that the credit crisis has clearly exposed what people already suspected, namely that they are working hard but not accomplishing much. If we want people to feel fulfilled, wouldn’t it make more sense to work less, and spend more time off with their families and their thoughts? Could we as a society imagine something like that?

Categories: finance, news

How to challenge the SEC

This is a guest post by Aaron Abrams and Zeph Landau.

No, not the Securities and Exchange Commission.  We are talking about the Southeastern Conference, a collection of 12 (or so) college football teams.

College football is a mess.  Depending on your point of view, you can take it to task for many reasons:  universities exploiting student athletes, student athletes not getting an education, student athletes getting special treatment, money corrupting everybody’s morals . . .

Putting those issues aside, however, there is virtually unanimous discontent with an aspect of the sport that is very quantitative, namely, how the season ends.  Fans hate it, coaches hate it, players hate it, and there is a substantial controversy almost every single year.  Only a few people who make lots of money off the current system seem to like it.  (Never mind that anyone with a brain thinks there should be a playoff … perhaps that’s the subject of another post.)

Here’s how it works.  There are roughly 120 major college football teams and each team plays 12 or 13 games in the fall.   Almost all the teams belong to one of eleven conferences — these are like regional leagues — and most of the games they play are against other teams in their conference.  (How they schedule their out-of-conference games is an interesting issue that we may write about another day.)  At the end of the season, teams are invited to play in bowl games:  games hosted at big stadiums with names like the Rose Bowl, the Orange Bowl, etc., that have long traditions.  The problem centers around how teams are chosen to compete in these bowl games.

Basically, a cartel comprised of six of the eleven conferences (those that historically have been the strongest, including the SEC) created a system, called the BCS, that favors their own teams to get into the 5 most prestigious (and lucrative) bowl games, including the so called “national championship game” that claims to feature the top two teams in the country.  The prestige gained by the 10 teams that compete in these games is matched by large amounts of money, coming mainly from television contracts and ticket sales.  For each of these teams, we are talking about 10-20 million dollars that goes to a combination of the team and their conference.  This is not a paltry sum for schools facing major budget cuts.

The most blatant problem with this system is that is it literally unfair:  the rules of the system are written in such a way that at the beginning of the season, before any games are played and regardless of how good the teams are, the teams from the six “BCS conferences” have a better chance of getting into one of the major bowls than a team from a non-BCS conference.  (You can read the rules, but notably, each of the conference champions of the six BCS conferences automatically gets to play in a BCS bowl game; whereas the other conference champions only get to play in a BCS bowl game if various other conditions are met, like they’re highly ranked in the polls).

There are lots of other problems, too, but we’re not really going to talk about those.  For instance the method for choosing the top two teams (which is based on both human and computer polls) is deeply and fundamentally flawed.  These are the teams that play for the “BCS championship”, so it matters who the top two are.  But again, that’s the subject of a different post.

Back to the inherent unfairness.  Colleges in the non-BCS conferences are well aware of this situation.  Led by Tulane, they filed a lawsuit several years ago and essentially won; the rules used to be even worse before that.  But in the face of the continued lack of fairness, colleges from non-BCS conferences have lately taken to responding by trying to get into the BCS conferences, jockeying for opportunity at big money. It has gotten so bad that a BCS conference called the Big East now includes teams from Idaho and California.  Realignment has caused the Big 12 to have only 10 teams, while the Big 10 has 12.

But realignment takes a lot of work to pull off, and it only benefits the teams that get into the major conferences. The minor conferences themselves are still left behind. So here is a better idea. If you’re a non-BCS conference, do what any good red-blooded american corporation would do: find a loophole.

Here is one we thought of.

The current rules force the BCS to choose a team from one of the 5 non-BCS conferences if:

(a) a team has won its conference AND is ranked in the top 12, or

(b) a team has won its conference AND is ranked in the top 16 AND is ranked higher than the conference champion from one of the BCS conferences.

What they don’t say is what it means for a team to “win its conference.”  Some conferences determine their champion by overall record, and others have a championship game to decide the champion.  This is the chink in the armor.

This year two interesting things happened:  (1)  in the Western Athletic Conference (WAC), Boise State ended up ranked #7, but did not win their conference.  The WAC doesn’t have its own championship game, and the conference winner was TCU by virtue of beating Boise State in a game in the middle of the season.  However, TCU also lost a game to a team outside their conference, and they ended up ranked only #18.  As a result, neither team satisfied condition (a) or (b) above.

And (2) in Conference USA, Houston was undefeated and ranked #6 in the country before the final game of the season, when it lost its conference championship game to USM.  The loss dropped Houston to #19 in the rankings, whereas USM, the conference champion, finished with a  final ranking of #21.  Thus neither of these teams met (a) or (b), either.

Here is what we noticed:  if the Western Athletic Conference had a conference championship game, then either Boise St would have won it, been declared the champion, and qualified for a BCS bowl, or else TCU would have won it and would almost surely have ended up with a high enough rank to qualify for a BCS bowl.  (As it was, TCU finished the season at #18, but one more victory against a top ten team would very likely have gained them at least two spots.  This would have been good enough for (b) to apply, since the champion of the Big East (a BCS conference) was West Virginia, who finished ranked #23.)

On the other hand, if Conference USA hadn’t had a championship game, Houston would have been declared the conference champion (by virtue of being undefeated before the championship game) and they would easily have been ranked highly enough to get into a BCS bowl.  Indeed, it has been estimated that their loss to USM cost Conference USA $17 million.

So, what should these non-BCS conferences do?  Hold a conference championship game . . . if, and only if, it benefits them.  They can decide this during the last week of the season.  This year, with nothing to lose and plenty to gain, the WAC would clearly have chosen to have a championship game.  With nothing to gain and plenty to lose, Conference USA would have chosen not to.

Bingo.  Loophole.  17 million big ones.  Cha ching.

Categories: data science, guest post, news

Bloomberg engineering competition goes to Cornell

December 19, 2011 Comments off

This just in. Pretty surprising considering we were supposed to hear the results January 15th. I wrote about this here and here.

I wonder what Columbia is going to do with their plans?? I guess there may be two winners, so still exciting.

Categories: data science, news

A rising tide lifts which boats?

My friend Jordan Ellenberg has a really excellent blog post over at Quomodocumque, which is one of my favorite blogs in that it combines hard-core math nerdiness with funny observations about how much the Baltimore Orioles stink (among other things).

In his post he talks about an anti-#OWS article called “The Occupy movement has it all wrong”, by Larry Kaufman, recently published in a Madison, WI newspaper called Isthmus.

Specifically, in that article, Kaufman tries to use the old saying “a rising tide lifts all boats” to argue that most people (in fact, 81% of them) are better off than their parents were. What’s awesome about Jordan is that he goes to the source, a Scott Winship article, and susses out the extent to which that figure is true. Turns out it’s kind of true with a certain way of weighting numbers depending on how many kids there are in the family and because so many women have started working in the past 40 years. Jordan’s conclusion:

So yes:  almost all present adults have more money than their parents did.  And how did they accomplish this?  By having one or two kids instead of three or four, and by sending both parents to work outside the home.  Now it can’t be denied that a society in which most familes have two income-earning parents, and the business-hours care of young children is outsourced to daycare and preschool, is more productive from the economic point of view.   And I, who grew up with a single sibling and two working parents and went to plenty of preschool, find it downright wholesome.  But it is not the kind of development political conservatives typically celebrate.

Another thing that Jordan tears apart from the article is that the original source specifically pointed out stuff that Kaufman seems to have missed, given his political agenda:

Winship also emphasizes the finding that children in Canada and Western Europe have an easier time moving out of poverty than Americans do.  This part is absent from Kaufmann’s piece.  Maybe he didn’t have the space.  Maybe it’s because a comparison with higher-tax economies would make some trouble for his confident conclusion: “the punitive redistribution policies favored by Occupy Madison will divert capital away from productive initiatives that enhance growth and earnings opportunities for all, while doing nothing to build the stable families and “bottom-up” capabilities that are particularly important for helping the poorest Americans escape poverty.”

When the Isthmus is running a more doctrinaire GOP line on poverty than the National Review, the alternative press has arrived at a very strange place indeed.

Go, Jordan!

Let’s go back to that phrase “a rising tide lifts all boats”. It was the basis of Kaufman’s argument, and as Jordan points out was a pretty weak basis, in that the lift was arguable gotten only through sacrifice. But my question is, is that a valid argument to make anyway?

Let’s examine this metaphor a bit. When we think about it positively, and imagine something like the housing bubble which elevated many people’s net worth (ignoring the people who weren’t home owners at all during that time), we can see why “a rising tide lifts all boats” is a good thing: we want the generic imaginary person to do well, and we’re all happy for them to do well.

However, if we turn that phrase around in a negative moment, it’s really not clearly a good perspective. Let’s try it: “an ebbing tide lowers all boats”. Take the example of a housing crash analogously to the above. Firstly it’s not true, since for those people who couldn’t afford housing in the bubble, a more reasonable housing market is a good thing (for some reason people keep forgetting this). Secondly, when we are thinking about lowered boats we worry about those people whose boats are lowered. Who are those people? How much have they lost? Will they be okay?

The answers are, they are the people who were barely able to own the house in the good times. They’ve lost everything. They aren’t okay.

It’s a nearly vapid phrase when you think about it, but it’s used by conservatives a lot to justify policies that only work well in good times.

I’d argue that the real question we should be asking isn’t whether we are all sailing away in boats but how much risk we take on as individuals. I will go into this further in another post, but the gist is that, instead of the unit of measurement being assumed to be dollars, I’d like to reframe the concept of economic health in terms of a unit of risk. Risk is harder to measure than dollars, and there are lots of different kinds of risk, but even so it’s a worthy exercise.

For example, in the housing boom we had people who could barely afford a house get into ridiculous mortgage contracts, with resetting usurious interest rates. They were taking on enormous amounts of risk, in this case risk of being foreclosed on and losing their home. By contrast, people who were well-off at the start of the housing boom are for the most part still well off. There was very little risk for them.

I’d like to offer up an alternative phrase which would capture the risk perspective. Something like, “we should make sure everyone’s boats are water tight and firmly moored to the pier”. Not nearly as catchy, I know. But to make for it I’m linking to this related video called I’m On a Boat. I’ve actually been looking for excuses to link to this for a while. Here’s a kind of awesome picture from the video:

Categories: #OWS, finance, news

Bloomberg engineering competition gets exciting

Stanford has bowed out of the Bloomberg administration’s competition for an engineering center in New York City. From the New York Times article:

Stanford University abruptly dropped out of the intense international competition to build an innovative science graduate school in New York City, releasing its decision on Friday afternoon. A short time later, its main rival in the contest, Cornell, announced a $350 million gift — the largest in its history — to underwrite its bid.

From what I’d heard, Stanford was the expected winner, with Cornell being a second place. This changes things, and potentially means that Columbia’s plan for a Data Science and Engineering Institute is still a possibility.

Cool and exciting, because I want that place to be really really good.

It also seems like the open data situation in New York is good and getting better. From the NYC Open Data website:

This catalog supplies hundreds of sets of public data produced by City agencies and other City organizations. The data sets are now available as APIs and in a variety of machine-readable formats, making it easier than ever to consume City data and better serve New York City’s residents, visitors, developer community and all!

Maybe New York will be a role model for good, balancing its reputation as the center of financial shenanigans.