Tuesday, March 18, 2014

Big Data versus the SAT

In a recent Time Magazine article, the president of Bard College, Leon Botstein, joined a chorus of criticism of the SAT, going so far as to call it “part hoax and part fraud.”  Criticism is coming fast and furious because the SAT has just unveiled a new, improved product to try to fend off a trend among competitive colleges to downplay the role of the SAT, and even to eliminate its use entirely.  (The not-for-profit status of the College Board, which produces the SAT, does not put the company beyond reacting to a profit motive; not-for-profit does not exactly mean you don’t get benefits from pulling in more revenue).

Among the critiques are that performance during one afternoon in the junior year of high school should not govern a student’s future (the SAT is not only used for college admission, but also by employers further down the road); that the SAT has little to do with what really constitutes learning and productivity (I haven’t done anything useful in my work by pulling the right answer off of a multiple choice test for as long as I can remember); that it correlates with income more than it does with anything else; and that what has now become years of SAT preparation detracts from more productive learning.

And that is just the start of the list. By its very nature as a standardized test, to the extent colleges rely on the SAT they are looking at exactly the same criteria, so the same sort of students will percolate to the top of the stack. The creative and off-the-wall student who adds the richness and intellectual diversity that a college seeks might be blown off course because there is no reason to think that such a student will do well in a timed, multiple choice test – or even that such a student will have an interest in the many hours of preparation courses required to be competitive in the test. To take the effect of the SAT exam on creativity to the extreme, read a previous blog post I wrote on the effect standardized testing has had on creativity in Asian countries.

You would think that in the emerging world of big data, where Amazon has gone from recommending books to predicting what your next purchase will be, we should be able to find ways to predict how well a student will do in college, and more than that, predict the colleges where he will thrive and reach his potential.  Colleges have a rich database at their disposal: high school transcripts, socio-economic data such as household income and family educational background, recommendations and the extra-curricular activities of every applicant, and data on performance ex post for those who have attended. For many universities, this is a database that encompasses hundreds of thousands of students.

There are differences from one high school to the next, and the sample a college has from any one high school might be sparse, but high schools and school districts can augment the data with further detail, so that the database can extend beyond those who have applied. And the data available to the colleges can be expanded by orders of magnitude if students agree to share their admission data and their college performance on an anonymized basis. There already are common applications forms used by many schools, so as far as admission data goes, this requires little more than adding an agreement in the college applications to share data; the sort of agreement we already make with Facebook or Google.

The end result, achievable in a few years, is a vast database of high school performance, drilling down to the specific high school, coupled with the colleges where each student applied, was accepted and attended, along with subsequent college performance. Of course, the nature of big data is that it is data, so students are still converted into numerical representations.  But these will cover many dimensions, and those dimensions will better reflect what the students actually do. Each college can approach and analyze the data differently to focus on what they care about.  It is the end of the SAT version of standardization. Colleges can still follow up with interviews, campus tours, and reviews of musical performances, articles, videos of sports, and the like.  But they will have a much better filter in place as they do so.

Wednesday, November 20, 2013

Live to Eat, Eat to Live

In a recent New York Times opinion piece, Paul Krugman assessed the possibility that the economy is in a new, constant state of mild depression, and suggests several reasons why this might be occurring, including slowing population growth and a persistent trade deficit.

To this I would like to suggest another one, which has been a topic of some of my previous posts: We simply demand less in terms of the consumption of produced, brick and mortar types of goods because that is not where we are spending our lives. Granted, we need a place to live, food to eat, a car to get around, but now we are not living to eat, we are eating to live; we are living to do things that do not require a huge industrial machine. (I won't even get into the point that insofar as we require the output of the industrial machine, it is now being run with less labor required).

Take a look at how people are spending their non-working, non-sleeping, non-eating time. It is increasingly doing things where the sum of the goods required are a chair, a table, and the machinery necessary to get a window into the virtual world, whether for binge-watching Breaking Bad, juggling texting with downloading photos, watching YouTube, or, for those who are creatively engaged, producing those YouTubes, in the case of my nine-year old, making movies on Movie Star Planet. The more we are focused on these activities, the less we feel invested in the homes where we generally occupy a five by ten space for our virtual activities, or in our car, which we now use as a transportation vehicle for those occasions where we venture out.

It doesn't take much of a reorientation in this direction to make a difference; and it takes even less when, as Krugman points out, there already is a drop in the demographically-driven demand even if everything else is held constant. And the forward path from here has the potential to be far more troubling that for the demographics, which at this point are mostly behind us. As I have written elsewhere:

We are in the year 2025: Because of advances in production technology, much of the path from extracting the required renewable resources through to the production and distribution of most of the items we demand can be accomplished with automated methods overseen by a small cadre of engineers. The main items we demand, beyond food, clothing and shelter, are the nth generation social connection systems. We are approaching the level of Nozick’s experience machine; we can anyone we want in whatever world we want, accompanied by whomever we want. If you think you used to burn a lot of your free waking hours with your jumping between email, video games, Facebook, and HBO way back when….

Given our evolved interests, most of us are spending a fraction of our income on consumption. There just isn’t a lot that we demand. What we do demand is cheap, and doesn’t require much of any labor to produce.
Or, doesn’t require production at all. For those who have the money to burn, demand is moving increasingly toward things like land, art, rare wines and Super Bowl tickets, by and large transfers without any economic impact. These notwithstanding, conspicuous consumption is also being dampened; what you wear or drive no longer is so dominating a signal; a far better picture of you and your status is just a few clicks away.

We are a society that basically eats, sleeps, works and then veges out. Not surprising, I guess, given that the tip of the spear of the economy, such as it is, are those same kids who a decade or two earlier were living at home with their parents after college, after graduate school – well, some still are. Though many of us now have our own prefabricated SmallHouse® (McMansions are a thing of the past; no one needs all that space, and, like mink stoles post-Mad Men, social norms regard these as the extravagances of a bygone era). That plus a car, food (the former rarely used, and both produced very inexpensively), our two-hundred dollar experience machine, and we are happy as a clam.

I don’t know exactly how this economy of the future works, but I can tell you that it is not working well. Where is the money coming from for even this minimally consumptive society? What levers can we pull to get ourselves out of this stagnant economy, to reduce unemployment? 

Sunday, March 3, 2013

The Product is the Promise: Finance and Social Values

In the first paragraph of my book A Demon of Our Own Design (Wiley, 2007) I observe that “You don't deliberately obliterate hundreds of billions of dollars of investor money. And that is at the heart of this book – it is going to happen again. The financial markets that we have constructed are now so complex, and the speed of transactions so fast, that apparently isolated actions and even minor events can have catastrophic consequences.” I then spend a significant portion of the book explaining the mechanics that lead the financial markets to lurch from crisis to crisis; why is it that while engineering in other fields increases safety, financial engineering seems to make things get worse. I suggest that the problem stems from the complexity and tight coupling that we introduce into the markets; complexity through financial innovations, tight coupling through leverage.

A system that is both complex and tightly coupled will almost inevitably have occasional accidents, what engineers term “normal accidents.” Attempts to reduce these accidents by adding in safety measures might actually increase their frequency because the safety measures add further complexity. This is not merely a philosophical point; in my book I go into detail on how some notable accidents – Chernobyl, Three Mile Island and Value Jet – occurred because of the added complexity from safety measures.

We can delve more deeply into the question, because even if we accept the argument from normal accidents, it still seems that financial markets have more than their fair share. Crises seem integral in financial sphere in a way that they do not in other industries. So we can pose the question of what it is about financial markets and the financial industry that make them different. There is an obvious and at the same time deep answer, one that relates to the essence of social interaction.

Lender or Borrower Be
To breed an animal with the right to make promises—is not this the paradoxical task that nature has set itself in the case of man?” – Nietzsche

In the Stanford “Marshmallow Test”, a child is placed in a room alone with a marshmallow and told that he may eat the marshmallow now, but if he waits ten minutes without eating it he will get two marshmallows. The punchline for the test is that there appears to be a relationship between the ability to wait and success later in life. (Not considered is how much the child actually likes marshmallows – I imagine an astute child who hates marshmallows eating the one immediately so as not to face eating two later. Neither is considered how much the subject ate for lunch before the test).

This is a test of an innately human trait: the willingness to sacrifice today for a later reward. For Toynbee, this trait is the mark of civilization, because it is only through building structures, clearing land, planting trees, all designed to find function beyond one's own life, that civilization can take root. When this trait occurs between two parties, we have created the relationship of the creditor and debtor. For Nietzsche, the promise enacted between creditor and debtor is the source of conscience and mercy. And, ultimately it is also the source of feudal classes and of what we now call capitalism.

The human trait of binding oneself now to gain a reward in the future leads to our ability to make promises. And the ability to make promises leads to three other traits: First, a conscience. And, because conscience only goes so far, the right to mete out punishment for non-performance. It also requires that people be similar, or at least predictable, because unlike a trade in the present, a promise is an abstraction that requires both parties share the same context.

It is through the creditor/debtor relationship that the rudimentary concepts of economic exchange – setting prices, determining values, agreeing on equivalences – evolved to introduce concepts of rights, contract, obligation, and means of settlement into society. With regard to the ability to enforce the terms and to punish those who fail, it also introduced the concepts of measuring one's power against another. And the promise required yet other characteristics we find essential to civilization: the ability to reach and record an abstract understanding, and to trust.

Nietzsche takes this beyond the corporeal to the extreme of the spiritual, where the realization of the promise is not in one's lifetime. The creditor becomes Christ, salvation to the debtor in the future for obedience and faith in the present. Nietzsche states, “we stand before the paradoxical and horrifying expedient that afforded temporary relief for tormented humanity, that stroke of genius on the part of Christianity: God himself sacrifices himself for the guilt of mankind, God himself makes payment to himself."

The Abstraction of Promises
It is the role of creditor and debtor that differentiates finance from economics. The most common and primitive economic act, that of trading goods, whether in kind or through a medium of exchange, does not have an temporal separation and does not invoke a promise. The promise and its traits come about once the roles of creditor and debtor become part of society, that is, once a financial exchange occurs.

In measured steps, finance has added layers of abstraction to the creditor/debtor relationship. In early society promises were made in kind. One good was delivered in exchange for the promise of another. Then collateral was attached to the loan – if the item being loaned formed the collateral, it was the equivalent of modern-day mortgage bonds. Collateral also could take the form of an agreement to be punished in the face of non-performance; the preverbal pound of flesh. With the advent of money came the promise made in terms of a payment that required a notion of equivalence, a general obligation bond. As with any promise there was the risk of default, but otherwise the payment made and received was fully defined in monetary terms. This made debts more easily transferable, creating what was essentially a bearer bond rather than an obligation to a specific creditor.

With the advent of mercantile trade in Medieval Europe came capital for financing the fleet and crew in exchange for the promise of a share of the bounty. This is the critical step in differentiating promises in finance from those in other areas, because the promise was defined in terms of unknown value. The final step in the chain of increasing abstraction and uncertainty came with forward contracts, where both the roles of the creditor and debtor were blurred. Both parties owed and were paid, but the exchange occurred in the future. One or the other part of the exchange was of uncertain value – indeed it did not yet exist – and funds could be more easily borrowed if the uncertain value was converted to a certain one.

Promises, Punishment and Mercy
In a primitive society, the punishment for reneging on a promise could be severe. This was because the “shadow of the future” was short, and because the debtor might not be brought to punishment. But as the structure of society progressed, punishment became more certain. People formed societies where reputation was critical, and as the societies became more stable, the failures of the debtor could be absorbed more easily. As people became more wealthy and their status secure – and those with wealth were the likely creditors – they could afford to reduce the severity of punishment. One path of this social evolution led to the feudal relationship of lord and vassal: the beneficent creditor and the loyal debtor. This process came to the point of contributing to a societal role for forgiveness and mercy. Nietzsche observes that:

It is not unthinkable that a society might attain such a consciousness of power that it could allow itself the noblest luxury possible to it— letting those who harm it go unpunished. “What are my parasites to me?” it might say. “May they live and prosper: I am strong enough for that!” The justice which began with, “everything is dischargeable, everything must be discharged,” ends by winking and letting those incapable of discharging their debt go free: it ends, as does every good thing on earth, by overcoming itself. This self-overcoming of justice: one knows the beautiful name it has given itself—mercy.

So we can see the path from the trait of sacrificing for the future leading to the concept of creditor and debtor; the creditor and debtor bound by a promise; and the concept of a promise helping to establish the form of society and its moral structure. It is no wonder, given its genealogy, that many view capitalism as something more basic than a form of economic organization, indeed that it is viewed by some as having moral, even religious, overtones.

Note: This post draws heavily from Nietzsche: On The Genealogy of Morals, from which the quotes are taken.

Tuesday, February 12, 2013

Wrestling and the Olympics

The International Olympic Committee has announced that wrestling will be removed from the summer games starting in 2020. I find this decision incomprehensible. I can only rationalize it if I rethink the Olympics as, well, some grand-scale ratings event. But if it has to do with athletics, and if it seeks to maintain a thread of history extending back to the Athenian Olympics, this decision is nonsensical.

In the meantime, we have golf enter the Olympics. Not too many years ago that would have been thought to be a joke. For others, like tennis and soccer, the Olympics is overshadowed by other tournaments. Who would rather win the Olympics than Wimbledon or the World Cup? And yet others, like swimming, have become a numbing presence. We are treated to just about every possible permutation of ways to traverse water: pool lengths = {1, 2, 4,...} x swimming styles = {breast stroke, freestyle, butterfly, backstroke, medley} x participants in the event = {one person, four people}. And add to that a panoply of events for diving into the water and dancing around in the water. Why? Because it sells advertising.

In terms of combat sports, wrestling is the last bastion. The Olympics have structured the rules for boxing in way that has degenerated it into a game of tag with gloves. Tae Kwon Do is a game of tag with the feet. I have already discussed the bastardization of these sports by the Olympics. And I have proposed that the Olympics reach back to the ancient games to add the one event that is not in the modern Olympics: Pankration. In our modern day this is best represented by mixed martial arts. Given the role Brazil has had in the development of MMA, it would have been fitting to have it introduced in 2016. Well, that isn't going to happen. The Olympics is moving one step further away from athletics, and rather than adding to the ancient roots of the games, they are severing one of the remaining links.  

Friday, January 25, 2013

A Short Story Inspired by the Work of Borges

Note on this post:
In the last while we have been provided with plenty of fodder for reflections on the virtual society. A virtual girlfriend that is (surprise) not real; a new product to help connect the dots across our indelible social network footprints; another product gathering steam that allows us to create footprints that, like those of real humans, wash away. (On the last two, here is a great article, crumbling footprints and all). 

A few months ago I had a post on the short stories of Borges, highlighting how various of his stories foreshadow issues of the virtual age, specifically the emergence of the double, i.e., a real and virtual self, and the problems that come with perfect memory and complete knowledge, which, though of course never obtainable, nonetheless seem to be the asymptote of the virtual age. Below I have written a short story that uses Borges as an inspiration. It reflects on some aspects of the virtual age, though without setting it directly in the world of social networks, virtual girlfriends, and indelible pasts.

I wrote this because I thought it would be fun to do. (And because I was sick with the flu). I hope you enjoy it, but don't expect it to be like any of my other posts. And it is a work of fiction. 

To say I knew Sophia Gallager, or that I had even met her, first requires defining a difference between reality and fantasy. It is easier to say, and say definitively, that Sophia did not know herself, and from that starting point then to ask how I or anyone else could have known her. I saw her once passing by the stairs near her father's study; I saw her at a gallery showing, animated and beaming in front of her work, paintings which were rarely seen beyond a small group of admirers, and rarely outside of her presence, and spoke briefly to her there; and after she passed away I learned about her, the core of what I know about her, from two artists who had befriended her from the outset of her professional life.

My brief acquaintance with Sophia came about because of a business meeting with her father, Roland; one that was weighty at the time but is now of no consequence.

I flew into New York and took a car out to his Hampton home on Georgica Pond. Depending on the temperature and rainfall, Georgica Pond, separated from the Atlantic by 100 feet of beach, could be a serene jewel populated with egrets and herons and the sound of the surf in the distance, or could be swampy and mosquito-ridden, which should not be surprising, because it is technically a marsh, not a pond. Worse, the water could rise up to encroach on the lawns and overflow the septic tanks of the likes of Stephen Spielberg and Ronald Perelman, forcing rats from their usual habitat on the pond’s periphery to new shelter in the homes’ basements. This happened earlier in the summer, and persons unknown solved the problem by shoveling a drainage ditch through the sand from the pond to the ocean in the dark of night. The force of the water pushing through the ditch opened up a broad channel, and the water rushed out of the pond, along with untold numbers of bait fish, crabs, and snapping turtles. By the time the pond dwellers woke up, the lawn-swallowing, septic-tank filling water had been replaced by stench-filled muck. With their food washed out into the ocean, the birds left too.

For the most part, the Georgica Association was spared during these occasional overflows because it commanded the more elevated west side of the pond. That still did not stop suspicion for landing on a few of the more low-lying Association members, Roland included. Of course, the thought of him actually heading out in the middle of the night with a flashlight and shovel and digging a trench the length of the sand bar was ludicrous. Whether it was him or someone else – other likely candidates included Simon Peyton, who already had a bad reputation because he would station armed guards to intimidate kayakers lest they come too close to shore to gawk at his mansion – the police concluded it has to be someone with a strong and loyal staff, since no one would risk hiring a team of migrants and have word spread out. Roland and Peyton certainly fit into that group, but then so did most everyone else with pond frontage.

Members only, the Georgica Association’s entrance was an unobtrusive wooded road by a farm stand. During the summer months the entrance was manned by a college student with a clipboard sitting on a lawn chair. There was a time when the Georgica Association sported a nine hole golf course, later divided into tracts for houses, but there remained a softball field for its Softball Sunday game and four clay tennis courts, tennis whites mandatory. It also had the only private beach in the Hamptons. At least technically that was the case; this goes back a century and apparently the judge was a relative of one of the Association members at time. Which might be why the Association was careful not to assert this too forcefully, since it was not clear how well things would turn for them this time around. But the meetings of the Association did discuss things like placing the volleyball nets on the beach strategically to make it difficult for traffic to interfere with their space.

The houses in the Association were Yankee understatement. A few remained summer-only residences with no heat and thin clapboard. Most were, at least by Hamptons standards, modest houses, wooden framed with scrubby landscaping. Roland’s was the notable exception. After making a study of all the available the south-of-the-highway parcels, a study that included several runs of helicopter reconnaissance, he settled in this, the last great enclave of Waspishness in the Hamptons, on a teardrop-shaped piece of land that is surrounded by the pond on three sides, (and therefore can be seen from the pond and surrounding houses on three sides), where he built a gleaming white 18,000 square foot house with twin gazebos, marble Ionic columns and antique statuary.

I drove up to the lawn chair-housed, clipboard-laden student, who checked my name off his list, and then into the Association enclave to meet Roland. The first thing I noticed once I reached Roland’s house, besides the iron gate, marble columns, figurines, stone walls and cameras, was that he had a moat. The moat connected to the pond on both ends. The water was running like a rivulet. The water level of the pond was the same both where the water was coming in and running out; the water current was generated through a series of underground jets. A bridge arched over the water, a smooth, white concrete strip with no railings on the sides. There was a large stone-paved parking area to the side of the front door. A young woman was waiting there, standing primly, feet together and hands cupped in front of her waist, like a dancer in first position.

We passed into a courtyard by the side of the house. It had white marble tiling, railings held up by balusters made of fluted marble columns, and a dozen statues on pedestals. There was something strange about the statues. They were shiny and smooth. I looked more closely at the arm of one, or what was left of the arm, and ran my hand against a textured and slightly translucent shrink-wrap covering.

The woman, Ms. Willoughby, explained, “It is a protective treatment. These are antiquities, a few date back to nearly 500 BC. The marble becomes weathered and porous over time from exposure to the elements. And here by the ocean the weathering would be especially pronounced. So the plastic encasement protects them. Comparable to being maintained in a climate controlled setting.” She brushed her hand along the leg of the figure. “ I am one of his curators. Although my focus is principally on the contemporary collection.”

Interspersed with these statues were others that did not have this covering, These, Ms. Willougby explained, were of more recent vintage – a few years old if that – crafted by the Milanese sculptor Michello Zegna. The antiquities were of limited supply, so he had these fabricated to fill up the spaces between the columns. Somehow these statues, which she called “contemporary antiquities”, became items of art in their own right, with Zegna been anointed as the master. And being regarded as art, fetched substantial prices at auction. Only Roland and a few others had the connections to Zegna to purchase this art. By occasionally putting pieces up for auction – pieces from their private collections – and by the fact that they were noted as both rich and major collectors, in short, by their ability to control supply and to generate demand, they managed, De Beers-style, to have these contemporary antiquities sell at auction for seven figures.

(I later was in Milan and decided to take a detour to see Zegna's studio. With Ms. Willoughby providing me an introduction, I took a taxi to Studio Michello, which occupied a warehouse in the Marreau district of Milan, an industrial section of the city separated from the epicenter of the fashion capital by six miles, the I-20 roadway and the cargo railway. The machining of marble blocks into replicas of Greek statues was an industrial-strength exercise, noisy and dusty. The principle tools were pneumatic chisels and rotary sanders. It was not an activity that would be tolerated in chic artist lofts, nor could such a space support the materials. The marble blocks had to be trucked in on flat beds and transported into the studio by forklift. No building’s elevator, even a freight elevator, could carry the weight of the blocks. So Studio Michello started its operation along side a ceramics refractory, an iron-working plant that made see-saws, jungle gyms and other playground equipment, and various unoccupied warehouses that, with the emerging fame of Zegna, transformed in the past two years into an artists’ colony.

The studio had been a metal fabrication shop before Zegna took it over. His production office was the old shop foreman’s office. It was reached by a metal step-up walkway, elevated and glass enclosed to provide a good view of the floor. Large fans attached to ducts which in turn ran from the office through an outside wall to give it a separate air supply and positive air pressure so the dust of the factory floor would not permeate the office. The production floor opened up to truck bays facing a broad alleyway where the marble was delivered and the crated statues started their journey to collectors.

Zegna had a front office accessed from the street in the same space where the fabrication business’s front office had been, but Zegna had built the space out to create a show studio for the occasional visit by the principals or the curators of its limited clientele, a workplace that would not require ear protection and face mask, where visitors could see genteel ‘finishing touches’ put onto the works by a team of ‘Italian artisans’, much as street artists take their already-painted work and spend hours painting and repainting the last few inconsequential touches of sunset as potential buyers stroll by. The real artisans out back in the production area, the men doing the actual work, were Indonesian. Though he hired the cream of the crop, they were still far cheaper than anyone he could find locally, or even from Eastern Europe, and they came from a strong tradition in stone work, a tradition that had faded in Italy over the past two generations).

We continued the walk without further conversation, diagonally across the courtyard and up a few steps and into a side entrance of the house. It had an L-shaped desk near the inside wall, the chair facing out to windows across the room. Beyond the desk was an arrangement of two stuffed chairs, a sofa and a coffee table.

It was here that I caught a first glimpse of the world of his second child. Along the wall were three paintings. In the center there was a simple line drawing by Jean-Michel Basquiat. The two either side were primitive, shallow, even by comparison to the Basquiat. Roland came in while I was studying one of them. “That is from my daughter, Sophia. She is a painter, though not generally known outside of a small circle.” He offered the chair nearest the door, with the best view out onto the vast mud flat that, in non-drainage times, would have been the pond. Beyond the pond I could see a strip of white sand followed by a strip of dark blue ocean.

Roland had a double chin, was balding with grey hair, and was overweight. He had on a brown long-sleeved shirt and beige shorts. His body was pear shaped with too-short arms that barely reached below his waist, though this was muted by his oversize, untucked shirt. After we sat down, his partner Parley Pratt came up on the screen, walking toward a table, teleconferenced in from his vacation home in Idaho. I wouldn't have given Parley's appearance much notice, except for the contrast with Roland. He was tall and lean with a rugged face, gray hair cut close. He could have been a movie version of a cowboy or a farmhand, and he did have something that was close to a real cowboy pedigree. He grew up in Wyoming, his father an fifth-generation rancher. Juxtaposed against Roland's public school clip, Parley seemed to have what I could only guess was a Rocky Mountain western accent.

Parley started the conversation off with some chit chat, which led to anecdotes about their early days in business, and then, passing the baton to me, asked about my personal background – where I grew up, what I like to do with my spare time, that sort of thing. I started down the path, then interjected, “I don't want to bore you with this.”

Roland replied, “No, go ahead, there's no time constraint here. We’ll stop you if it gets too boring.” Then he added, “Oh, and if you don’t mind, we would like to record our meeting, because being the summer, there are others who will be on the team who couldn't make it.”

This recounting of my life story was a calibration exercise to allow them to assess the conviction and even the truthfulness of what I would say during the course of our business discussions, and for that, having a recording was essential. Even if not boring, any life-story monologue is off the point, but I knew from my preparation that their interest was not as much in what I said but rather in how I said it. Their vacationing colleagues were actually non-vacationing professionals of a Maryland-based consulting firm that would take the tape and video – New York law required the disclosure of the taping, but not their video recording – to assess periods where I might be hedging or where I lacked conviction. (And, if it got to that, where I was simply lying). The point of boredom would come only when they received an indication of some sort that the calibration was completed.

This would give them fodder for the next stages of our negotiations. (Which, as I already intimated, ended without any result). This technique of their's had become an open secret, and in spy-versus-spy fashion I had a few sessions with another consulting firm to prep for the meeting. The exercise was simple: obscure the calibration phase with noise. For the visual aspect, I looked down randomly, switched my position in my seat for no particular reason, darted my eyes between them and avoided their eyes at other times. In short I was a fidgeting mess, fidgeting in any number of ways that are used to read visual cues. I did the same with my voice; clearing my throat, hesitating sometimes and doing speed talking without pauses at others, imagining at times I was giving a speech to a crowd, and then at others speaking sotto voce. I was assured that if I did this well (and I could have taken medication that would have made it all but effortless, though with some loss in concentration for the more substantial part of the meeting), the result would be as useful for them as if I had taken a polygraph while running an obstacle course.

So much for the intrigue of this meeting. Though it might be worth its own, more complete account, I now come to the point of this particular narrative.

Sophia was a Korean orphan who, along with her older brother, had been adopted by Roland and his now-deceased wife. It is difficult to appreciate given the glitter of modern-day Seoul just how backward a country Korea was when Sophia was an infant. I had occasion to visit Korea then and many times since, and have been awestruck by the changes. Even for the working household, the living conditions were rugged. The typical Korean house had an outdoor kitchen where meals were prepared and dishes washed, even in the dead of winter; it had an indoor bathroom, but usually nothing more than an opening to a “honey pit” under the floor, with crumpled newspaper as toilet paper. The kitchen was outdoors because the stove was fueled using yontan, coal briquettes that emitted noxious fumes and was not designed with an exhaust system. These soldering briquettes were also placed in containers under the thin, lacquered floors of the houses, and occasional leaks into the heated rooms led to hundreds of deaths from carbon monoxide poisoning every winter.. The heating was hardly sufficient in any case; there was never a respite from the cold during the winter. The view of child rearing among the labor class was to allow hardship in infancy to toughen up their children. Babies were slung on mothers' backs with a cloth tied around their waste, their heads unsupported. Infants were put to sleep on stiff straw pillows that flattened the back of their heads over time. It goes without saying that the lot of an orphan was more difficult.

An orphan adopted into the U.S., as thousands were in those years, had won the lottery. They moved from the bottom rung of society, with little hope for the future, into a world of opportunity and comfort. And Sophia and her brother did so in spades by ending up in the home of a well-to-do family, that over the years after their adoption became a fabulously wealthy family.

The world lay before them – education at elite schools, money and connections to pursue a career in any field, to become a patron of the arts and a philanthropist. Unfortunately, their harsh orphan years left scars. Both were mentally challenged and emotionally distant. As Sophia moved into adolescence, she dropped ever further behind her classmates, both in academic work, and physically and socially as well. However, through the efforts of her father, Sophia still had a fulfilling career, after a fashion. Sophia liked to paint, though she was no more remarkable in this than in any other sphere of her life. Still, her father seized on this interest. A major patron of the arts, he determined a plan for her to live the life he had wished for her. He embedded her into the coterie of his artists' community. The artists were attentive to the quid pro quo, and in any case were game for a play. They allowed her to feel that she was one of their own. They discussed her works with her enthusiastically, bought her paintings to add to their personal collections, arranged shows and gallery exhibitions, by invitation only – since any outsiders might burst the bubble – to show her work.

Roland graciously extended me such an invitation at the close of my meeting that day. He was hosting a gathering of artists that very night – under Ms. Willoughby's direction – with a private showing of their newer works, just down the hall in the main rooms of his home, and in the Athenian courtyard, weather permitting. So that evening I stood out in the courtyard, now with the sun stretching the sculptures with long summer shadows, and saw Sophia standing before a painting on an easel. She was short, stocky, and in her mid-thirties. She stood with little movement, like someone nursing an injured back. I walked over to meet her, and as I closed the distance, before I could make out what she was saying, I could hear bass drum undertones from the thick thud of her tongue.

I introduced myself, and two young artists quickly joined us. As it turned out, I became fast friends with one of them, named Paolo. It was his painting on the easel. As it also turned out, or occurred to me later in the evening, they had come to hover over us in order to intervene in the conversation if I unwittingly injected the wrong dose of reality. The dose of the reality being to add a critical air to the fact that Sophia was being feted as a prominent and appreciated artist. Though with little talent, painting was all she had, and she had an enviable life built around it. This arrangement, of course, was kept quiet. Sophia never became aware of it; a task that was not as difficult as it might have been given that she lived a sheltered life, remaining in the Murdock home, and was not astute nor inquisitive.

So the revelation of this strange story: Roland controlled his world, even created a world to his liking, to the point of imposing this on his own daughter. But is there a better world for Sophia than the one that he did create, one where she would have been happier and more fulfilled? It is a fact that she never did accomplish what she experienced, didn't create the value she believed she did, nor have the friendships and respect, the apparent adulation, that was showered on her. She lived in the equivalent of Nozick's experience machine; she experienced a life that had been concocted for her, but did not act in its reality.

Sophia's life was, to her understanding, filled with adoration and fulfillment, a life many others, unaware of the particulars, might have envied. The question I came to, one actually that the two artist acquaintances put forward, was whether they or I would enter into the same. If we had her limitations (which only looked to be limitations to us, but were not limitations of which she was aware), would we be willing to, with no prior recollections retained, live her fulfilled life? (Or should I call it an apparently fulfilled life)?

The question to ask concerning Sophia is whether her life, one of futile and hopeless labor, one with no real purpose, is a life others would be willing to follow. If you could be transformed as was Sophia into a fantasy world that fulfilled your dreams to be a great artist, an athlete, a scientist, with a veil placed between your world and the real, if you could live and die while thinking that fantasy was real, would you do so?

Some years after our gallery meeting, Paolo confided in me that as a witness to this, to what he regarded as an existential rift, he collaborated with Sophia in some of her work to have it rise to something meaningful, but soon stopped on that course because he realized he was replacing one form of a virtual life with another. Or adding on to it, because in doing this, Sophia, rather than being herself, and merely reflected as something different, was being made to be something other than herself by his efforts. Rather than altering the mirror, he was altering her.

Sophia died peacefully in her sleep on May 6, 2005; the funeral limited to family members and a few close friends. She was forty-four years old.

No one who knew her has written an account of her life. What I write here, which I dare to write only because her father has now passed away as well, will therefore be her lasting memorial, (her work, such as it was, has scattered to the wind). Absent such self-reflection, this is no more than a casual reminiscence.   

Tuesday, January 15, 2013

Learn, Signal, Network, Party

An article today in the New York Times discusses the growth of on-line courses, and the plan by the California higher education system to integrate some of these courses into the brick and mortar curriculum. On-line courses allow students around the globe to experience the same courses, taught by the same, world-renowned professors, as those who have jumped the hurdle to get into prestigious universities and paid $40,000 a year to study there.

In some cases it is even better than physically sitting in the real lecture. A friend of mine who teaches a popular MBA class at Harvard gave a set of his lectures for one of these programs. He was set up in a lecture hall-turned production studio, complete with a set of bright-eyed students. (The bright-eyed students – models hired by the company to give the ambience of a classroom). The end result has the production quality of an HBO series. It was watched by over 150,000 students in the first few months after its release, compared to under a thousand a year at Harvard – and at Harvard, the class is oversubscribed.

For the technical subjects like computer science, or, for that matter, accounting, the on-line programs may have a shot at competing with what you get in the brick and mortar world. Beyond the lectures, which you can capture as well on-line as in the lecture hall (where the class size is so large that direct interaction with the professor is all but impossible), most of the learning in computer science comes from interaction with the computer, with other students, and with instructors in small study sessions. The various on-line programs are creating solutions to allow learning through all of these channels.

If on-line programs end up developing to prepare students as well as the college classroom does, will they supplant enough of the function of the university to have a material effect on college-level education? Will they affect the limitations that arise from the tight admissions and hefty price tags for the top-tier schools? Will they shutter lower-tier schools? That is going to be a big area of debate for the next decade as these on-line programs develop and refine themselves, and as we see the quality of the product that emerges.

I want to as the next question: If it does as well in teaching what a student needs to know for these technical fields, or, for that matter if it does it even better -- we have to admit that as a possibility as well-- what else remains of the college experience that it fails to replicate? I think the U.S. college system is founded on four objectives: Learn, signal, network, and party. Once we have learning out of the way, what becomes of the other three?

One thing you do not get if you take Stanford classes on-line that you do get if you graduate from Stanford, even if you master the material just as well, is a Stanford degree. And the value of that degree is as a signal to the job market that you are smart – though what it should signal is something more modest, which is that you did very well in high school – and that you are well trained. This signal is missing for those who do the courses on-line.

But what is the value of the signaling? It is not very valuable if either, a) there is a low-cost, accurate method to gauge ability before hiring, or b) it takes time to gauge ability, but the employee is earning his keep while that ability is assessed.

The first approach works for many technical fields, especially when it comes to computer science. Set someone down to write a few programs and it quickly becomes evident whether they really know what they are doing. Throw in some math problems to verify that they really know their differential equations (though why anyone cares at this point is a bit of a mystery to me). And maybe add in some brain teasers for fun. Granted it is not perfect, but neither is the signal coming from where you graduated and your GPA.

Perhaps this process will become institutionalized, for example by allowing students in the on-line courses to take the same tests as the brick and mortar students in a controlled, verifiable setting. If you studied the same thing and did as well on the tests, then why should an employer care about the technicalities of the degree? What if they can get the on-line student on board for a few thousand dollars less? If it turns out that the market prices the difference at, say, $10,000 a year, and if after a few years the work history dominates the degree in assessing your future, then the $160,000 extra investment does not look too good.

The second approach, used in less technical fields like the entertainment industry, is to let graduates do apprenticeships where the cost of hiring and firing is low. A Harvard degree might give a bit of an edge for this sort of a job, but it is not a guarantee someone will have the difficult-to-define abilities for the job. So the entry hurdle is low, undergraduates from all over can get low-paying or non-paying work doing menial but useful tasks, and over the course of what might be several years they are either moved up the entry-level ladder or are weeded out. The proliferation of internships we have seen over the past few years might be a cyclical phenomenon resulting from the poor job market, but it also might be an emerging structural part of the post-college employment process, to some extent supplanting the college's signaling function. Although this has not been the model for technical fields, it could provide a second approach to deal with the noisier signals that come from the on-line programs.

A century ago, or even less, the old college tie and the old boy network were the main take-aways from the college years. Even today, the network with other students might be the most valuable part of a top-tier MBA. And no doubt it is also valuable in a technical field. But networking now has a life of its own. Supported by the machinery of social networks, on-line programs are already working on building these networks, ones that can be far more extensive than within any university. And when it comes to technical areas – and for that matter, even in non-technical areas – networking and interacting virtually is pretty much the way things go even with the student sitting three seats away in the real classroom.

Once you take the learning, signaling and networking out of the picture, what is left? Well, it might be what, in reality, is the largest component of what goes on in our undergraduate system: taking four years off to have a good time. For many students, the history and English classes are the dues they have to pay.

I think you could pull out half of those who go to college, put some of them into a year or two of vocational training (on-line or not), put others directly into the workplace in an apprenticeship or internship, and see a positive effect for the economy. So although partying is the one aspect of the college experience that cannot be replicated by an on-line higher education, that will be a net gain to society.

Note: One obvious caveat in all of this is that although on-line courses have a good shot with technical subjects, for liberal arts and humanities the task is more difficult. These require small group discussions and intense interaction with the professor. I think for those who seek such an education, the model also is different from that of the large real universities. To my mind, the model is that of any of a few dozen small liberal art colleges with an interactive and focused curriculum.  

Friday, January 11, 2013

My Work on Agent-based Models

Today there is a New York Times article on my work on agent-based models and related points.  The paper the article refers to is linked to here. And there is related discussion, dealing with stress testing issues and agent-based modeling, in the Office of Financial Research 2012 Annual Report, pages 46 to 58.

Monday, December 10, 2012

The Great Migration of the 21st Century

One lesson we should keep in mind as we recover in the aftermath of Sandy is that we are slow learners. Although the vulnerability of many of these communities is undeniable, we have resolved to rebuild the homes. That resolve will no doubt weaken if the region is revisited by similar disasters, and those displaced will be forced to move on. If climate change is at the root, that will happen. There will be a crescendo of such disasters, replaying thousands of times in populated areas across the globe. Hurricane Sandy thus has given us a glimpse into what will be the dominant theme of the twenty first century: forced migration.

Historically, migration has been driven by need, such as a disparity in economic situation, or because the migrating group reached the limits of the land given population growth. The migration may be into uncontested, virgin land; what is referred to as wave migration. Or it may be migration into other populated areas, which can lead to a new elite displacing the existing elite, to changes in status and a redistribution of wealth, but with the two societies existing side by side. A third type of migration, prominent in the barbarian period in the first millennium CE, is not based on economic need or population constraints, but on a nomadic culture pillaging the riches of the lands they invade. The first two are demand-pull, the third is supply-push.

I can envision any of these migration models playing out in the next century. Gradual migration and assimilation, or a gradual replacement of the indigenous population with a new elite, or one of invasion and warfare. Or wave migration; less likely but particularly interesting because the very effects of climate change will open up new, previously uninhabitable land even as flood and drought make other land uninhabitable. The plot of James Bond's “A View to a Kill” comes to mind; there the villain planned to trigger a massive earthquake that would plunge most of the California coastline into the sea, turning his holdings of inland desert into new, prime oceanfront real estate. Climate change and rising sea levels replaces the earthquake and villain with an alternative plot.

How bad can this sort of thing get?

The Last Great Migration: The Barbarians
There has been revisionist history over the past decades recasting the invasion of the barbarians; the use of the term migration in place of barbarian invasion is representative of this shift. And the barbarian invasions were a great migration. But it may be too early to discard the view, depicted in accounts of the time, that the feudal Europe we recognize emerged from the wave of a thousand years of invasion and ethnic cleansing.

The headline statement for this period is that the barbarians laid waste to everything, and over time forest and swamp intruded where there had been civilization. By the ninth century, there were miles of formerly populated countryside devoid of people, and those in one village lived their lives with little knowledge of other villages. In Spain the Vandals divided the country among themselves, but not before they destroyed the land. When the Goths conquered the Vandals, they fled from Spain, crossed the Straits of Gibraltar to Africa, and continued with unrelenting ruthlessness. A contemporary writer gives this account:

They carried their destructiveness into every corner of it; they dispeopled it by their devastations; exterminating every thing with fire and sword. They did not even spare the vines and fruit trees, that those to whom caves and inaccessible mountains had afforded a retreat, might find no nourishment of any kind. Their hostile rage could not be satiated, and there was no place exempted from the effects of it. They tortured their prisoners with the most exquisite cruelly, that they might force from them a discovery of their hidden treasures. The more they discovered the more they expected, and the more implacable they became. Neither the infirmities of age nor of sex; neither the dignity of nobility, nor the sanctity of sacerdotal office, could mitigate their fury; but the more illustrious their prisoners were, the more barbarously they insulted them. The public buildings which resisted the violence of the flames, they leveled to the ground. They left many cities without an inhabitant. When they approached any fortified place, which their undisciplined army could not reduce, they gathered together a multitude of prisoners, and putting them to the sword, left their bodies unburied, that the stench of the carcasses might oblige the garrison to abandon it.

The barbarians were equal opportunity destroyers. No matter what their station, those who survived their invasions uniformly found their living standards diminished as this migration proceeded. The Barbarians were rural and to some extent nomadic, mingling agriculture with hunting and herding. If the land became exhausted, they moved on to clear virgin land while the forest closed in behind them. They lacked many techniques for cultivating and preserving the land. They used slash and burn methods which quickly led to diminishing yields. Before the migration, under the late Roman Republic, the average yield in Italy was four times the seed. After the migration, in thirteenth-century England, yields were at least three times the seed. But in the barbarian age the largest harvests were twice the seed, the lowest ones fell below one and a half times the seed. This means that at least half of the cultivated area served to produce seed, a dearth in production compared both to what existed before and what would exist thereafter.

But, on the bright side...
The barbarians brought about some equalization for the lower classes. Social inequality grew dramatically during the Roman period; ancient Rome had rich aristocrats and well-off freeman farmers, but also had landless laborers and slave labor. The long depression of the barbarian age fostered the growth of a new, intermediate class that combined the now landless freemen and the freed slaves. This new social group became the serfs of Feudal society. The reduced efficiency in agriculture increased the demand for labor; there was work for every man. Indeed, labor often was in such short supply that the landholders had to bid for their services. So, strangely, the barbarians became a leveling force for society even as they broadly diminished the standard of living.

Anyone who lived through the life cycle of the baby boom knows two things about demographics. First, demographic cycles are slow but inexorable. And second, perhaps because they move so slowly, they are often ignored. It was obvious with the emergence of the baby boom post-World War II that over the course of the next five to ten years there would be a tidal wave of bodies coming into elementary schools, and that in ten to fifteen years that tidal wave would hit high schools, then colleges, then the housing market. Yet we lived through split sessions because schools were not built to accommodate this boom, even though there was more than adequate lead time. (And many of the schools that did get built then were torn down once the baby boomers move past school age, just in time to miss the next demographic wave – the children of the baby boomers).

Climate change will progress at an even slower, imperceptible pace. And unlike demographics, where the changes in birthrates are undeniable, climate change exists in a cloud of uncertainty. Not only do some question its existence, but even those who take it as a given cannot clearly project its course. The point is that we miss even the obvious risks if they move slowly enough, and the realities and effect of climate change remain less than obvious. And there are few risks that are as slow moving but substantial as those associated with climate change. The frog in the pot is the operative analogy.

Barbarians overran Europe as far as Scotland to the north and Portugal to the west; the land was carved up and administered by this new elite, with the original landholders displaced and the laborers becoming serfs. The Burgundians and the Visigoths took two thirds of their respective conquests, each Burgundian housed as a “guest” with the former landholder now living in a small part of his former estate. The Vandals seized the best land in northern Africa with no regard for the former inhabitants. The Lombards in Italy took a third of the land. The Franks took possession of much of the land in France.

The newly arrived became lords of their holdings, the previous tenants and farmers became their serfs. In the end this great migration gave us the Feudal Age, a social order that defined Europe for eight hundred years. What will appear a century hence, after the great migration on which we are soon to embark?

Thursday, October 25, 2012

A Crack in the Foundation of Economics -- More Readings

Last year I did a post on a mathematical error that has dictated the direction of important work in economics, and more especially finance. The discovery of this error, by U.K. mathematician Ole Peters, has slowly gained some recognition, though for some reason the journal where the original paper was published has not been willing to publish this correction.

At its root the error is obscure -- as would inevitably be the case for it to have persisted for so long and for its incorrect conclusion to be relied on by such luminaries as Paul Samuelson and Kenneth Arrow.  But more has been published about it after my post which do a better job at explaining the problem and its implications. So for those who are interested -- and you will be interested if you think about how a portfolio grows over time, how the policy for a group relates to the results for individuals, or the implications (correct and mistaken) of the St. Petersburg paradox -- I am providing links to them here:

The first is an interview with Ole by Michael Mauboussin, and the second is a paper by a group at Tower Watson. It is significant that the bulk of the notice for this is coming from industry rather than academics, and that the core group that is providing notice is the affiliated with the interdisciplinary Santa Fe Institute.