designing better futures

Genetics, Behaviour & Bullies

Wow, This is a great article in the Atlantic about the group behaviour in rhesus Monkeys and potential analogs in those big bald chatty apes we know as Homo Sapiens Sapiens "elder wise human".

The article hints about the functioning of a genetic variable and how it interacts within a social environment.

Here is the teaser video which only hints at a small part of the article.  This type of research will lead to many books and the genetic component will only loom larger as we are on the cusp of  the $1,000 genome. 

When I was helping to manage a Gene sample gathering project that was to be the World's largest, a single Genome cost about $100 million to sequence.  My estimate of the cost curve was that we would hit $1,000 by 2010.  We will probably be there in 2011, not bad analysis.

The issues mentioned in the article include:

• Violence and bullies (individual bullies often get ostracized from the group and suffer biologically due to the exclusion)
• Socialization and group conflict(some interesting narratives about conflict and the maintenance of a dominance hierarchy)
• Non-linear phase transition in group dominance  (rapid downfall after a coup for one group)
• Genetic potential realized relative to environmental factors specifically what we would call "nurturing or good mothering".

There is even hint about the fascinating Dunbar limit which I think holds one key to optimal group organization.  Great article for the anthro-socio geeks like me.  I will probably read the Atlantic article 2-3 times as it is dense and not quite scientifically conclusive in many areas, but fascinating all the less at the hints it gives to future questions in regards the role of genes, culture and environmental determinism in the face of genetic potentials expressed. 

living to be 100: National Geographic research and video TED Talk

Web 2.0 vs. Corruption

One of the most debilitating factors in economic development is corruption.  Corruption not only soaks up the efficient allocation of resources, but also shrinks investment horizons to near zero.  Why invest in education for your family or children if corruption means jobs are not based on merit.  Why invest in building a home or business if they can be taken.  Endemic corruption and poverty go hand in hand.  For some reason I have a strong visceral reaction to corruption, something about the Iowan in me. 

Having traveled a bit and spent time in the 3rd world, I have witnessed the costs direct and indirect of corruption.  I studied economic development in university as a focus of my anthropology degree. Here is a good academic papers on how corruption impacts people far beyond the bribe paid.  Here is one involving roads from the IMF.

Many assume corruption to be a 3rd world or poor phenomenon.  It isn't. Here is a list of countries ranked from the very credible Transparency International Survey.  The US made it to 19th place this year as the least corrupt place. 

Studying economic development is important.  The US is currently undergoing massive Economic Stimulus across sectors and industries yet, I have yet to hear of a single case of reaching into development studies that may offer lessons as to what works or doesn't. 

Corruption costs big time.  Land use, and registration is one of the things that gets hindered by corruption and is a point of interest for me.  It is a $9.9 trillion problem mostly affecting the developing world.

The Good News is Feedback

Better process design and feedback loops typically resolve corruption.  Investigative journalism, public feedback, freedom of information acts etc.  all aid in this.  These tools if available and functioning are effective unless corruption goes to the top of the political structure. 

The bad news is that if corruption goes all the way up, as in Russia it won't go away until leadership changes.

Here is a video highlighting the nature of Russia's problem. Poverty and corruption are highly correlated. Although a specious argument Russian male life expectancy of 59 years which puts it at #182 out of 227 countries is probably not helped by the issue.  Corruption and its economic burdens costs the average Russian citizen a lot.

So what can You do with your spare time to help out.

Check out these websites and see if there is something you could do.  If you have spare time and skills this would look pretty sharp on a resume.  Creating tools that make things better is pretty powerful stuff.

These are US sites, but a quick google search should bring up other projects in various countries and regions:

• Sunlight Labs
• Expert Labs
• Property law wiki (just an idea at this point from me)

It is starting to work in the developing world.

Here is a video from TED about a person who wants make a business out of fighting corruption.  The positive externalities from this would huge.

The Height of Folly & the Skyscraper index.

The Skyscraper index has been around since 1930 according to Wikipedia.

The concept is that skyscrapers are a contrary indicator.

I find these indicators interesting but mostly anecdotal. 

My own thesis is that economies and markets for various goods and services have normally bounded rates of growth or decline due to competitive and feedback dynamics.  I am working on a project to model these.

Extreme variance from the normal rate of change may sometimes be indicative of a future reversion to the mean. 

The extreme growth of banking as a function of GDP in the US is one example.  Here is a good paper looking at banking as a % of GDP since 1860.

The extreme variance of median income versus median home value in the US is another example.

Technology, finance and un-shakeable faith in the future all coalesce into magnificent projects and works which transcend commercial sensibility, they are collective dreams writ in stone, steel and glass.

The recent opening of the Burj Khalifa tower in Dubai is the latest example of this.  

For those wishing a deeper dive on the Skyscraper index the 2005 paper which was the source of the image above is here: "Skyscrapers and Business Cycles". The Quarterly Journal of Austrian Economics 8 (1): 51–74.

My guess is that the Great Pyramid in Egypt, the Mayan pyramids and other peaks, monuments and temples or civic structures in civilizations probably coincided with bubbles as well. 

At least with skyscrapers, there are some tangible relics for anthropologists to admire later, much more interesting than say the South Sea Bubble, which mostly created paper and frustration.  Let face it, if a bubble has to have economically non-viable externalities, buildings sure beat sock puppets.

The next big towers going up are in China in 2012 and Korea in 2014.  Get ready to set your economic stimulators to full stun.

Full disclosure:  I am an architecture, archaeology and design fan so probably lack full economic objectivity in this area and willingly look up and cheer on the dreamers while clutching my own wallet firmly on the ground.

Pro globalisation via the BBC

All though not fashionable, here is a helpful video that offers some support for globalization and business as a potential force for good.  The arguments for or against business are often shouted, lacking the nuance and listening found in good debate.  Many rarely consider global sources as legitimate voices for global issues, preferring convenient sound bite loaded local media outlets which may merely amplify opinions already held.

This video hints at the importance of property rights, free trade and other vital components in development.

This video puts forth a few helpful pro-arguments for pro-globalisers.  Whether you are pro or anti globalization, educating oneself makes the debate more interesting than partisan rhetoric. 

A good debater who has deeply considered an issue can articulate arguments on behalf of both sides of an issue, it also makes for more interesting conversation.

Could you disconnect, even if you wanted to?

Here is an interesting map from William Easterly's site AidWatch. It shows the distance from major cities as a function of geography and time.  Most of us are a few hours away from each other.

 

A few things to consider when looking at a network diagram like this:

1. People and things spread fast
2. Ideas spread faster
3. Feedback loops amplify and intensify certain things
4. Individuals can't really opt out of this process easily

All of the above are true for ideas, emotions, things and the human condition in general.  The village is shrinking.  Increased competition in whatever form you imagine it (resource, economic, innovation, improvements) will accelerate and be amplified in such an environment.  Margins shrink as things get more connected.  The positive externalities of competition flow to customers. 

Warren Buffet pointed out 10 years in 1999 that the automotive and airline industries are great examples of global growth industries with limited investor economic output, but significant customer benefits delivered.  Bigger markets aren't always more competitive.  Globalization means fewer economic moats.

Bigger and more connected is different.

Full disclosure, the most remote, I have ever been was in 1992 when I was in the sub-Sahara in Ngigmy, Niger brushing up my anthropology field work skills in a village that took 3 days to reach via bush taxi, market car and finally foot. While staying in this remote village, I met an elder who eventually asked the biggest question on his mind of a young white American. In Hausa via a translator. I was asked, "Do you know Michael Jordan?"

An anthropologist looks at Transaction taxes. Why 2014 might look like 1914.

There is a lot of talk about a transaction TAX in the US.  One can argue whether it is punitive, driven by vigilante populism or a legitimate safety mechanism a la Tobin.  One of the sub-fields of anthropology is archaeology, the science of looking through dead people's  junk in an act of guessing how people believed, behaved and organized themselves into cultures. 

Stamps are a useful way to revisit transaction taxes. 

One of the more recent US transaction taxes on stocks was initiated in 1914 and then increased later in the 1930's to help pay for the Great Depression.  New York state itself imposed a tax on stock transactions in 1905.

The stamps for the federal transfer tax are affixed to this document shown to the left.  This documents records the sale of 33,973 shares of Stutz Motor car company.  My great grandfather used to own a Stutz Bearcat, in small town Iowa.

For those interested in Philatelic fiscal self-flagellation visit this site with more tax stamps.

The  1914 US transactions tax of %0.20 stayed in force until 1966.  Any good tax is food for politician zombies and won't be rescinded easily. Today's proposal would see a %0.25 tax in place.  That is equivalent to $50 per $10,000 worth of shares bought and sold.  

The gold bugs may want to look back at the past and have a look at the silver tax stamp to the left.  A spike in gold is one thing, a sustained price level reflecting a decline in the dollar may seem like low hanging fiscal Fruit for the tax man.   $3,000 gold for a sustained period could bring the label hoarder thrown at the gold owner.  A gold tax would not be surprising.

In the book, The Leopard, the old prince watching the empires of feudalism falling and the new empires of industrialist Italy rise, says that, "all things must change so that they may remain the same."

When the federal transaction tax was repealed, California decided to keep it. One could easily imagine that happening again.

The current and looming fiscal challenges will most likely mean govt. self justification for new forms of taxation. 

French royalty used to say the goal of taxation was to pluck as many feathers from the goose as possible with minimal honking, today one has to keep the populist pundits confused and tax indirectly and with slight of hand.  a bit of stimulus here and there and then some obscure slight of hand, such as the AMT, which slowly captures everyone. 

The Romans invented tax outsourcing by hiring tax farmers. 

The protesting of transfer taxes has taken many forms including tea parties.  One of the more passive forms of protesting the transfer tax was to affix a stamp next to the tax stamp indicating that the original stamp was affixed under protest as seen in this image. Source here.

 

Derivatives traders should be wary.  CDSs with their huge notional amounts probably have politicians licking their lips.  The CDS tax seems almost like winning the political trifecta for politicians of a certain ilk. The CDS tax arguments which I don't support or refute would read something like this:

• Large taxable notional amounts
• Slows down the mega trillion dollar derivatives machine
• Forces the more questionable players offshore
• AIG et. al retribution
• Too complicated for the general public to argue the case against

Here is an old grain futures tax stamp from the Updike grain company.  Source image here.

Archeology today involves trowels, brushes and patience.  The future archaeologist will probably spend time digging around server logs, which seems like less fun than looking at stamps.

The mother of all transfer taxes is the federal Value Added Tax.  For those advocating a federal securities transfer/transaction tax, be careful what you wish for as precedents set can be powerful things. The US has  a dangerously short debt duration and looming mandated fiscal deficits.  A federal VAT gets easier to justify in DC with a AA debt rating, but that is something to be discussed in 2011...2-3% federal VAT sounds about right.

Full Disclosure:

1. I am just finishing up work on High frequency trading strategy in c# with +3.0 Sharpe ratios  so would suffer directly from a transaction tax. 
2. I would like to have seen my great grandfather riding in his Stutz Bearcat, it sounds swanky.

Twitter is glance

Twitter?  Here is a video articulating in a funny way that Twitter has not only jumped the shark, but jumped the Fail Whale as well.  

I would pose a counter argument to the Twitter fail whale, but first one has to understand what twitter is and what it does. 

Twitter is the technical expression of the physical concept of glance.  Glance is how humans relate at the most superficial level.  We glance to see the emotional, physical and engaged state of those physically around us. 

An interesting socio-biological hypothesis highlighted in The third Chimpanzee by Jared Diamond author of Guns Germs and Steel, is that the very size of the whites of the eye or sclera evolved functionally so that we could monitor each others directed glance.  Consider the change in your behavior when you can't see where people are looking?  When you wish to engender trust you take off your sunglasses, unless of course you are in LA or going through a self conscious hipster phase.

Glance is our first level of social interaction, our outermost degree of connectedness and intimacy. 

Social gaze allows us to monitor and feel connected with others.  Being in a bar isn't about drinking, it is about capturing a furtive glance or flirt that may escalate into something else.  Glance is about feeling engaged, accepted and connected at the most elementary level.

Twitter allows that.  Twitter is currently the easiest tool for sending or receiving social glance publicly.  The desire to be aware of others or to make others aware of us is innate.  Twitter or any medium which facilitates public/private glance will be popular, one can argue the oldest and shortest twit is the emoticon, the digital facial glance proxy.

Logo's and brands are physical glance tools that allow us to signal at a glance our values or those values we purport to telegraph.  Whether it be a sports team, individual athlete, style, wealth, power, sense of humour, ascribed social position etc.  We first and foremost communicate physically using our clothes, logos etc. combined with an awareness of giving and receiving glance among shared symbols.  Branding is the use of money to cultivate shared social values for a set of glanceable(sic) objects or relatable (sic) experiences.  Consider how Disney does this at physical park level, shared memory via narrative and finally logo/ icon level.

Twitter facilitates Social Glance creating a slightly closer social space.  It is as useful or as banal as those with whom you choose to exchange glances.

Glance is innate, intimate and superficial at the same time.  The desire to glance or be glanced is not going away, it will manifest itself in different ways technically.  Blogs, Twitter, Mood messages etc. are all digital manifestations of glance, expect to see more of them. 

A tough to get a hold of book on how and why we react to various media is The Media equation.  Don't let the unusual cover put you off, it is a fascinating distillation of social science research into how we react to media of all types physical and digital.  The book is worthy of consideration by anyone involved in media, interaction or design.

Anthroplogist / historian/ social scientist humour the Beatles 1,000 years on...

Trained as an anthropologist and studying a bit of archaeology and art history, I can totally appreciate that this is probably closer to the truth than these fields would like to admit. ht The Technium

Your world Interface anywhere: The Video

This may seem passe to say, but the rate of change and how you interact with the world is going to change faster than ever.  I am not talking about e-books (next years commodity) killing newspapers etc. or anything that banal.  (don't worry journalism will survive).

The world is going to get more fragmented.  Did you know that your view of the web via google is now different from everyone elses?

Soon your world will not be the same as anyone elses.  I hope this sense of disintegrated reality and individual control doesn't create more selfish people. 

We already control the ambient noise and music, people we choose to interact with/ignore around us etc.  If you work in media you need to be aware of this, partial attention is the pre-cursor to augemented reality.  The hardware for all of this is out there and this stuff is going to be everywhere. 

In the future, people will probably take info: vacations where the seek authenticity and no digital input.  If you feel you are on a digital leash/ addiction with a blackberry, you haven't seen anything yet. 

PS. Apple, microsoft and RIM don't own the moats or competitive edge to be a part of this.  The future is up for grabs.  Google has the strongest position in my mind as they get "infonomics and anthromation.

TED junkie and progress for the Bottom of the Pyramid

There is a great book about growing economies and finding new markets by serving the poor.  It is called the Bottom of the Pyramid.  I read and reviewed it in 2006 and was hooked. 

The thesis is that the poorest people are a huge market and they need services and will pay for them.  People who live on less then $10 a day have needs and they can be served if we listen. 

Here is a great story about the progress of the Aravind Eye clinic, which is an Indian for profit eye clinic modelled on McDonald's.  There is a lot to learn from and consider here.  The gift of sight is delivered efficiently to many who would have never considered it possible.  The ingredients are passion, entrepreneurial management thinking and drive. 

I have a met few people who do this including life insurance for the poor and a specialist in mobile banking.  These are mundane services in the developed world, but can be life changing in other parts of the world.

Full Disclosure: I am a TED video junkie.  I haven't owned a TV in 20 years and am picky about films and shows I watch, but TED almost always makes the cut.  If you want learn something interesting, check out some TED shows.

Black Swan author is an awkward bird

Nassim Taleb is a mixed blessing, part cheerleader for ignoring the false rationalism of statistics in the realm of human folly we call economics and part self indulging jester for being "mis-understood" and protesting too much.  I think he suffers a case Roubini syndrome.

Roubini syndrome involves being right once about a big thing and therefore attributing every utterance and opinion subject to that opinion and framework.  Having only a single mental hammer seems to have forced both men to see all problems before them as nails.   

The risk in Roubini syndrome is that of the one hit wonder pop star who slowly fades away.  Both men have more to contribute but seem bent on correcting the media with ever more shrill voices.  They have an analog version of SIWOTI syndrome which currently keeps them from more interesting and lasting contributions to thought on economics.

Take a look at Taleb's latest paper Oct 18,2009 entitled Common Errors in Interpreting the Ideas of The Black Swan and Associated Papers.

The paper's first pages are a tiresome tirade, but he has some solid points in the back end of the paper.  My own opinion is that his overly emotional rebuttals to prior rebuttals to his work cheapen his voice and muddle the waters. Don't feed the trolls.  A good idea stands the test of time and the best of ideas attract the strongest of criticisms early on before being accepted.

New paradigms are rarely acknowledged as such immediately, that is the role of fads masquarading as innovations.  History and ideas of historical note are only acknowledged correctly in the breech.

My recommendation is that the Black Swan should sink or swim in the sea of ideas.  The author needs to let it leave the nest to defend itself and fly on its own.  Ideas once submitted for consideration are no longer their author's property, but rather become a part of a useful collective consciousness or fade away.   Paradigms are a group phenomenon whether true or not.

The gifted Anish Kapoor creator of the Cloud Gate sculpture in Chicago long ago accepted that it would forever forward be known as "the bean", such it is with all creators and their creations in the public domain.

Shit book hints at one key to human development

Excreta, turds, poo, shit, etc. are all terms for something that induces disgust in most.  This response is innate and indeed wired into use at a visceral level and a key to survival.

All we need to know about shit, is that we want to be away from it.  Sadly many can't get away from it, they end up living, inhaling and consuming it.  This leads to death and disease. 

In development people refer politely to water borne disease leading to over 2.2m child deaths per year according to the UN.  Water borne diseases in most instances relate to drinking shit polluted water.  Too put that in context AIDs is estimated to kill 2.0 million and malaria around 1-1.5 million per year.  Shit kills.

This is a problem that the now developed world has kind of solved and that the developing world is still working on.  Like all human endemic problems it is rooted in behaviors, beliefs and fears.

Understanding shit and what happens to it is key to human development as much as economics, corruption etc. and curing diseases are.  Indeed, solve the shit problem and many of the diseases that limit human development and factors related to GDP growth may resolve themselves a bit.

Rose George has written a very entertaining and important book entitled The Big Necessity in which she travels the world discovering the cultural issues and mores around handling waste.  Her voice is that of the economist magazine, for which she once wrote, humorous, well read and considered.

If you are interested in the human condition and understanding the behaviors, and issues that may better it, read this book. 

I am fascinated by economic anthropology and sustainable development and appreciate the field work that George has done in trying to understand what the solution to the problem of shit may be.  Solutions aren't just about plumbing and digging toilets.  Like most aid dropping in money or technical help rarely does anything but minimize acute crises.

Marketing, behaviour, economics and technology, distribution and other issues.  Consider it a business problem/opportunity. This is a fascinating book about something that gets very little attention relative to its impact on limiting the human condition and capabilities.

Rose George's description of techniques used to change a village's behaviour, involve economic incentives and changing beliefs while raising awareness. The lessons about motivating people for sustained change are as relevant to the business manager as they are to the aid worker.  technocrats and major aid institutions often fail in these areas.

Factoids:

• Thomas Crapper helped improve the usage of the toilet in London, hence the phrase "take a crap" (perhaps best to leave it)
• For all of the butch culture, Americans are very prudish in the waste dept.  euphemisms abound in the culture
• the japanese have the most advanced toilets in the world, warm seats, water wash etc.
• Wiping with paper is very unsanitary relative to washing with water
• Since 1994, 935 million gallons of raw sewage have been dumped into lake Michigan
• German men pee sitting down
• Chinese put used toilet paper into trash bins instead of flushing it away
• Many chinese public toilets have no stalls or barriers, so people get to know each other very well
• The average shit session yields 250 grams about .551 pounds of solids
• 1.7 million people in the US don't have a toilet
• The corridors of the palace of Versaille used to be filled with urine and fecal matter as people had nowhere to go, it was an honor to hold the king's chamber pot while he filled it.
• 400,000 people get sick in 1993 in Milwaukee from feces contaminated drinking water killing 100
• The UK has 186,000 miles of functioning sewers that are 250 years old
• One of the only cures for a "superbug" infection is a fecal transplant
• Wash those hands: in the UK "more than 1 in four people have faecal matter on their hands"
• over 40% of people don't wash their hands after going to the toilet
• much more in the book about a key element of the human condition, namely shit

You get the point the Shit book (The Big Necessity) is interesting, educational and important about something "polite" people don't talk or think about.  If you are interested in sustainable development, furthering the human condition or understanding how to drive change among a group of people with a fixed behavior check out this book.

Anthropology & Economics: Economics you won't see on CNBC

Political economy is the study of the macro functional outcome of how our species organizes itself in its various groupings.  It is easy in the CNBC whizbang world to get caught up in bombastic posturing and the banalities of some host with a suit and an opinion trying to get you to watch for just one extra 30 second ad. 

Economics is  more than a clownesque Cramer who fails an economic and entertainment litmus test. Thank god CNBC's ratings are dwindling as America looks to re-invent itself with the next quick buck plan and inflates the next bubble with accompanying amplifying digital hope halo. 

 I think travel, time with the family or a good dinner party would have been a better way to a richer life than the banality of installing granite counter-tops in the hopes of goosing home equity as a way to a "richer life".

Most of the readers of this blog may think and study what happens on the more functional / developed economy end of the economic continuum.  There is much to be learned about what happens when things go wrong in our developed economy from emerging or chronically dysfunctional economies.  Our crises are sporadic, but not chronic or endemic, at least not yet.

On the other end of the political economic continuum is real failure with a larger human toll.  Learning about from these failures could be as important.  Who knows, studying external aid stimulus shocks in the 3rd world may tell us something about the efficacy of our own stimulus attempts? 

Would anyone pay cash to destroy clunker goats as a way stimulate the farming economy in a developing country?  Think about it?  Of course "we" are different, insert your own pedantic ethnocentric myopic narrative of fact here.

When a state fails in a profound economic way it has serious human costs. 

One of the least dignified ways for a person to die is from a banal disease such as Cholera.  While not as exciting as looking at the latest ponzi, bailout, or bonus "horror" there is a lot to learn from the other extremes of economic failure.  This video shows Zimbabwe and its Cholera epidemic, which can be almost solely blamed on failed govt policy in a kleptocracy gone horribly wrong.  A cholera epidemic is an output of a failed political and economic system.  All systems of economy may have something to teach, even in their failings.

For those interested in learning about economics and the concept of political economy, I would suggest reading Amartya Sen's thoughts on capabilities.

I am looking forward to reading his new book on concepts of the Idea of Justice.  This won't excite the CNBC crowd or those looking at charts trying to divine the next 10 minutes in the S&P 500, but I look forward to some quiet time with it.

Not only is a Sen a grounded realist as an Economist and Nobel Prize winner, he also helped develop the UN Human Development Index.

Who knows an hour or two reading Sen, may be a "richer" experience than the same time spent watching "Financial Journalism" on CNBC. 

Full Disclosure: I haven't owned a TV in 20 years, but suffer the pointlessness of CNBC's "Journalism" daily in the background in the trading office I currently find myself in.  There are some needles in the CNBC digital haystack, but they are far to thinly spread between the empty opinions and  vaudevillian digital charades to be worthwhile. 

I believe the only way CNBC will get the audience back is to follow the wrestling industries strategy from the 80's.  Tell everyone it is fake and then really put on a show WWF style.  Amp it out with midgets, texas deathmatches, etc.  The crowd wants bread and circuses so deliver.  Drop the pretensions of Journalism or economics and get on with the show. 

For real news try Reuters or Bloomberg.

Independant thought is tougher than you think, but please make the effort.

Just caught this on Michael Covel's Trend following:  Watch group think in action as individuals deny what they sees with their own eyes.  Most likely you would to.

Please question everything, even if it is makes you seize up for a day or two.  We are social animals and far less individual than we like to believe.  Our greatest cage is the limitation of our perceptions of ourselves.

Our culture and most "modern cultures" are based on a fictive belief of individualism and yet the archetypes that are accepted or acceptable are fairly limited.  It is a strength and weakness. 

As the ancient Greeks said, Know thyself. In addition: question authority! and don't trust the group. This is just one financial anthropologist's opinion.  But there is nothing like a group of people "succeeding" to seriously do harm as their flawed beliefs get re-inforced in the short or medium term with misplaced money or recognition.

Warning: The Milgram experiment is a deeply disturbing side to the human species and watching it is disturbing., Our desire to conform with the group or a weak but present authority figure at the expense of the individual or individuals is truly disturbing.

Paul Romer is an interesting thinker

Paul Romer's approach to acknowledging the need for "rule" evolution and competition for best practice is very compelling.  Indeed it is the basis for a Federalist system.  One could argue that the ongoing centralization of US policy via federal regulation has hindered the countries rate of adaptation.  The desire for regulatory unity and standards is helpful, but if it oversteps can lead to ossification.  SEZ (special economic zones) and charter cities as put forth by Romer are needed now more than ever.  Our technology and rapid rate of idea inter-exchange mean that we need our rules to evolve at an ever faster rate. 

The implicit question posed by this argument: "is the US becoming a dated mainframe type structured system in an ever evolving eco-structure of laws and economics that needs smaller units of response at state and local levels."  The technologies of biotechnology alone are going to change social stresses faster than computers in the next 30 years.  How will we evolve our rules, be they codified laws, social mores or behaviour sets?  Should the federal level be locking down a single rule set or should state and local systems be given more freedoms?  Premature optimization is a problem in computer coding and in "rule establishment" which has very real costs, think of the federal prohibition experiment in the 20's.  The flipside of this argument is of course the Jim Crow laws of the south.

I like Romer as he reminds me of Hernando de Soto (Video here) recognizing the role that behaviours codified as laws or informally as acknowledged as cultural norms drive the human economic and social condition.  He gets the meta game, even if he acknowledge that the Jeffersonian Federalist concept was there before.  The historical case of Hong Kong put forth by Romer is a bit stretched in the discussion below and should be taken with a grain of salt relative to its very awkward origins as a drug runners paradise run by the British after the seccond opium wars.

Taking things for Granted

I have often referred to a type of financial risk as "oxygen" risk.  Oxygen risk is anything so common and familiar that it is taken for granted.  In that vein I offer something to watch that is both interesting and important, a video about clean water technology.  Most of the readers of this blog will take little interest in this, but it is my show here :)

Finance and risk are interesting and important but for me what is most interesting are things related to potentially significant changes in the human condition.  Property rights, iodized salt, sustainable energy, access to toilets, micro-nutrients and civil open society in the Popperian concept aren't considered sexy because they are the "oxygen" for most of the readers of this blog.  For me they are endlessly fascinating. Understanding how they can become more accessible to developing countries and more importantly adapted by their cultures is a point of endless fascination for me.  I am looking forward to reading my copy of a book on Human Waste, ick but it is important to the condition of life for billions of us.

So here is an interesting video on a new water filtration technology.  It is no panacea, just another technology, but most changes and successful systems consist of many little things.  This may be one of them for some people.

S&P 500 rolling returns movie 1881- 2009

Looking at graphs can be deceiving.  I used to be chief analyst for Europe's equivelant to the MIT media lab and am fascinated by how people respond to data and information.  A static graph isn't the way we go through life.  So here are the 10 Year rolling returns of the S&P 500 animated.  The long term if you will.  I threw the PE data for fun.  Data is from Shiller. 

Note the data is plotted as a semi-log and that looking at single countries data is a limited look at the concept of Equities as it is represents a selection and survivorship bias and compounded by using a sample of 1. 

One of the best books, I have read that explains how people interact with various media and form biases is The Media Equation.  Music by De Phazz

Retro finance: Lo-Fi manifesto

"High finance", used to be a phrase exemplifying large amounts of value and high degrees of acumen.  It turns out in retrospect that High finance, meant bankers and mortgage brokers gone wild on CDO & CLO crack.

Finance is a shared cultural belief system and set of behaviours, not a physical reality.  In finance, the most well  known sub-culture from a western finance perspective is Sharia finance which seeks to adhere to various culture practices of lending and interest etc.  Many cultures practice alternative forms of lending, saving and allocating capital.

Through various western eras, lending has been allowed or not for various groups with various constraints based on the fashions of the times, the label usury is a culturally subjective term that springs up in times of fiscal crisis.. 

In music Lo-Fi refers to a style that is purposely sub-optimal from an acoustic fidelity perspective but aesthetically more pleasing.  Lower fidelity doesn't always mean lesser quality as quality in music is a subjective value.

I would argue that a culture's use of finance relative to the human biases inherent in any group means that some form of Lo-fi finance may be longer term optimal.  Lo-Fi finance could actually increase fidelity (trust) in the system long term. For the econo geeks out there (the groups long term utility function may be optimized using sub-optimal local or short term temporal constraints)

Lo fidelity finance could be an interesting point of research for the behavourial economists out there.

Glass Steagall was an excellent example of Lo-Fi finance in action. Glass Steagall's repeal in 1999 was a call for optimization, speed and ironically financial strength.  Woops.

Another great example of Lo-Fi finance is the Credit union.  Credit unions are the unwashed little hippies of the finance world.  They aren't "power suits" etc., but have done well all things considered.  I don't mean to get all "Amish" on you, but Lo-Fi has some serious potential.  The Lo-Fi label in finance could serve the same function as the Organic label does in stores.  People could choose a brand with known qualities.

The manifesto for Lo-Fi finance has some basic ground rules. 

1. Seperation of investment banking from deposit taking
2. Seperation of any high gamma (or convexity exposures) unless fully hedged with the undelrying.  This is about CDS and other forms of asymmetric leveraged low probability high impact risk taking.
3.  A predetermined threshold of market domination in any geography or market segment to avoid concentration of risk in any entity
4. Elimination of the Basel 11 capital accords
5. Elimination of the Ratings agencies as a systemic threat
6. Lo-Fi participants would not be allowed exposures to non-lo-fi participants
7. Others, please suggest them....

 The participants would  agree to them and most likely any Lo-fi participant would be barred from engaging with a Hi-Fi operator in all but limited forms of risk exposure.

Lo-Fi would involve separating many risk activities and preclude certain firms from engaging in them.  Yes it would be short term sub-optimal, but long term stable. 

Eventually deep cultural norms are forgotten or thrown off, only to be rediscovered when something bad happens.  The Repeal of Glass Steagall is just such an example of a codified norm that may be relearned in some new fashion.

Plus ça change, plus c'est la même chose.

Here is a little Lo-Fi Music to ponder the issue:

VaR explained & the BS model (not Black Scholes)

Value at Risk is pretty simple.  Someone is making a guess about what they expect to happen 95% or 99% of the time.  i.e. 99% of the time you will lose less than $1000 a day. etc.

What many people forget to focus on is the fact that what happens the other 1-5% of the time is what counts.

What many people don't know is that there are 3 types of VaR.  The Risk manager presenting the report usually just mentions the number and that is all, but scratch below the surface and you can learn what your risk manager is really thinking.  Next time ask them what type of VaR they are using and keep this handy explanatory list nearby to decipher what they are saying.

1. "Well, basically we use Historical Var compiled from the data."  (I am going to let history bullshit you.)

2. "We use our mighty computer resources to calculate a Monte Carlo simulation for VaR."  (I take history, blow it into a million little pieces and then each piece will bullshit you ever so slightly.)

3. "We have a sophisticated financial model creating a robust Parametric VaR."  (I am going to personally bullshit you with a tweaked Garch model or overly sensitive Levy Distribution)

Not knowing much you will nod and agree that, "the number looks about right."  and sign off on the risk limits, now you are bullshitting yourself and the whole team.

I am not Against VaR or any other standard risk tool or view.  I am against any tool which becomes institutionalized.  Once a risk tool or approach becomes a wink and a nod, sign off or a CYA calculation it loses value.  Risk management is meant for curbing human behavior, otherwise individual or collective greed wells up and overwhelms an organizing system of faith, which is what finance and money are.

Examples of institutionalized risk management beliefs that have or will become rubber stamps:

• Ratings Agencies (NRSRO ministry of truth)
• Securitisation magic (of course we all know that now)
• Basel II Capital Accords
• Probably the next financial innovation which will yet again revolutionize access to credit
• Any company wide policy which creates a ...Yeah but it passed the X test. Or well they signed off on it...type of mentality.  See Dilbertian risk management.

The most dangerous risk manager or system is the one that becomes the de facto agreed standard we can all agree will stand the test of time.  Once a unified risk belief is shared in aggregate all participants will start gaming or trading it the same way.  When all participants share a similar view, the system is susceptible to harmonic dynamics.  See the video below.