October 2009


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Last week has been a pretty unproductive week. Fell ill on Tue and Wed. Barely managed to work for a few hours on Thu. But by Friday I was back to normalcy. Generally one of the ways I get over from an inertia state to an active state is to read something interesting. So, picked up this frequel( from the back cover : nice name for freakonomics sequel ). I knew there was a lot of controversy relating to this book. Some people argued that authors got it completely wrong as far as global warming is concerned. Some argued it was a hotch potch of some articles.

Whatever others have to say about this, I have found this book a real page turner. Even though some people criticized the book saying that it was a mish mash of random thoughts, the author clearly mention their intention in the very first note. They identify the theme as “role of incentives” and their hypothesis is that people respond to incentives which are not necessarily predictable. These stories are based on “economic approach” where the underlying premise is that behavior is driven by a rich set of values and preferences.

While presenting this opinion about incentives, authors introduce a number of interesting examples like the following

Image 1.This campaign by US Dept of transportation urging people not to drive drunk. Authors estimate that walking while drunk is 8 times fatal than driving drunk. Simple alternative (a seemingly safe one) to driving drunk is actually more dangerous.

2. How Cable TV might have improved the status of women in India

There are 5 chapters in the book with each chapter filled with umpteen number of stories, where results are presented based on the economic approach, looking at micro data, trying to ask questions and teasing out some answers. In a sense, this kind of thing actually makes economics interesting I guess. Its the same with stock market . Long term predictions(read anything more than a couple of months) are very difficult. Near term predictions are also not great too. If one looks at stock market data, almost everyone is dealing with the same starting point, univariate time series of stock prices, option quotes. You can do a low frequency, medium frequency or high frequency analysis. More and more I get exposed to data, I have a feeling that there is money to be made only in high frequency trades ..

Coming back to the book,

ImageHow is a street prostitute similar to deparment store santa ?

The first chapter is about authors understanding demand curves of prostitutes. One of the challenges of asking questions about such topics is data. Everyone knows the more sensitive the topic is, the more difficult it is to procure data. Drugs, Violence, Sex are some of the things where getting data becomes a dangerous adventure. So, credit does go to Sudhir Venkatesh’s hard work to actually get the data in the first place. Once you have some structured data , slicing and dicing is the fun part and here is where the authors excel is bringing out some interesting observations. In creating a narrative, the authors come out with a lot of aspects about women, women’s lives, prewar prostitution etc. Here are some aspects mentioned in the book

  • It is hard to be a woman , be it developing countries or developed countries, say the authors. Practices such as breast ironing , abandoning girl childs in China, pay scale mismatch in corporate America etc. make it difficult to lead a woman’s life
  • Prostitution has by far managed to be a woman’s game( though things are changing pretty fast:) )
  • Prewar prostitutes were earning far more than the current street prostitutes. It is argued that one of the reasons could be the rise of premarital sex.
  • Whole lot of observations are based on the working paper, Empirical Analysis of Street-level Prostitution . It’s abstract says the following :
    • Combining transaction-level data on street prostitutes with ethnographic observation and official police force data, we analyze the economics of prostitution in Chicago. Prostitution, because it is a market, is much more geographically concentrated than other
      criminal activity. Street prostitutes earn roughly $25-$30 per hour, roughly four times their hourly wage in other activities, but this higher wage represents relatively meager compensation for the significant risk they bear. Prostitution activities are organized very
      differently across neighborhoods. Where pimps are active, prostitutes appear to do better, with pimps both providing protection and paying efficiency wages. Condoms are used only one-fourth of the time and the price premium for unprotected sex is small. The
      supply of prostitutes is relatively elastic, as evidenced by the supply response to a 4th of July demand shock. Although technically illegal, punishments are minimal for prostitutes and johns. A prostitute is more likely to have sex with a police officer than to
      get officially arrested by one. We estimate that there are 4,400 street prostitutes active in Chicago in an average week.
  • Reference to NYTimes article(The economy of desire) which makes a case(weak one though) that having a relative in the family with AIDS changes the sexual behavior as well as self-reported identity and desire of a person
  • Article supporting Larry Summers Hypothesis – He, Once a She, Offers Own View On Science Spat
  • Why legalizing sex work is dangerous for sex workers .. Taboo / Illegal things are priced at a premium. Once you remove restrictions, prices drop like crazy and thats bad news for escorts. From the freakonomics blog , here is an interview with a high profile prostitute.
    Link A Call Girl’s View of the Spitzer Affair

Authors finally after all these stories, anecdotes, empirical evidence suggest that street prostitute is similar to a department store santa, they both take advantage of short-term job opportunities bought about by holiday spikes in demand


ImageWhy should Suicide bombers buy Life Insurance?

As I began reading this note, I had a feeling that it was similar to “outliers” , Gladwell, story all over. Thankfully the authors mention that the point was already made by several other books and stop belabouring the same point. The whole chapter revolves around Craid Feied who manages to set up a database for ER and thus revolutionizes information management systems in a lot of hospitals. Some of the interesting things mentioned in this part are

  • The effect of surname in academic profession 🙂 Link : The benefits of being economic professor A ( and not Z)
  • Deliberate Practice has 3 components. Setting specific goals, obtaining immediate feedbacks , and concentrating as much on technique as on outcome
  • Why terrorism is so cheap and easy ?
  • How the estate tax has an impact on the death rates of people who inherit tons of money ? very funny things mentioned in this context
  • The most interesting part is the fact that hospital database is being used to track terrorists

The authors answer the question about suicide bombers . The database suggests that one of the defining characteristic of a suicide bomber is , he /she doesn’t buy life insurance. So the quirky take on that fact is : Suicide bombers should buy life insurance to leave no trail behind them.

Unbelievable Stories about Apathy and Altruism

This part was a little dragging. Behavioral economics, apathy shown by 38 people towards a murder in a NY neighborhood, stories about altruism etc are the aspects touched upon

ImageFix is in – and It’s cheap and Simple

I think this is the BEST chapter in the book

Premise under which the narrative is built around : Cheap and Simple fixes often address problems that seem impervious to any solution.

  • Starts off with the story of Hungarian Scientist Ignatz Semmelweis who came up with a simple fix to solve perpetual fever, something witnessed immediately after child birth in many hospitals. Fix was : Disinfect your hands before operating on maternity patients. Simple but powerful fix which has saved innumerable lives till date.
  • Polio is another vaccine which can be considered as a fix. Instead of dealing with the problem after the fact, see to it it doesn’t arise in the first place.
  • McNamara fix of seat belts in cars to prevent fatalities
  • Nathan’s solution to hurricanes is fascinating. A little dig in to Nathan’s intellectual venture gives a superb account of what he and his team is up to.

What do Al Gore and Mount Pintabu have in common ?

Reader meet Nathan and his team again in this chapter where the solution to global warming is presented in a different way. There is a considerable debate about this chapter. I have no clue on what is right and what is wrong about global warming. The only thing I feel is the solution of actually spraying something in the air to global warming is lateral thinking.. Who knows, it might work.

To digress at this point, recently I came across an interesting example of lateral thinking. This was long time ago when prince of Turkey wanted to modernize the society. He did not want women to wear burkhas!. Well the usual boring way to stop women from wearing burkhas is to impose some law, penalty, etc… However he was a great lateral thinker. He passed a law where , “All prostitutes were ordered to wear burkha” .Behavior change among normal women was immediate !!. Terrific example of how you can fix things, change aspects of societal behavior by lateral thinking…… May be Nathan and his team need to be given a hearing and funding to see whether their lateral solutions works..Who knows, it might just work…

My takeaway from this book : Understanding data and teasing out answers to interesting questions is a great fun activity. If one spends enough time gathering data or visualizing data, one is bound to ask useful questions. Lateral thinking and open minded ness towards solutions usually result in interesting solutions.

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Michael Lewis, needs no introduction . His previous works have been best-sellers. When he writes a book about subprime crisis, I was expecting a dot-com esque narration of subprime mess with all the ingredients of a thriller movie ride.It turned out to be exactly what I expected.This book is essentially a collection of articles, essays by various people before panics, be it the 1987 crash | asian currency crisis | dot-com bust | the recent sub-prime bust. Reading this book is like bringing old newspaper articles, magazines from your attic to go over what people said about various crisis situations.

The book talks about four panics


Oct 20, 1987 Panic – Black Monday
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The more I read about Oct 1987 crash in various books, the more I think that nobody knew why it happened. Even though 6Billion USD of the total sales of 40 Billion USD (Stocks + Futures) on the day of crash was represented with portfolio insurance selling, it could be hypothesized that portfolio insurance was the effect rather than the cause. Michael Lewis in the first part of the book presents various articles appearing in NYTimes, WSJ ,research reports to take the reader back to 1987 environment. There are articles which blame Program trading in the form of index arb or portfolio insurance for the crisis. Some feel that synthetic option creation itself was a flawed concept. If you want to manufacture an option on the market, you cannot do that by selling and buying the market as the market will not allow you to do it.

Facts are : Index arb saw that the futures were going through a free fall and stock market was trading at a huge premium. Most of the trades knew that the stock index was calculated using Friday’s closing prices but still chose to believe that they were updated. They shorted the index and waited for the futures to fall to close the other leg of the arb. Meanwhile large fund houses who could not short the stock, shorted futures instead. However when the stocks finally opened on Monday, the cash futures spread was not juicy and index arb ran amuck trying to close the other leg of the transaction thus buying futures for a brief period of time. Meanwhile stocks were dumped by everyone and thus futures continued the free fall.

After the fact analysis :

  • There should have been circuit breakers
  • Futures trading is dangerous
  • Portfolio Insurance is crap
  • Dynamic option manufacturing is a sham
  • Coordination problems between Futures and Spot market regulators
  • One thing to fear is “FEAR”
  • Margin requirement should be drastically increased in futures market
  • Uptick rule should be applied to futures market
  • Shorting restriction in futures market

As any after the fact analysis appears, they appear correct in hindsight but nobody said anything before crash. ! Is it age-old willingness to suspend one’s critical judgement when lots of money is made ?

A gem of a statement in this part of the book is :
Best animal behavioral experts don’t pretend to know why antelopes panic precisely when they do.

Can we know why humans panic? Very unlikely


Asian Currency Panic
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Well, the gory details of the currency crisis is known to all. Foreigners lend large amounts of money as short term capital and South east asian countries lap them up. However the capital was short term and it was naturally difficult to fund long term projects, irrespective of whether the countries intended. The currency panic is combined with LTCM failure. One thing I feel about reading these panics is that it gives some numbers about the sheer volume of mess that was created. Here are a few numbers

  • 175 Billion of Short term debt was lapped by South east asian countries
  • Russian Treasury Bills were offering 50% interest rate
  • LTCM blew away 4 Billion in 6 weeks
  • LTCM lost $120M in one day and lost $500 M on one trade, selling put options on index
  • Partners put in $1.9B of the total $4.4 B fund

Dot.com Panic
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A classic recount of dot com crisis. Again numbers are something which hits me , every time I read about dot com mania. Here are some numbers and quotes from the book
  • Dumbest Dot-com , All Advantage raise 175 Million USD and spent 40 Million USD in the first quarter . Their model , pay users to surf. It was valued at 700 Million USD by the venture capitalist !
  • Theglobe stock rose 600% on the first day of its IPO. Their model, replicate society on the net !
  • Computer.com spent 60% of its initial funding on 90 second Superbowl Ad.
  • In 2000, 371 Internet companies were value at $1.3 Trillion , 8% of the entire US Stock market
  • NASDAQ peaked on March 10th 2000 and 10 days later, an article in Barrons, “Burning Up”, changed the world of dotcom
  • Dotcom era : Instead of stock price reflecting the fundamentals of the company, it started affecting the fundamentals of the company
  • Investors doled out $78 Billion to the employees of 100 start up companies
  • Bill Gross 1000 page article on GE Capital financing made the stock tank by 25%
  • A boom with out crooks is like a dog with out fleas. It does not happen.
  • When some one talks badly about a boon, turn back to him and ask him,”Where were you during the boom time” ?.


Subprime Panic

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Any numbers reported for this panic will be incorrect as we are still living through that crisis. I remember reading a book titled ” Trillion Dollar Meltdown”. With in a few months, the same author came up with another book . “Two Trillion Dollar Meltdown”. By Feb 08, there were numbers being quoted as high as 7 Trillion Dollars as the global impact. Is this really a panic ? When I hear the word panic, I have a mental image of an event happening very quickly. Subprime mess keeps telling us that there is more to come.

In any case, the good part of the book is that you don’t have to read it sequentially. Since it has articles and independent views from various people, one can start reading from any page….So, I guess, the book can be a good subway read/ office commute read..

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For the last one month I was completely occupied with work . Weekdays and Weekends flew away before I realized that it has been quite sometime since I had read any book. This weekend , being a long weekend , decided to spend my time reading a book on ambiguity. I stumbled on to a reference to this book on some blog and was intending to read at some point in time. A nice holiday break and festive mood around was good enough to motivate me to read this book, which was touted as a mathematical novel.

There are 2 stories which are intertwined in this novel. One about Ravi Kapoor, who narrates his learnings from a class on Infinity at Stanford. The second story is about circumstances in the life of Ravi’s grandpa, Vijay Sahni who gets imprisoned for a brief period in his life. The narration of these two stories can be visualized by the following image:

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The upper box represents the story of Vijay Sahni. The lower box represents Ravi’s story in the novel.

The conversations between Vijay Sahni and Judge Taylor brings out Euclidean and Non Euclidean Geometry

The five postulates of Euclid based on which the entire “ELEMENTS” is built are :
Postulates :
1. It is possible to draw a straight line from any point to any point
2. It is possible to produce a finite straight line continuously in a straight line
3. It is possible to describe any circle with center and radius
4. All right angles equal one another
5. If a straight line falling on two straight lines makes the interior angles on the same side less than two right angles, the two straight lines, if produced indefinitely, meet on that side on which are the angles less than the two right angles.

The fifth postulate controversial nature lead to the development of Non-Euclidean Geometry

The lower box is Ravi’s story where his stanford professor Nico, uses a perfect blend of examples and historical narrative and leads to the Continuum problem

Continuum Problem: Is there a set whose cardinality is greater than the cardinality of natural numbers, but less than the cardinality of the real
numbers?

What is the connection between the two stories ? Why does the book develop these themes in the first place ? What set theory and geometry have in common ? A reader would definitely be delighted from the way connections are made in the book using two stories.

Here is a snippet from one of the conversations between Vijay Sahni and the Judge
This freedom has me in awe. It is unbounded, and every single one of us possesses it. We are free to believe or not to believe; we may create mathematics or build homes or write poetry or do nothing at all; we can marry and raise a family or stay in bachelorhood; we can quest for new adventure or find comfort in the familiar; we can seek meaning or we can doubt that it is possible to find meaning. Every path is there to be taken or ignored, and none is ordained. We are given no certainties, yet we are given the capacity to feel certainty. There is no absolute meaning to latch onto, yet transcendence is within our grasp. We are free to chart our course, free to pursue our passions, and free to create the axioms of our lives. And it is in this glorious freedom that I find grace. This freedom, then, is my proof of His existence.

Here is a list of mathematicians who figure in the book as the stories progress

Image Zeno popularly known for his Paradox

Image Italian thinker Giordano Bruno
Image Galileo

Image Bhaskara (1114-1185)
Image Pythagoras (570-490 bc)

Image Cantor
Image Baruch (Benedict) Spinoza (1632-1677)
Image Euclid

Image David Hilbert (1862-1943),

Girolamo Saccheri (1667-1733):

Image Farkas (Wolfgang) Bolyai (1775-1856)
Image Farkas Bolyai’s son Janos (Johann) Bolyai

Image Nikolay Ivanovich Lobachevsky (1792-1856)

Image Johann Carl Friedrich Gauss (1777-1855)

Image Bernhard Riemann (1826-1866)

Overall this book reminds me of “The Lady tasting tea” which gives a good historical narrative of people contributing to the field of statistics.

I guess the take away from the book, besides getting a thrilling ride on the basis of mathematics is this gem of a statement:

It is true that absolute certainty may lie outside our reach, but we live for that magic moment of discovery when we are attuned to this sense of order and connectedness. And the existence of this order and connectedness is a leap of faith.