Byrne's Eye View

The Chinese government has decided to curb their equities bubble by -- yes! -- cutting taxes on fixed income so they can have a bubble in that instead (W$J).

China's highest legislative body reviewed a proposal authorizing the State Council to cut or abolish the 20% tax on interest income to curb the exodus of funds from bank deposits to stocks as rising inflation erodes savings.

This is not exactly sound thinking. While a tax cut is a generally good idea, I don't think anyone has ever stopped a speculative bubble by making it easier for people to borrow money. If the Chinese government is serious about ending the bubble, they'll stop censoring their accountants.

What's really distressing about this bill is the prospect that it might work: the problem with China is that banks are lending more than they can afford to, and they're doing that by hiding their nonperforming assets. What the Chinese government is saying is "Stop taking advantage of our banking system's insolvency: put your money in our insolvent banks, instead!"

It takes a People's Republic to screw people this badly.

Bloomberg:

Zhang Shibao covers 12 Chinese stocks and recommends investors buy all of them, even after they've more than tripled on average in the past year.

"We are still in the middle of the bull market and the uptrend is irreversible,'' said Zhang, a steel analyst at China Merchants Securities Co. in Shenzhen.

What can you say to these guys? If a market reaches a peak, it's because all the sane people have given up even trying to figure it out, and everyone else takes speculative success as positive feedback. If you'd asked Mr. Shibao to compare the prices of the stocks he analyzed to their intrinsic values, I don't think he would have said that they were all trading at a 70% discount to their real worth -- but that's what he'd have to say to justify keeping a 'buy' recommendation.

"I haven't encountered any pressure from my company so far not to put out sell calls, but I think there will be if I do,'' said Ping, who has been a securities analyst for two years after getting his Master's Degree in Finance from Shanghai's Fudan University. "I avoid that by skipping companies that are not worth a buy. Instead of putting out a negative report, I'll just not put out one at all.''

Welcome to the Kindergarten Report Card market: everyone is differently A-OK.

China doesn't allow investors to sell shares they don't own and buy them back later, a practice known as short selling. That leaves brokers more reliant on buyers for commissions.

That explains it: 'sell' recommendations don't mean anything to someone who doesn't own a stock -- and to someone who does own it, they mean "you're wrong." Thanks to this helpful law, there's no reason whatsoever for anyone to be anything less than bullish on Chinese stocks: if you don't like it, all you can do is not trade it.

The WSJ reports that the Senate thinks Amaranth manipulated energy futures ($), and calls for more regulation (apparently on the theory that losing all your investors' money and losing your jobs is not a big enough disincentive to do what Amaranth did). This ignores the evidence that manipulation isn't worth it, and -- this bears repeating -- ignores the fact that Amaranth's actions led it to lose money, and the counterparties to those actions made a killing.

It seems to me that if misbehavior is expensive, and correcting for it is lucrative, any regulation would be superfluous. Then again, that's not the kind of attitude that gets anyone elected.

I love this long, detailed exposé of Rupert Murdoch. It details how he exploits conflicts of interest, and uses his media properties to lobby for his political agenda.

It should be noted here (since it isn't in the article) that the New York Times has a substantial interest in seeing Murdoch's acquisitions (particularly that of the Wall Street Journal) thwarted, and thus an uncharitable explanation of the article might be that they're using their media properties to lobby for their political agenda.

Now, I don't think there's anything wrong with that, but if Rupert had done it, I'm sure the authors of that piece would have.

I just read Jared Diamond's Collapse and Guns, Germs, and Steel. They're both ploddingly thorough expositions on simple theses -- Diamond would obviously make a fabulous grad student or research assistant -- but they suffer because Diamond is trying to address economic problems from a biological and geographical perspective.

For the most part, Diamond doesn't stray too far from his expertise, but to the extent that he doesn't he's reciting the ecology of a region, not making useful historical judgements. To the extent that his research is applicable, it's economically illiterate and thus not too useful when he uses it to make economic predictions.

In general, Diamond's thesis goes something like this: most societies are aware of their immediate needs and their recent history, but are bad at thinking generations ahead based on the worst-case scenarios from generations before. So, as noted by Malcolm Gladwell the Vikings who settled Greenland managed to ignore abundant food sources and an approaching famine -- they lived like Europeans once they'd left behind the one continent where that lifestyle made sense.

Flat-Earth Economics

Diamond's economic view is sadly limited. He notices that many societies collapse when they run out of resources, and assumes that this is inevitable. And indeed, it looks that way. If we have a finite amount of resource X, and we use some fraction of X each year, it's a simple matter of division to find out how many years we have before the X is all gone.

But it's not that simple. Most of the societies Diamond studied used pretty simple property rights: most of their natural resources were collectivized, or private ownership was rendered tenuous by capritious legal systems and violent criminals. Once property rights are definite, someone who owns a resource has multiple options: they can sell now, or they can hoard their product and put it on the market later. How do they decide? It helps to treat everything financially: oil reserves, for example, are an option that can be exercised for cash now (extracted and sold) or held until later (when the "strike" price -- the extraction cost -- has increased, the value of money has decreased, and the price has fluctuated in some way). If resources are finite, you'd expect all of us to be hoarders: why would I sell my oil now if I could leave it in a fifty-year trust and sell oil when it hits $700 a barrel?

Why not, indeed? If oil is finite, property rights are indefinite, and we all know both, you'd expect people to hoard oil. But every hoarder 1) raises the current price, but 2) lowers the future price. If literally everyone hoarded, oil would spike now and be cheap later -- they'd be giving up a definite high return in present dollars for a questionable lower return in cheap future dollars. There's an equilibrium -- and, as it turns out, the equilibrium is a pretty elegant solution. The equilibrium price turns out to be the price at which product consumption decreases by a fixed percentage each year -- which means it will last indefinitely.[1] And how fast? Fast enough that the resource reserves -- which, remember, we were treating like a financial instrument -- return exactly as much as any other investment.

When you think about it, this is the only result that makes sense: how could we possibly have an economy in which being a lawyer has finite rewards, being a doctor has finite rewards, being a beggar has finite rewards, and owning the last drop of oil is the way to infinite wealth.

We won't run out, though flat-earth economics ensure that it'll always look that way.

[1] If we consume 5% of our remaining oil each year, we'll keep getting indefinitely closer to depletion without ever getting there. It's similar to Zeno's Paradox -- you can get halfway there as many times as you want without ever getting where you're going.

This Bloomberg story uses way more numbers than it needs to:

Rowling, 41, caused a stir among Potter fans when she said two characters will die in the new book. The six earlier novels about Harry's adventures at Hogwart's School of Witchcraft and Wizardry have sold more than 300 million copies, earning Rowling a 545 million-pound fortune and making her wealthier than Queen Elizabeth II, according to the U.K.'s Sunday Times Rich List.

I think they're catering to readers' financial fetishes; numbers are for Bloomberg readers what monosyllables and pie charts are to USA Today's audience.

I've added two new links in the sidebar:

• Unenumerated is a blog about nearly everything from someone who clearly knows the subject matter. Topics include cryptography, finance, property rights, history, and the relationship between Kolmogorov Complexity to common law as illustrated by gunfights in Westerns.
• Unqualified Reservations is even more entertaining: the author, 'Mencius Moldbug', riffs on property rights as illustrated by Fnargocracy and how Dubai and other city-states show that "a government (like any corporation) can deliver excellent customer service without either owning or being owned by its customers." This kind of attitude makes some people really mad, which is a good sign; after carefully reading the Manifesto, I'm pretty sure I count as a 'formalist'.

In other news, comments and trackbacks are open. Link at me. Talk to me.

Slashdot links to some articles about online reputation systems.

Apparently, many of the commenters assume that implementing something with a new set of hardware will force us to reinvent it. Thus this:

I'll play devil's advocate here...

Let's say you comment on the theory concerning the use of demolition explosives on one of the world trade centers - pointing out that the collapse of the WTC doesn't look like other building demolitions [google.ca], or that the "symettric demolition" claim is incorrect.

However, the conspiracy theorists on the site are extremely fanatic about their theory (as opposed to a more moderate site that tries to investigate properly.) As a result, you receive a large quantity of negative feedback that attaches itself to your online reputation.

Other things that can affect you would be playing RTCW:ET, where you get kicked from a server for n00bism as you didn't dodge the three panzers that get fired into your local area (because another player thought you should have.)

And my personal favourite - just claim you support Bush. Your reputation would instantly tank.

Right. Interesting. But there isn't a single argument here that doesn't apply to real-world reputations. Nobody claims that "We shouldn't have a thing called 'reputation', because paleocons will think Daniel Larison is swell, but atheists won't like him a bit. Thus reputation, which we're treating as a scalar, is bunk."[1]

The Right Question

The problem is, of course, that reputation isn't so simple. The Reputation Question is not "What is Byrne Hobart's reputation," but "What is Byrne Hobart's reputation in the field in which I'm interested, according to people whom I find reliable?" To make it easier, consider a controversial but well-known figure, evaluated by a couple hypothetical (read: highly stereotyped) third parties. Let's ask a 20-year-old college student and a 40-year-old linguistics professor to evaluate Noam Chomsky's reliability in terms of 1) foreign policy, and 2) linguistics. For simplicity's sake, they can give us one number, ranging from 0 to 1, that represents the correlation between what Chomsky says and what (given enough time) they'd expect to be true.

The 20-year-old undergraduate knows that Chomsky was against the Vietnam War about six years before we withdrew and opposed to intervention in Iraq before we even got there. The undergraduate [2] sees this as sufficient evidence to rate chomsky as about 95% right on foreign policy. Unfortunately, our undergrad isn't aware that Noam's reputation stems mostly from his early academic work; he gives Chomsky a 60% chance of being right about linguistics. Our professor, on the other hand, reverses these measures: Noam wrote one of the most influential linguistics texts, and his political views -- while cogently articulated -- sound more contrarian than consistent.

When we can ask (what skeptics consider) the same question ("What is his reputation?") and get four answers from two people, the problem is probably the question itself. The right question requires a chain of trust: A, whom I consider 90% reliable, says that B is 80% trustworthy, while B notes that C is about 70% accurate when making guesses about future oil prices. Thus, the correlation between price changes and C's predictions should be about .90 * .80 *.70, or around .5.

I concede that the main conclusion is that when you really think about it, trust is boring.

The Right Person

What's more interesting is whom to trust: websites like Slashdot and Wikipedia use a sort of gift culture, in which people write for free and are judged based on the quality of their writing. But reputation -- as, for example, someone with unconventional views backed by clever research -- doesn't always tranfer to other sites -- where the same iconoclast might be seen as a time-wasting troll. It's trivially easy to register a reputable name on a new site (unless your name is 'cmdrtaco'), so names themselves don't mean much.

But commercial websites don't have this problem -- they authenticate a user's identity by using a unique identifier that the user carries with them almost all the time. There's probably a framing issue, here: once people know they're going to spend money, they assume that the company they're spending it on won't accidentally share their credit card information. And because losing a credit card is so inconvenient, users hang on to this new identity. Rather than waste money and time building a new reputation system they use one that's already in place -- and instead of a nebulous reward like 'consistency', users can have an ID that's as synonymous with them as their bank account.

Security is an obvious concern, but commercial sites have been working on this long enough to have it nailed: instead of forcing people to transmit their full credit card numbers, all we really need is a one-way hash of some or all of it. So rather than log on to one site to check your email with one ID, and another site to comment on a blog with another ID, and yet another site to buy a book with yet another ID, you'd perform one log on (matching your name to a hash output from your credit card number) and the central ID database would take care of the rest.

Just In Case

If you really, really want to link a person's identity to a single number that represents just how much they ought to be trusted, I can think of one tricky but viable solution: prediction markets.

[1] I'm only using this example because I like Dawkins and Larison -- they're both reputable, as far as I'm concerned -- but they each probably consider the other a confused and conniving dissembler.

[2] Whom we stipulate reads Counterpunch and smells vaguely of fennel.

Most of us are hypocrites. None of us should care. Hypocrisy is a popular sin because it's so easy to find: if you say one thing and do another, you're probably doing something wrong. But it's only easy because it's such a cowardly form of moral arbitrage: in effect, calling someone a hypocrite is saying "I don't know what you did wrong, but you must think you did something wrong."

It's never hard to find an example of why accusing someone of hypocrisy is moronic: take the editorializing on Al Gore's advocacy of lower emissions contrasted with his carbon-spewing lifestyle. It's true that Gore pollutes more than most of us, and asks us all to pollute less -- but from the perspective of caring about climate change, it really doesn't matter exactly what Gore does if the net result is less carbon. Objecting to Gore's advocacy of lower emissions on the grounds that he doesn't appear to follow this belief system in his personal life is Moral Marxism -- caring more about actions and intentions than about results and the parties that suffer for them.

The World Economic Forum in Davos was "carbon neutral," despite all these folks flying it to attend, because in large part, people donated money to third world countries to plant trees or build hydoelectric dams for electricity.

That's more or less the point of a division of labor: rather than treating carbon as a sin for which we owe penance, we can treat it as a problem to solve as cheaply as possible. And solving a problem cheaply is synonymous with paying whoever can solve it for less to do so -- polluting and buying carbon credits is hypocritical in the same way that buying groceries instead of having a garden is.

It takes a simple thought experiment to show that the Gore kerfuffle is ridiculous. We can assume that pollution is either bad or neutral, and thus that either Gore is bad for advocating emissions cutbacks but good for enjoying his high-carbon lifestyle, or he is good for wanting lower emissions but bad for burning so many fossil fuels. Now, he could try to satisfy the anti-hypocrisy contingent by cutting his personal emissions to be in line with his stated preferences. That would almost certainly mean he couldn't make any movies (flying around looking pensive spends more carbon than a quiet evening at home) and cutting back from a mansion to a middle-class house would certainly preclude some furrowed-brow soirées among the cares-about-carbon set.

Unfortunately, this means that pollution proponents are less satisfied with him (he's not burning much fuel!) while opponents are equally annoyed (he's not suggesting any more cutbacks!). Consider: if someone out there lives a low-carbon lifestyle but sees pollution as okay, and he an Gore maintain their views but switch their lifestyles, the only (moral) difference is who's doing the polluting versus who's doing the pronouncing -- the level of pollution and criticism are unchanged. In fact, the only constituency pleased by that turn of events would be the anti-hypocrisy crowd: the only people who believe that it's a good idea to be consistent are the ones who don't believe in much of anything.

It's easy to gravely opine that our actions ought to be consistent with our philosophies, but it's also a null criticism. If a hypocrite is someone whose actions and beliefs appear to diverge, they must be doing something right. They're also doing something wrong, but as long as hypocrisy is the object of criticism, they'll have no idea what. Hypocrisy is morally neutral, because correcting it means a 50/50 chance of being better or doubling down on error -- it's hardly useful to argue that we shouldn't hedge our bets.

I've criticized Marketocracy for accidentally championing survivorship bias over actual talent. As it turns out, they're one of the better phantom portfolio contests -- CNBC's investment contest is gracelessly melting down because of some familiarly shady practices.

These contests are fun, but I still don't see the point. Any time there's a reward for winning and there isn't a penalty for losing, everyone has an incentive to pursue the most volatile strategies they can. Subterfuge is just another form of volatility: since there isn't a real risk from getting caught (they'll take away your Monopoly money!) but there's a major benefit to trying, everyone who really wants to win has a great reason to cheat.

Tangentially

I have to wonder if this isn't a great analogy for economic safety nets funded by progressive taxes: as the incentive to succeed gets higher and the penalty for failure gets lower, we'll have fewer people trying to be Sam Walton and many more hoping to be Jay Gould. Of course, seriously successful people are hardly average. Policy ought to acknowledge that as jobs get more specialized and more technical, the Gini Coefficient for the distribution of influence is going to keep rising. Laws that turn risk-taking and dishonesty into the best bets for success are going to divert Gatesian intellects and Charanesque work ethics into subversion, rather than creation. Which isn't a very exciting prospect.