Self-Molestation for Science

This is an interesting post on Free Exchange. It's written quite abstractly, and I don't think it's a particularly eloquent statement of the point it is getting at, but it's thought-provoking nonetheless.

So the post itself discusses some of the cultural biases inherent in interpreting economic theory.
It discusses an example where economics theorists were dissatisfied with the conclusions of on branch of economics theory, and so chose to rely instead on another. It argues, quite correctly, that this choice to change theoretical frameworks is a situation where the economist in question has to make a fundamentally biased choice - there is no definitively correct answer.

However, I was disappointed to see that the author did not make what I thought was the obvious leap to broaden the discussion to science in general, because this is what all scientists in all fields are forced to do every day. The very fact that we don't know everything (and thus have jobs!) implies that there is no definitely correct theoretical framework, and that each scientist much make biased choices about the framework in which he operates. The point the author is trying to make, I believe, is that while not quite as simple and clear-cut as many people think science is supposed to be, it actually is - or at least can be - a good thing. The essence of good science is good judgment. While we can certainly look at the existing evidence to help us determine the most likely theoretical framework, and we can change our minds as more evidence becomes available, scientists are forced to make a number of choices about what they personally think is the most likely scenario in the face of imperfect evidence. But if we didn't have to make such choices, we could not progress. It is important that there always be competing ideas - the trick is to design the institutions of science so that over time it becomes clear which is the correct idea, and for scientists to be ready and able to switch their thinking. I suppose this is what the dramatically inclined might refer to as a paradigm shift.

Anyway, science is a fundamentally human endeavor. We come to the knowledge of truth about the universe through the efforts of people - often petty, jealous, obstinate, greedy people. Papers are published not simply to righteously expound upon newly discovered truth, but to further careers, impress funding agencies, stroke egos, and all sorts of other selfish, undignified reasons. But still, this ugly process does serve the point for which it is intended - to uncover truth. The point the blog post comes so close to making well, is that in the same way that market economics turns the greedy, selfish profit motive into a public good - namely the creation and distribution of wealth - the institutions of science are able to turn the distinctly human motivations of scientists into a useful, successful quest for knowledge.

Tack on another six months

Megan McArdle obviously does not want me to graduate.

Drawing Correct Conclusions

I suppose that this officially makes me the biggest nerd on Earth, but I just found a link to free economics textbook on my favorite blog, Free Exchange from The Economist. I started reading it tonight, and my intent is to try to read it pretty much cover to cover.

Subprime Reporting

By this point, I am sure everyone has heard of the "Sub-prime Mortgage Crisis" and how stupid pundits are screaming about the end of the world. Well, as usual, it ain't.

If you are anything like me, you've been seeing this story floating around for months now, and kept a vague interest in it because it seems kind of important and interesting, but have been utterly frustrated by the fact that most of the coverage barely even attempts to actually explain what is going on. Reporters constantly mention things like "Collateralized-Debt Obligations (CDO's)" and then briefly mutter something about this being an obscure, complicated financial instrument. I have even found this to be the case in my favorite magazine, The Economist (although I found this an interesting article on risk-assessment), which as its name suggests has much better business, finance, and economics coverage than almost any other major news outlet.

So, imagine my excitement when I found this brilliant little interactive feature linked from Matthew Yglesias' blog that will give you a pretty good idea of what a CDO is in about 2 minutes. Then, based on the comments from that blog post, I read this very interesting article which does a much more thorough explanation (it's long and not for the faint-of-heart, but I dig this shit).

The summary, as best I understand it, goes something like this: First, banks loan out a crapload of mortgages. Then, they bundle them together to sell to someone else. However, they divide the sale up into "tranches" where the highest tranches pay out first and have the lowest risk, and the lowest tranches pay out only if the higher tranches pay out, and so have a higher risk. That all makes perfect sense and is not where the trouble lies. The problem is that no one wanted to buy the lowest tranches - so these then got bundled together and re-tranched - this re-tranching is what makes a CDO. So again, the highest CDO tranches pay out first and were thought to be low risk, and all the risk was thought to lay in the lowest tranches. But since the CDO is composed entirely of high-risk assets, even the highest tranches of the CDO are pretty risky. But apparently, no one figure that out until now. So banks and others are holding onto these highest CDO tranches, having been told that they are low-risk, but since all they are composed entirely of high-risk assets that are not paying out, they now are not worth shit and people are losing a shit-ton of money. Since most of the CDO's not paying out are based on 'sub-prime mortgages', we have the infamous 'Sub-prime Mortgage Crisis'.

H-E-Double Hockey Sticks!

I certainly have serious disagreements The Weekly Standard, especially their 'war can fix all problems' mentality, but sometimes they can be quite smart and funny. Check out this hilarious parody of Mitt Romney's religion speech.

I should mention that I found links to both this and the article I posted yesterday from Matthew Yglesias' blog.

You Can't Beat the Market!

Most of my blog posts are going to simply be me linking to really interesting things I read on the web. Here's first, from Portfolio Magazine.

It's a profile piece about a stock broker who realized that his entire profession is a giant exercise in peddling bullshit. Basically, his job was to take people's money and make them feel good about it.

What, at least to me, is more interesting is the idea behind why stockbrokers are full of shit - the efficient market hypothesis. Basically, you can't beat the market. Nobody can. If you could, so could everyone else, in which case they would. But everybody can't beat the market... because everybody IS the market. So therefore nobody can beat the market. Pretty slick, eh?

UPDATE: It seems my favorite blogger, Megan McArdle, took note of the article - several times!