Posts Tagged ‘Economics’
If I Were In Charge, Health Care Edition
I have no desire to be in charge. I’d have to suffer too many fools and forego too much sleep. But I take comfort from knowing that, if I were in charge, I could confidently propose solutions to many of the common problems politicians hem and haw about. It’s not just that I’m smarter and better trained than most of them, I simply wouldn’t care about getting re-elected. So the obvious solutions that piss people off would be fine with me.
Unfortunately, health care is not one of these problems. The solution really isn’t obvious. So I’ve been thinking about it lately. I’ve got some preliminary ideas that I’d like to share. But be nice. I’m not saying these are the answers. They are just the best out-of-the-box thinking I’ve been able to come up with so far.
Explaining the Credit Crisis in 10 Minutes
Via my buddy Matt Watson, here is a really well done infographic explaining the credit crisis. Merely entertaining for regular readers who’ve been following the crisis. But quite informative for any of your friends who haven’t felt the need to wade through all the commentary.
Willie Smits Is a Genius
Rafe posted this TED talk by Willie Smits without much commentary. I would like to add some. When I first started watching, I thought, “Wow, you can make a lot of hay out of simply applying Econ 101.” This was in response to the fact that they bought the former rainforest land in question, making it private property. This is one of the classic solutions to a Tragedy of the Commons problem. But then my appreciation made an exponential run upward.
Somehow, he managed to perfectly balance the economic and ecological package into a rapidly growing and self-sustaining system. You see, he had to figure out how much economic benefit the land could generate at each point in time and never have more than the corresponding number of people working the land. He had to figure out how to mesh psychological factors with incentive structures to get the locals to adopt the land both socially and economically. He also had to plot the path for an ecosystem in time and space.
Each of these three prongs represents an effort to control a dynamic system and he had to mesh all of them at once. He makes it sound obvious in retrospect, but make no mistake, this is a feat of sheer brilliance. I think there are some good general lessons to learn from this, but the real ongoing value is in the human capital he has built for managing this process. He should cycle through groups of apprentices that then go forth and attempt to replicate this miracle. I really hope this lasts and expands in the long term.
Synchronized Chaos and the Economy
I had a thought today when I was reading Arnold Kling’s post on always trying to fight the last war with financial regulations. We seem to reliably have financial crises. They don’t follow a schedule, but they do happen somewhat frequently. What if the financial system is gripped by the same phenomenon of synchronized chaos that I described in this post? A brief survey of Google and Google Scholar doesn’t turn up much. Anybody know of work in this area? In other words, “Is there a mathematical economist in the house?”
Read This If You Want to Understand Me
Scott Sumner has a great post at his blog TheMoneyIllusion (highly recommended in general if you’re into monetary economics). In it, he explores the difference between values and worldview. In particular, he explains how academic economists tend to have liberal values but an economic, rather than liberal or conservative, worldview. This leads to interesting effects when you try to measure academic economists on the left-right spectrum.
What I loved was the list of seven differences between the “common sense” and “economic” worldviews. They are concrete examples of how economists differ in their causal reasoning from even very highly intelligent and educated non-economists. If you want to understand where I’m coming from, read the post. It’s pretty much one of the three primary planks of my own worldview. [In case your curious, the other two are that (2) the human brain is a woefully inadequate decision making substrate and (3) many of the outcomes we care about are produced by complex dynamic systems that are very difficult to characterize]
Brilliant or Crazy? I Really Don't Know.
Apropos of Rafe’s last post on Complexity Economics, I ran across an economic stability proposal that is either brilliant or crazy. I both haven’t thought it over enough and am probably not qualified to determine which.
Must Read Article on the Financial Meltdown
Via Tyler Cowen at Marginal Revolution, an excellent article in Wired about how one formula, embodying one assumption, catalyzed the meltdown. I recommend you read it and ponder it. There are many useful lessons for modeling complex systems in general.
However, I will summarize for those of you short on time. A fundamental problem in securitization is figuring out how different components of a security are related. Think of it as measuring how well the components are diversified. The more independent the components, the less risk embodied in the security. Thus AAA rated tranches of mortgage-backed securities are supposed to be very safe because the components are supposed to be highly independent.
A Chinese mathematician named David X. Li had an insight. You don’t have to analyze the dependencies directly, you just have to observe the correlations in the market prices of the components. Then you can compute these really tight sounding confidence intervals on the correlations of various components because you have all this market data. Of course, the market can’t take into account what it doesn’t understand. So you see a bunch of 25-sigma events. At least, your model says they are 25-sigma. Oops!
Possible Insight 