Addressing Prosecutorial Overreach and Intimidation

In the US, the justice system relies on plea bargains and summary judgements to keep the gears of justice working. If every arrest required a jury trial the costs would be significantly higher.

From the prospective of the suspect, whether or not to suspect a plea deal depends on the following equation that compares the cost of both options:
P = Probability of conviction
S(trial) = Trial sentence
S(plea) = Plea sentence
V = Psychic value of being found innocent rather than guilty
C = Cost of mounting defense

1. P*(S(trial)) + C - (1-P)*V > S(plea)

2. P*(S(trial)) + C - (1-P)*V < S(plea)
In scenario 1, it makes sense to take a plea deal. In scenario 2, it makes sense to fight the plea deal. In theory, the probability of conviction should vary with the defendant's knowledge of whether or not they actually committed the crime and many unnecessary trials can be avoided.

The issue comes because prosecutors realize early in their careers that they can make their time much easier by massively inflating the sentencing that defendants would face if the case went to a trial. Accepting a 2 year prison term can make more sense when the other option is a chance at being sentenced 30 years to life if the case goes to trial. This can be the case even if the defendant thinks they are actually innocent. This was famously done in the case of Aaron Schwartz (Who was actually guilty, but of a relatively minor crime with a poorly written statute that allowed for multiple felony charges), in which the stress induced from this overreach helped drive a young programmer and activist to suicide.

As Orin Kerr notes:
"Yes, the prosecutors insisted on jail time and a felony conviction as part of a plea. But it is not particularly surprising for federal prosecutors to use those tactics. What’s unusual about the Swartz case is that it involved a highly charismatic defendant with very powerful friends in a position to object to these common practices."
The ability of prosecutors to bully defendants into plea deals doesn't mean the whole system needs to be revamped, but ways to reduce this imbalance of power should be addressed.

Some potential methods to prevent this:

1. Reduce maximum sentences for various crimes. This would be a very labor intensive process and would be difficult for politicians to back more reasonable sentencing guidelines without getting accused of being soft on crime. But there is a potential for the political environment to turn against the government in security matters. If proponents properly the frame the issue as one of preventing government misconduct there is a slim hope that this can be addressed.

2. Rather than fix individual measures, adopt a broad method such as forcing concurrent sentencing to be adopted over sequential sentencing for crimes of specific type would mean that prosecutors wouldn't be able to threaten quite as much prison time in order to force innocents to plead guilty.

California has a rule like this for single offenses where a single act or omission can only be punished in one manner.  Broadening this rule to include many individually committed crimes would prevent prosecutors from being able to throw the book at suspects. The caution would be in preventing scenarios where a criminal can commit one significant crime and then feels safe the they can commit any number of less significant crimes without many consequences. 

3. Have plea deals cap the maximum potential time served. If a plea deal is offered by the prosecution, the maximum prison time sought by the state (or equivalent punishment) can only be 5 times the time of the offenses mentioned in the plea deal offered. If significant cooperation in other investigations is involved as a condition this cooperation can be made equivalent to X years served for the purpose of the calculation.

This way, people like Michael Milken might not have been incentivized to agree to the charges which led to him serving 22 months in prison because the prosecutor was trying to use RICO to put him in prison for life*. Once the 22 months are on the table the size of the stick the prosecutor is using changes from life to under 10 years.  Because judges determine the sentencing they would have to be involved in signing off on plea agreements with pre-determined sentences, which might cause some additional complications. Maybe this should be reserved for cases defined as "high profile" when the prosecutor is also facing political pressure for a successful resolution.

There are probably other ways to make prosecutors more accountable. The path of a high profile victory against a public enemy towards a career in politics is an unfortunate one. But it isn't just the high profile cases that matter, it's the potential abuse of anyone who is being charged with trumped up charges in order to make them more pliable to a plea deal. Right now the United States has a system where if there is a target on your back, there will be laws that you violated and the prosecutor can add them up until you agree to a plea deal. 

It's a less than optimal system that badly needs to be addressed.


*Guiliani was the overreaching prosecutor in the Michael Milken case. Milken only agreed to the charges which he thought would not lead to prison time after prosecutors threatened to go after his brother.

Summers and the Fed

Bernanke's replacement seems to be the media story of the hour, even though this story probably won't be resolved until the fall. It is a strange type of discussion where people on opposite sides of the political spectrum like John Taylor and Diane Feinstein are on the same side of the debate - both prefer Janet Yellen.

At this point it looks like the media and pundit backlash makes the idea of a Larry Summers Fed chairmanship somewhat remote, but it would lead to a potentially interesting situation. The Fed chairman doesn't have dictatorial powers - if the FOMC board chooses to vote against the chairman the majority has power to set policy. While this is unheard of in our lifetimes in the US and in countries like Japan, it happens all the time in the UK.  Mervyn King, the former Governor of the Bank of England, was outvoted many times.

Given the well documented ability of Larry Summers to anger people around him, his chairmanship could lead to a situation where the chairman is not the person who decides where monetary policy is going next.  The market already has a hard enough time figuring out what the Fed is going to do when one person is nominally in charge. It would be interesting to see how inefficient the market gets if Summers takes over yet Federal Reserve officials don't follow his lead as closely as he might like/expect.

Given my occupation, that's a good reason for me to hope that Summers becomes the next Fed chair.

Assorted Links

1. The UK is thinking of letting a company with links to China's government censor their internet exposure. This is another example of the basic rule of thumb that when people are told to think of the children the policies proposed are going to be pretty asinine.

2. Maybe someone is jealous of all of the attention Carlos Danger has been getting. Side note: I do hope that Anthony Weiner stays in the race, politics is a lot funnier with him around.

3. Welfare has spillover effects onto future generations.

4. An interesting theory on why women like conspicuous and relatively ugly luxury handbags. Key quote: "When women felt jealous, they drew designer logos that were twice the size of those in the other conditions."

Psychic Hedging in UK Betting Markets

In the UK it is legal to bet on many things. And with the royals expecting a baby, many people were betting.  This isn't a market I would want to be a part of - it seems almost obvious that some people will know the actual information and betting against people who hold the winning hand isn't usually a profitable activity. From the WSJ, we learn the odds were heavily in favor of the baby being a girl, despite 1.07 boys being born to every girl.

Bookmakers are offering bettors a chance to predict the child's gender. And a girl is the overwhelming favorite, with payouts of just £4 on a £7 bet this past week. A spokesman for the couple announced last month that the duke and duchess don't know the gender.

The betting markets turned out to be quite wrong - it was a boy. So what happened? For one thing, it seems like there wasn't a sizeable information leakage (Or maybe there was, but people didn't believe Harry enough to bet on his information). If someone made money betting on the sex of the baby, they made it without impacting the wider market. So the betting market was wrong for one of two reasons - psychic hedging and/or misinformation.

Psychic hedging is betting on an outcome that will make the person unhappy. So if a sports fan bets against their favorite team, either their favorite team will have won or they'll have money. In either situation they'll be happy. In this case, there is presumably a preference for a new king. Not only are male leaders more generally preferred, the birth of a girl would involve a messy procedure of changing the law to allow the girl to retain her place in line.  This preference for a psychic hedge would be combined with misinformation and misinterpreted market signals - betting on the expensive side of this type of trade is the easiest way to presumably follow other traders who might have inside information - to skew the odds even more in favor of a girl than could be explained by psychic hedging alone.

If insiders did make money off of these betting markets they got away with it quite handily this time.

Evil CEOs vs Bad Incentive Systems

A lot of people seem to think that most CEOs are actively evil and that this explanation can be used to explain many of the problems in our economy.  A recent example of this fallacy comes from a ritholtz.com post looking into the way appraisers that didn't inflate the value of houses were seemingly systematically blacklisted. 

"The appraisers’ petition was done over the course of seven years.  Even if we assumed, contrary to fact, that the CEO did not originate the plan to inflate the appraisals the CEOs knew that they were making enormous numbers of fraudulent “liar’s” loans with fraudulent appraisals.  It is easy for a CEO to stop pervasive fraudulent lending and appraisals.  Where appraisal fraud was common it was done with the CEO’s support."
I've met a few CEOs, and while they may care much more about the bottom line than the average person they aren't looking to break the law in order to gain a small advantage. The risk usually isn't worth the reward.

In most of these cases there is a much simpler explanation: The CEOs presided over an incentive system that rewarded misbehavior on a small scale without doing anything to directly endorse the behavior.  In the case mentioned above, those who originate the most loans will be bringing in the most revenue. There will be no comeuppance to catch the overconfident employees who bend the rules because an overly optimistic appraisal will be justified by rising prices a year from now. The more cautious employees will stagnate compared with those who are willing to bend the rules.   And so the people who get promoted during a boom will be the revenue generators (the rule benders) and the practice will become more widespread as time goes on.

All that this requires is that the CEOs set up a system to encourage and promote the people who are generating business. They don't have to have anything untoward on their mind. 

Grand conspiracies are fun to talk about. It would be nice to have a few specific people to blame for the problems in our world because that implies we can solve those problems by targeting the people at fault. But the truth of the matter is that the incentive system set up by the people running the show is at least as important as the moral character of the people in charge and probably more important.

Assorted Links

1. This looks like an effective way to do cardio.

2. What we know about heart disease is probably wrong.  Note: While inflammation is likely to be more significant than current treatments emphasize, there are people skeptical of this doctor. 

3. This was a sad day for the UC system - this latest development suggests that no major problems will get fixed. 

4. Most people look at experimental economics as undermining market fundamentalists because of the rational expectation roots of the Chicago School. Here is a take which suggests that when rational expectations is taken too far it eventually undermines market fundamentalism. 


A few more links

1. Robin Hanson examines why betting isn't more common.  All of these issues he brings up seem relevant, but the introduction of money into the equation seeming rude and highlighting power differences outside the conversation is probably the most important.  Maybe that's why my friends won't make many bets with me... or maybe that's why I don't have more friends.

2. This ghost city, an attempt to replicate Manhattan, in China will be relatively easy to find, or at least recognize.  The story is funny because it combines many of the common worries about China: It covers their over investment in real estate, willingness to directly copy the west and the increasing problem of bad debt.

3. An interesting perspective on the pre-access to consumer confidence survey data provided by Reuters.  In the end, what Reuters is doing is just selling private research. If providing early access to market moving research is disallowed completely that will have some very strange repercussions.  And traders not involved in the HFT game should know enough not to be trading during this time period anyway. (Unfortunately, when I looked at execution algorithms provided by major I-banks they didn't specifically step away from the market, but they would usually stop trading when volume dried up as they often do before economic releases.)

4. Matthew Yglesias almost endorses mercantilism.  The idea that when it comes to mercantilistic policies the public choice critique is generally better than the Ricardian/comparative advantage critique is an important one.

Puffery

Standard and Poor's is going for an interesting defense.

S&P said in its request to dismiss the case that the government can’t base its fraud claims on S&P’s assertions that its ratings were independent, objective and free of conflicts of interest because U.S. courts have found that such vague and generalized statements are the kind of “puffery” that a reasonable investor wouldn’t rely on.

And yet rating agencies are still a key part of financial regulations

Avoid Texas?

A lot of people have been talking about moving from California to Texas due to an increasingly unfavorable policy regime in California. But they are forgetting about one of the very unfavorable regulatory regimes in Texas - their friendliness to IP lawsuits.

Patent lawsuits are rife in East Texas.  At first it was just one or two particularly friendly judges, but over time the perception has been that juries are even more favorable to plaintiffs - perhaps because they realize that their local economy is supported by the large amount of patent lawsuits filed in their district.

Companies should make every effort to avoid doing business in places where the litigation environment is unfavorable. It might be hard to avoid patent lawsuits by avoiding doing business in the state, because apparently all it takes is for companies to register in the state and courts may justify the location based on that alone. The American Invents Act might have helped solve this problem already by splitting up joinder lawsuits where one patent troll sues everyone at once so the defenders can have more of a say in the location of the trial.

So boycotting Texas probably wouldn't do much to stop patent trolls. But it would have been funny if it could have potentially helped.

End of Google Reader Link Day

1. Why Youtube isn't the best long term partner for content creators.

2. Reynold's Law - or why subsidizing status markers is a bad idea.

3. Robin Hanson's musings on Orson Scott Card's theory of what makes a story. I've always prefered stories that focus on the milieu more than the character centric stories found throughout the fiction section in bookstores everywhere so I like his theory that the general preference for character centric stories is just an accident of the current environment and will shift as society changes. 

4. Goodbye google reader.  There are other RSS readers, and hopefully one of them will have the ability to search through RSS feeds that I have read. This is very useful as there are many occasions when I remember I found a piece of information from a feed but have forgotten which one.