Unpleasant Facts

The only way to solve problems is to be willing to think about them first

The Internet is more polarizing than national newspapers

A new study has gotten some people excited about how the internet is not as ideologically segregated as many people think.

We find that ideological segregation of online news consumption is low in absolute terms, higher than the segregation of most offline news consumption, and significantly lower than the segregation of face-to-face interactions with neighbors, co-workers, or family members.

The paper calculated an isolation index, which is basically how much people are exposed to a point of view that is similar to their own. An internet where conservatives only read fox news and liberals only read the new york times would have a very high isolation index score.  However, because conservative blogs link to the New York Times and liberal blogs link to foxnews.com, that paper finds that the internet has a lower isolation index than national newspapers and the people we interact with everyday.

The problem with this line of thinking is mentioned as a caveat in the paper:

We conclude with an important caveat: none of the evidence here speaks to the way people translate the content they encounter into beliefs. People with different ideologies see similar content, but both Bayesian and non-Bayesian mechanisms may lead people with divergent political views to interpret the same information differently.

This caveat been vastly underrated by most people looking at this research. When reddit.com or the huffingtonpost.com links to a conservative site such as foxnews.com, it is most likely for one of the following reasons:

1. To tell their readers about the lies Fox News is telling their readers
2. To make a liberal point, highlighted with "even Fox News admits..."
3. To make counter arguments to the views expressed, so when the reader visits the website they are inoculated against any of the arguments made.
4. To show their readers that those who disagree are them stupid/racist/misogynous/etc.

As the authors mention, a liberal isn't likely to trust data from a known conservative website in the first place.  The same point extends for conservatives linking to liberal websites. A conservative reader who visits an article on nytimes.com because he followed a story about their media bias is still isolated from the liberal point of view.

The paper itself is very interesting, but readers should be wary of drawing the wrong conclusion from this research.

The Libor-OIS Spread and the Market

A lot of the basic market indicators have been flashing panic signs recently. One example of this panic is the VIX, a measure of expected S&P 500 volatility over the next month, has spiked up from just over 15 to over 35 today (It hit 45 last week) in a little over a month. When the VIX is purified for recent price action in the S&P 500, the recent volatility spike suggests that people should be buying the market. However, there is increasing pressure in the financial system and buying against a panicky market while the financial system’s pressure is accelerating can be very risky.  

There are a few measures that can be used to measure financial system pressure. Equity prices and volatility, the former going down and the latter going up, are one sign. Another is credit default swaps (CDS). CDS for the average major American banks rose between 50 to 100 basis points over the past month.  A less volatile measure of market stability is the LIBOR-OIS spread. This is the spread between the rate banks lend to each other on the interbank market and the effective federal funds rate. Not only does this spread indicate stress, but according to research published by the St. Louis Fed “the LIBOR-OIS spread has been the summary indicator showing the “illiquidity waves” that severely impaired money markets in 2007 and 2008.” This time the illiquidity stress is coming from European banks exposed to sovereign risk, as well as other financial institutions that are exposed to distressed European banks (The flight to quality towards Switzerland banks caused short term interest rates there to briefly go negative, hitting -0.25% on May 25th). 

The chart bellow shows the LIBOR-OIS, which fell through most of 2009, has rose over 20 basis points in the past month.

Image001

 

 

Intellectual Pessimism

Via Arnold Kling, I found this interesting question/answer from Matt Ridley:

6. What interesting question didn’t I ask that I should have? And please answer it!
You did not ask me why intellectuals are all such pessimists. And my answer is that pessimism gets attention – from funders, from the media, from governments. Also, for reasons I do not fully understand, it sounds wiser than optimism.

Some people might think that optimists ask this question when they don't know how to respond to the pessimist's concerns directly. However, there are a few reasons beyond attention why being pessimism might be the intellectual's preferred approach.

1. Intellectuals are more likely to stick to ideas than to get their hands dirty executing their ideas in the real world. The optimistic intellectual might be tempted to leave the ivory tower for opportunities elsewhere, leaving the intellectual profession full of pessimists.

2. There are always flaws to any plan/idea/project, so it is often easier to point out the flaws than help make it work.

3. There is a fine line between being optimistic on a subject and being a cheerleader, so it is easier to avoid the fine line completely and be a critic.

4. A continuation of the status quo or "these trends will continue" is often a rather boring point. Intellectuals need to be interesting in order to for people to pay attention to them.

5. Optimists who believe that a problem will be solved but who aren't quite sure how sound a lot less impressive than a pessimist who can give you the reasons why a problem is important and why each attempt to solve it will most likely fail.

6. Discussing why something won't work gives the intellectual the chance to raise his status relative to the people he is critiquing. Discussing why a certain group is going to do amazing things would lower his status.

What am I leaving out?

Interesting links and some thoughts

1. Looking at Japan since 1990 when adjusting for worker decline gives us a very different picture. (Hat tip: MR)

2. Tyler Cowen on Greece. Key Quote: "If the old illusion was that Greece was a wealthy country, the new illusion is that Greece will, in short order, become wealthy enough to pay back ever-growing sums of debt." More here.

3. Scott Sumner on America's relative economic success since 1980 (unadjusted for working population changes) followed up by his take on why GDP growth around the world slowed after 1973. He focuses on a lack of technical innovation rather than mentioning resource constraints.  He also misses the obvious point that a larger amount of the wealth being created today isn't being measured in GDP - one obvious example is that the internet has created a vast consumer surplus.  The internet is not generating much revenue relative to the services that it supplies because in most of its uses scarcity on the internet is very low.  If scarcity approached zero anywhere in society, GDP from that sector would also approach zero as there would be no transactions to measure.  In that case, GDP growth would be a very misleading indicator about the progress of society.

4. There was some sort of finale recently. Marginal Revolution misinterprets the credits, Megan McArdle sums up how they chose the human drama over the sci fi/fantasy aspect and points out that Lost's viewers numbers highlight how mass culture doesn't really exist anymore, Will Wilkinson is hopefully joking and io9 gets it.  Well, maybe these guys have a more accurate view.

5. Massachusetts doesn't seem to have health care reform under control.  Whether or not the US follows suit depends on the constitutionality of the individual mandate.

On Robin Hanson and Meta-cynicism

Robin Hanson has another post up where he discusses the need to disseminate cynical views. He points out that idealism is public and cynicism is mostly private.

It seems to me that idealistic views dominate official views, especially views visible to many and expressed by the powerful. (After all, power is far, and far is ideal.) Idealism dominantes most official speeches, especially for funerals, weddings, award acceptance, politicial stump, and movie hero speeches. Idealism also dominates most ads, product brochures, vision statements, legal rulings, textbooks, and song lyrics. Cynical views are found in private conversations, e.g. at a bar or water cooler, in porn, from stand-up comedians, in movie villan speeches, and in political rants about certain sorts of “them.”

He clarifies that he is talking about cynical beliefs, not cynical moods by linking to his essay "The Cynic's Conundrum" that attempts to distinguish between cynical beliefs and a cynical mood. 

Cynical beliefs are either that people have relatively "low" motives, or that people are hypocritical about their motives. (Even when "high" motives dominate conscious thoughts, the cynic can claim that low motives better explain overall behavior patterns.) Similarly a cynical belief about a social institution is that while it may claim to serve high functions, it actually serves low functions.
 
A cynical mood is rude, unhappy, and complaining, presumably about low motives and functions. Cynicism is contrasted with idealism, a good-natured emphasis on sincere high motives and functions.

Two explanations are advanced for cynical moods. Each explanation explores a tie between cynical beliefs and cynical moods. Through these explanations, they suggest that teaching cynicism might not be the best idea.

The idealistic explanation of cynical moods is that the cynic has unusually high motives or insight. He is better able to see behind false appearances, and he is more shocked and disapointed to discover the low motives of others. Because he is unwilling to be hypocritical, he is less popular and so he succeeds and leads less. Most people dislike cynics because cynics expose most people's hypocrisy.
 
With this explanation, it seems that correctly teaching a person cynical beliefs will turn them into someone with a cynical mood. The idealistic explanation of cynical moods implies that exposure to cynical beliefs needs to be weighed against the usefulness of the cynical information. There are further costs to being a young cynic.

The cynical explanation of cynical moods is that the cynic has unusually low motives or ability. He can better see low motives because he has them in spades, and the cynic complains to belittle the success of others. That is, if he cannot win in some area then the cynic will complain that the game is unfair, or that those who succeed are not really very praiseworthy. Most people dislike cynics because cynics are losers.

This view suggests that teaching cynical beliefs to those who are predisposed to hear it is likely to be a waste of resources. This view suggests that the students who are susceptible to cynical views are not the type of people who will get anything useful done with them.

The trade off between sociability (idealistic beliefs) and expressing the truth (cynical beliefs) needs to be carefully considered. There are social norms imposed on people who promote unpopular true ideas, so the scales need to be leveled by changing these social norms.  While it is very difficult to change social norms that are built up over time, in Predictably Irrational Dan Ariely gives a few examples where long held social norms are replaced by market norms once money gets involved. Maybe the same thing can be done for cynical beliefs using a mechanism that Robin is already very familiar with. TGGP makes a similar point in the comments of Robin's post when he points out that betting markets impose market costs for holding idealistic views and thus lead to more true beliefs in the long run. Those in favor of cynical beliefs but not cynical moods should focus more on promoting the social norm of betting money on ideas.

Links and Commentary

1. John Tierney reviews "The Rational Optimist" by Matt Ridley.

Key quote: "Rulers like to take credit for the advances during their reigns, and scientists like to see their theories as the source of technological progress. But Dr. Ridley argues that they’ve both got it backward: traders’ wealth builds empires, and entrepreneurial tinkerers are more likely to inspire scientists than vice versa."

Another point the article highlights is that the doomsayers predicting minimal progress or even regression have existed in the past and they were wrong even though they had what sounded like good reasons.  Unfortunately for humanity, this is a relatively weak argument. Just because humans have solved problems in the past doesn't mean that the problems the large world faces now are going to be equally amenable to scientific or entrepreneurial solutions.

2. Scott Sumner analyzes recent market movements.

Key quote: "It’s a strong dollar crisis that has been misdiagnosed as a weak euro crisis.  If this sounds familiar, recall in July – November 2008 the dollar also rose sharply against the euro, and once again 99% of pundits failed to recognize that the excessively strong dollar (reflected in falling asset prices and falling NGDP growth expectations) was the real problem, and the worsening of the banking crisis was a symptom."

Scott Sumner has had some very interesting commentary, but I am starting to wonder whether or not he is seeing the world through his model of optimal central bank policy and labeling anything that he believes the central bank could possibly fix as a mistake of the central bank if nothing is done to counteract its effects. It would be a weird monetary policy that almost always sought to cancel out a flight to quality in the dollar or tone down a bull market dollar sell off.  When the dollar sells off during rallies or strengthens during sell offs, part of it is due to the change in the price of crude oil which is reacting to changes in projected world aggregate demand and is not necessarily US specific. I would also need to see the evidence for why the market reaction on the day or two after plans are announced is seemingly seen as more significant than  long term trends.

Side note: I wonder if he realizes that his proposed policy of having the central bank target nominal GDP with the help of GDP futures has the potential to drastically reduce the volatility of the stock market.  Even without being very inflationary, this policy would be very positive for the stock market's actual valuation.  However, the suppression of volatility would lead to greater problems the next time the central bank was unwilling or unable to prevent real volatility.

3. Will Wilkenson looks into the Robert Frank vs. David Friedman debate on income distribtion, specifically the part where Frank wants libertarians to think that his redistributive ideas are coherant with libertarianism.

Short Version:
Robert Frank: "I know what the market would do if they were free, so people who like markets like libertarians should agree to this redistribution if they are smart."
Libertarians: "I don't think he quite understands why libertarians like the market process."

On the effectiveness of banning short selling

The chart below is the index of stocks on the restricted list normalized to the time shorting stocks was banned. The highlighted area is the time period that the SEC did not allow short sales of specific stocks.

Image002

Source: Bloomberg, Palantir

A lot of the news stories about today’s market sell off focus on the lack of coordination between European regulators and panicking of the German regulators in particular.  Perhaps people were more worried about the past repeating itself.

Image003

Source: Bloomberg, Palantir

Europe to Markets: We can't hear you!

Europe decided to continue its policy of covering its ears and telling the market that they can't hear them. Today, the Bank of Italy unveiled rules which allows Italy's banks to ignore changes in market value of their European government bond holdings in their available for sale portfolios.

Not to be outdone, Germany decided to prohibit naked short selling and credit default swap speculation on European debt.

In response to this news, the Euro sold off 1.5%. So if they are trying to create a weak currency in order to help Greece out, they are at least succeeding in that. However, instead of seeing the markets as their adversaries, they should consider them as advisers that are telling them that something is really wrong and drastic austerity measures still need to be taken.

Seth Roberts vs. Intellectual Slogans (and worrying about Type II errors)

Seth Roberts is one of my favorite bloggers.  In terms of bloggers who introduce me to new ideas that I end up trying to internalize, he is up there with Robin Hanson, Tyler Cowen, Eric Falkenstein, Arnold Kling and Bryan Caplan.  His posts on self experimentation, health care (including the health benefits of omega 3) and insiders vs outsiders are particularly interesting. 
 
However, recently Seth Robert's goes too far in a post where he thinks that certain claims sound too much like real thinking but don't touch on real data, and therefore prevent analysis more often than they help the analysis.
 
1. Absence of evidence is not evidence of absence. Øyhus explains why this is wrong. That such an Orwellian saying is popular in discussions of data suggests there are many ways we push away inconvenient data. [Me: This is wrong, the phrase is not meant to deal with probabilities. Evidence of absence means that a claim is unlikely or false, and the lack of evidence for a claim when evidence shouldn't necessarily be present does not automatically make the claim false even if a claim with some supporting evidence is stronger than a claim without any evidence all things held constant.]
2. Correlation does not equal causation. In practice, this is used to mean that correlation is not evidence for causation. At UC Berkeley, a job candidate for a faculty position in psychology said this to me. I said, “Isn’t zero correlation evidence against causation?” She looked puzzled.
3. The plural of anecdote is not data. How dare you try to learn from stories you are told or what you yourself observe!
 
Orwell was right. People use these sayings — especially #1 and #3 — to push away data that contradicts this or that approved view of the world. Without any data at all, the world would be simpler: We would simply believe what authorities tell us. Data complicates things. These sayings help those who say them ignore data, thus restoring comforting certainty.
Maybe there should be a term (antiscientific method?) to describe the many ways people push away data. Or maybe preventive stupidity will do.
 
I responded in the comments.
 
While these sayings are used incorrectly many times, there are good reasons these types of arguments are mentioned in public discourse. Rhetorical strategies in the public space often make use of really bad arguments that are countered by those sayings. Your annoyance is how much of a crutch these arguments are among people who should be arguing in good faith and at a higher level than average.
1. “Absence of evidence is not evidence of absence.” This was a very useful concept to point out to those people who believed that because nominal national US housing prices had never dropped before that they wouldn’t drop in the future.
2. Correlations are assumed to be causation in many cases where it is incorrect. People make arguments all the time that point out correlations, think up some mechanic that explains why the correlation is causation but fail to even consider whether the correlation is actually coming from an underlying factor driving both conditions.
3. Politicians always like to bring out a few people who would be really helped or harmed by the policies. Obvious examples include the widow in need of medical care for her sick kids or Joe the Plumber who would be caught in the higher tax bracket.
Obviously there are places where arguments 1 through 3 work. So the main problem isn’t about the arguments themselves, but that people use these responses when they assume the person is either arguing in bad faith or is relatively ignorant when that isn’t the case. Furthermore, they often feel like 1 through 3 are enough to settle the question entirely when more argumentation is needed to make their point.
 
Seth pointed out that he really wants people to reply with data, not slogans. He wrote a post on how he is worried that these slogans are bad because they throw out data instead of adding new data. He then wrote a new post highlighting my use of point number one in the above comment about the housing bubble. He thought that this was illustrative of preventive stupidity, since I did not mention the response that one could have told the person who believed in housing that housing prices did fall in the Great Depression (Which is a weird point to make because while it directly contradicts the "housing never goes down" meme; it is not the best argument to make about whether or not housing prices were likely to go down in a relatively stable economic environment). Again, I responded in the comments.
 
It is weird that you think this is an example of preventative stupidity rather than that of an incomplete argument.

 

Side note, the phrase “evidence of absence” in the context of the phrase you think of as “preventive stupidity” seems to have a more specific meaning than your more literal interpretation:
http://en.wikipedia.org/wiki/Evidence_of_absence

 

I didn’t make the other good arguments against housing price movements never going down because it seemed off topic - but there is a whole lot of other data driven analysis that could have been made about the likely path of housing prices such as price to rent or income ratios, affordability indices, real prices historically dropping, rising interest rates, unsound lending and the financial condition of the average borrower, the prevalence of ARMs and the future path of interest rates, other regions in the US with falling housing prices such as Texas in the 80’s and CA in the 90’s and other countries with falling housing prices.
The key here is that even the above arguments are just surface arguments. I can’t just make an argument about price to income ratios without addressing whether or not there is something truly significant about that ratio. If we are having an in-depth discussion, I also have to address the counter arguments that try to give a justification for why those higher ratios are sustainable in today’s environment.
The question is whether or not the other arguments on your list of “preventive stupidity” are good in the same way as the price to income ratio is useful for learning about housing markets - they make a point but are otherwise incomplete. I still stand by my statement in the original comment - In the case of housing markets, knowing that something can still be possible or even likely despite it not happening in recent history can be very useful. It is actually more useful than knowing that housing prices went down in the Great Depression, because while many people believed that the future path of the economy was tied to the housing market, the point that housing markets fell in the Great Depression is just not that interesting unless people thought another Great Depression was likely independent of the housing market.
Now, when discussing ideas with other people we do not always give them the benefit of doubt and dig down into the data with them. The salesman/huckster and politician are two groups of people where we know they are biased so if we do engage them we might not engage them fully. It is insulting to explain that I am not weighting their ideas very much because I think their anecdotes or correlations are just convenient coincidences or carefully cherry-picked data. In these cases it is often easier to tell them that the plural of anecdote is not data and correlation is not causation rather than go into the details and accuse them of dishonest data manipulation.
It is very annoying to be on the other side of this style of confrontation because the person making the “preventive stupidity” arguments, when not followed up with the below arguments is being a little (or if it is about your own research, very) disrespectful to the person who sees themselves as trying to learn the truth in an unbiased manner. 

 

1. The underlying cause for the correlation.
2. When the absence of evidence would be significant or what evidence would disprove the view (The housing market hasn’t fallen in recent history, but if the market is still rising when the mortgage credit to GDP ratio falls I’ll take that as evidence that the market has moved for fundamental rather than speculative reasons)
3. The reasons why the anecdotes were collected in a biased manner and how this bias skews the results

 

From this point in a conversation, you can either label their actions preventive stupidity and halt discourse entirely, or you can ask for more depth about what they think the underlying causal factor is, what would qualify as evidence of absence or why the anecdotes are significantly biased/unrepresentative.

Seth does point out that people rely on the phrases "correlation is not causation, "absence of evidence is not evidence of absence" and "the plural of anecdote is not data" a bit too much. The phrases by themselves only imply the real argument, and often imply that the other person failed to consider a very basic principle.  Used properly, the phrases are starting points for thinking about interpreting data, not concluding arguments. In the end, it is up to both people to try to communicate, so knowing the proper response to these types of implied arguments might make for better dialogue than trying to label their phrasing as Orwellian self deception.

[Side note to explain why Seth's anecdotes about people incorrectly making these "preventive stupidity" arguments more often than they make other incorrect arguments is biased data: People might be more likely to incorrectly treat Seth Roberts as a salesman because he is the author of The Shangri-La Diet and writers of diet books are not generally seen as truth seekers]

Addendum: Also, anyone interested in making ground breaking paradigm shifts will encounter resistance to new ideas that might appear obstructionist from people who are focused on incremental progress.  As for the people obstructing that person, they may feel like they are merely doing their part to protect people from giving credibility to yet another false belief.  From the perspective of a person caring about maximizing society's true beliefs in aggregate, sometimes certain types of arguments need to be shot down quickly merely because of how tedious it would be to refute each person who makes that type of argument. While this approach itself has some false negatives and might unfairly reject things like the Shangri-La diet without even testing it, the people who act in this manner may believe that it is a small price to pay to protect people from the cranks and cultists. Of course, the people to take this "maximize the aggregate belief in truth" approach are likely to be insiders, with their own special set of biases.

The market is the enemy

Scary words when coming from the leader of the free world:


A senior US official told The New York Times that President Obama warned the Europeans – based on his own experiences early last year – that it was no good playing catch up with the markets. They had "to get out ahead as much as possible" by producing a rescue plan so enormous that market speculation, against the euro, and against heavily indebted EU countries, would be shocked into submission.

Dealing with the markets was like dealing with a military enemy, Mr Obama said. You had to use "overwhelming force". He also offered help from Washington to buy up euros for dollars and ease the pressure on European central banks.

 

It would be more accurate to say that reality is the enemy. The governments need to credibly get their act together.  The above quotes further confirms that world leaders are trying to use the US financial crisis playbook for the Greece/Soveriegn debt crisis. The market movement today suggests that the market is still skeptical of this bail out attempt. Even if people think it will work, it is useful to remember that TARP was passed on October 3, 2008 and the S&P 500 bottomed quite a few months later on March 6th, 2009.

  
Hat tip: Naked Capitalism