Asymmetrical Information

From the desk of Jane Galt:

One for my co-blogger

World's largest snake caught in Indonesia.

UPDATE: Not Exactly

From the desk of Jane Galt:

The horror continues

Some Iranian officials are now putting the possible death toll from last week's earthquake at 50,000, and health care workers are warning that more could die from disease in the crowded tent cities where those affected are living. If you have a couple dollars to spare, you might want to toss them in the direction of the Red Crescent, which is staging a relief effort.

From the desk of Jane Galt:

Yet another boost to our health care costs?

The Wall Street Journal has a piece (subscription required) arguing that health care costs are growing fastest among the boomer generation, rather than the elderly, heralding a potentially disasterous price spiral when those already-expensive boomers really hit the ill years. But much of the piece focuses on obesity related costs, which should be self limiting -- after all, we're constantly being told that fatter people die younger. They may be costing more now, but if that conventional wisdom holds true, that should act to hold down costs in later years, both of medicare and social security, as heavy oldsters die quick.

From the desk of Jane Galt:

Rudy v. Hilary in 2006?

John Ellis makes a damn persuasive case:

This would be the Super Bowl of Senate races and a dramatic "wild card" lead-in to the 2008 presidential election. Only one of the principals could advance to the next level.

For Giuliani, challenging Clinton is a necessary step if he hopes to be a national GOP player. He could, if he chose, run for governor in 2006, but that wouldn't do him much good on the national stage. He would still be a pro-gay, pro-choice "Rockefeller Republican."

But Senator Giuliani would be a different matter. He would have slain the dragon, and slaying the dragon would bestow upon him exalted status. Major points of difference with the GOP's core constituencies — like the sanctity of life (abortion) and the evolution of mankind (stem cell research) — would become much less disqualifying.

Red State Republicans — those from the GOP stronghold states — could learn to love Rudy in a New York minute if he beat Hillary.

. . .

Regarding 2006, the only acceptable result for Clinton is victory. By then, former Vice President Al Gore will be in the final phase of his reinvention and an all-but-announced candidate for the 2008 Democratic presidential nomination. If Clinton defeats Giuliani, she reasserts her claim as the front-runner. If she loses, Gore becomes the front-runner and the dream of a Clinton restoration dies.

It's been a long while since politics has been a big New York story. No one cared if George Pataki beat Carl McCall or if Chuck Schumer beat Al D'Amato. And on a national level, it couldn't have mattered less. Who wins the Giuliani-Clinton race matters a lot, and on a lot of levels.

From the desk of Mindles H. Dreck:

Owls in Central Park

Fellow New Yorkers might be interested in visiting the four Long-Eared Owls that have taken up residence in a cluster of Black Pines just West of the South end of the Bow Bridge (map).

From the desk of Jane Galt:

We wish you a merry Christmas . . .

Where the hell have we been? Well, your intrepid correspondant has just spent six lovely, lovely days in the country, entirely without access to the internet. Can you imagine? For those who can't, I hope to have photos up soon.

More later, but for now, happy holidays, everyone!

From the desk of Jane Galt:

Wednesday Dog Blogging

I have a glorious new digital camera, a Minolta DiMAGE g500:

. . . and hence it's time for some dogblogging. Some people, lacking dogs, are reduced to desperate measures like catblogging. We will not discuss them here, except to say that they are more to be pitied than hated. For absent a dog, how could you take pictures like this?

On the couch? Moi? I don't know what you're talking about. I was just standing here, minding my own business, when this couch bumped into my butt.

From the desk of Jane Galt:

How much intelligence is Saddaam good for?

The news is now talking about what sorts of inromation they're hoping to get out of Saddaam, starting with the location of the WMD. People are talking about the difficulty of interrogating him, given how high-profile he is. But it seems to me that there's a problem which is potentially even bigger: does Saddaam have any useful information?

In his new book, Bob Rubin discusses the problem of the CEO -- that even a CEO who is receptive to disagreement or disagreeable information will find people agreeing with them, or "softening" bad news, because they are awestruck or merely ambitious. Brutal tyrants have this problem in spades: people don't tell you things you don't want to hear, because you tend to shoot them. This phenomenon explains a lot of Hitler's behaviour during World War II -- as I recall, by the end of the war, Hitler spent much of his time ordering phantom divisions, long since destroyed, around Europe.

This may well also be the explanation for a lot of Saddaam's behavior leading up to the war. As a coworker pointed out, there's an enormous "What the F***?" factor to his actions. It's simply lunatic that he could have thought he would defeat us, and if he didn't have WMD, why not let the inspectors in? The most interesting explanation I've heard is that he thought he did have WMD -- that subordinates, fearful of his wrath, had been giving him regular reports about a phantom weapons program he didn't want the UN to discover. It's certainly fascinating to consider that all those games the Iraqis played with the weapons inspectors pre-1998 might have been aimed less at fooling the UN than at preventing their boss from discovering that they hadn't succeeded in fabricating anthrax after all.

From the desk of Jane Galt:

So long, Saddaam

They've captured Saddaam, pulling him out of the hole in a farmhouse cellar where he's been hiding for months.

I confess, after all this time I didn't believe we'd get him.

This could be a major turning point. Of course, I thought the same thing about the death of Saddaam's sons, and it made little difference. The television is reporting that Saddaam's second-in-command seems to be the guy who is orchestrating the terror (to the extent that it is orchestrated, and I don't think anyone really knows how much that is). Nonetheless, I think this should be a major help to the effort to restore order to Iraq. Capturing Saddaam not only removes any fear that he will one day be back in power; it enhances the perception of US power. One hopes that the message to terrorists is "If we can capture Saddaam Hussein, we can find YOU."

Now the question is "What should we do with him?"

The answer, of course, is "try him". We want Saddaam to be seen as a criminal, not a martyr, not a victim of overweening US power.

But who should try him? The people of Iraq? Should we go the Slobo route? Or should he be tried by the CPA?

The people of Iraq seem the natural choice. But they've no infrastructure for a civil trial after thirty years of dictatorship, and the punishment they mete out might well be morally unacceptable to many nations.

The international court route will be unpopular since it won't mete out the death penalty . . . though as regular readers know, I'm against the death penalty, so that doesn't particularly faze me. More problematic is the politics of such a court, after the fracas between the US and Europe.

The CPA is good in one sense -- it enhances the perception of US power -- but bad in the same sense -- we don't want to be seen as carrying out a vendetta against Saddaam. Ultimately, it shouldn't be the US acting against Saddaam; it should be the people of Iraq, and the world.

I'm tenatively in favor of option two, but I'm sure I'll reconsider that in the next few days.

Anyway, whether you were for or against the war, I think we can all rejoice that a really foul dictator is going to be brought to justice. It's a good day.

From the desk of Mindles H. Dreck:

Captured

Saddam Hussein is in custody.

BAGHDAD, Iraq, Dec. 13 — Deposed Iraqi leader Saddam Hussein has been captured near his home town of Tikrit, the U.S. military has confirmed.

It appears they've had him for a while and have performed DNA tests. There are even pictures.

Expect to hear about the conditions of his detainment.

From the desk of Jane Galt:

In OLDEN days . . .

Finally, a new government proposal I can really get behind:

Wouldn't it be nice to have a federal Cabinet position entitled Grand Old Man? Qualifications would include longevity, magnanimity, and an acute sense of the way things were. The Grand Old Man could head his own little policy shop, let's say the Office for the Loving Development of Euphoric Nostalgia, or OLDEN. This office would have special enforcement powers like the ability to reinstate the blue laws and revive the sense of a national day of rest and worship. The Grand Old Man could sign into law special injunctions placed on busybodies. He could publicly censure whippersnappers. He could belt-strap politicians on the backside for mistreating a young lady. His office could publish a daily newsletter called "Here Now, Hold Your Horses," which would hold up any new policy proposal to the light of traditions older than the oldest family line. He would meet regularly with heads of state to inquire whether they had purchased flowers or a hat for the Mrs. The Grand Old Man's office would be entrusted with enforcement of decency laws. He would give press conferences that would include some of the following phrases: (some humorous) "Victoria's what?" "Here now, that's bathroom talk." (others tragic and imploring) "How can you let those dear girls do that?" "My wife wept till I got rid of cable."

From the desk of Jane Galt:

Question of the Day

How many calculations can a computer chip perform per second? A friend needs to know for an article.

From the desk of Jane Galt:

How bad is our corporate governance?

Those who are interested in the subject should read this paper by University of Chicago luminary Steven Kaplan, in which he argues that the problem is not nearly so bad as we think.

From the desk of Jane Galt:

What happened to the stock market in the 1990's?

I've been reading Robert Rubin's new book, In an Uncertain World:

About which more later. Today, it's gotten me thinking about the stock market, and what happened in the 1990's.

Mr Rubin has some scathing -- and well deserved -- remarks about the stock market in the 1990's, and the self-proclaimed geniuses who preached eternal prosperity based on a few good years. But he doesn't offer a good answer for the question that we're all asking ourselves, namely "What the %$@! happened back there?"

I have . . . ahem . . . a possible answer.

It has to do with who we are as evolutionary beings. I mean, we like to think that we're all as rational as my Chicago professors often said we were, merrily calculating our utility curves for Hallmark Keepsake ornaments and rationally value-maximizing our portfolio of Thomas Kincaid paintings. But let's be honest: when you get right down to it, a lot of the time we're just hungry mammals stuffed into a suit and tie, desperately trying to survive and reproduce despite the odds. And in those times, the iron hand of evolution reaches right up through our amygdala and makes us do some crazy stuff . . . like buy stock in a company whose primary asset is bike messengers.

Seriously, think about the way evolution has programmed us to learn.

We are, by nature, fearful beings. But fear will only get you so far in this imperfect world, and so nature has also equipped many of us with a modicum of courage and a taste for novelty. Those people try new things. If disaster doesn't ensue, they try them again. If that works out, they do it a third time. Each time they lose a little more fear . . . and a few more, slightly less courageous people are encouraged to try it, having seen it work for the "thought leaders". After the eighth or twentieth repetition, the entire tribe is eating pterodactyl steak or riding railroads or investing in the stockmarket.

We are programmed to lose a little more fear every time we are successful -- to worry less about the risks. It's a heuristic that allows pre-rational animals to function pretty well in a universe of many unknowns.

But it has its costs. And I'd argue that speculative bubbles are one of them.

The interesting thing about the stock market bubble -- and its nasty aftermath -- is that not all that much had changed in the stocks themselves. Oh, earnings went negative, of course, during the recession and the aftermath of 9/11. But 9/11 didn't hurt that many stocks, and any fool could have told you that eventually, a recession was coming. Actually, by historical standards, the recent recession was unusually mild, although it certainly didn't feel like it to me when I was unemployed.

What changed was not what we knew; it was how we felt about what we knew. Investors in the late 1990's were excessively optimistic about the prospects for growth; at one point, one of my business school professors pointed out that for Dell to meet the growth rate implied by its stock, it would have to increase sales by 400% a year, every year, for the next two decades. Before they reached that target, they would run out of people on the planet to sell their computers to. Irrational exuberance is too kind--investors in the late 1990's had completely slipped their cams.

And I'd argue that the main reason that this happened was that we are programmed to worry less about risk, the longer we go without disaster. Richard Feynman wrote brilliantly about this as it applied to NASA estimates of the probability of space shuttle failure:

why do we find such an enormous disparity between the management estimate and the judgment of the engineers? It would appear that, for whatever purpose, be it for internal or external consumption, the management of NASA exaggerates the reliability of its product, to the point of fantasy.

The history of the certification and Flight Readiness Reviews will not be repeated here. (See other part of Commission reports.) The phenomenon of accepting for flight, seals that had shown erosion and blow-by in previous flights, is very clear. The Challenger flight is an excellent example. There are several references to flights that had gone before. The acceptance and success of these flights is taken as evidence of safety. But erosion and blow-by are not what the design expected. They are warnings that something is wrong. The equipment is not operating as expected, and therefore there is a danger that it can operate with even wider deviations in this unexpected and not thoroughly understood way. The fact that this danger did not lead to a catastrophe before is no guarantee that it will not the next time, unless it is completely understood. When playing Russian roulette the fact that the first shot got off safely is little comfort for the next. The origin and consequences of the erosion and blow-by were not understood. They did not occur equally on all flights and all joints; sometimes more, and sometimes less. Why not sometime, when whatever conditions determined it were right, still more leading to catastrophe?

In spite of these variations from case to case, officials behaved as if they understood it, giving apparently logical arguments to each other often depending on the "success" of previous flights. For example. in determining if flight 51-L was safe to fly in the face of ring erosion in flight 51-C, it was noted that the erosion depth was only one-third of the radius. It had been noted in an experiment cutting the ring that cutting it as deep as one radius was necessary before the ring failed. Instead of being very concerned that variations of poorly understood conditions might reasonably create a deeper erosion this time, it was asserted, there was "a safety factor of three." This is a strange use of the engineer's term ,"safety factor." If a bridge is built to withstand a certain load without the beams permanently deforming, cracking, or breaking, it may be designed for the materials used to actually stand up under three times the load. This "safety factor" is to allow for uncertain excesses of load, or unknown extra loads, or weaknesses in the material that might have unexpected flaws, etc. If now the expected load comes on to the new bridge and a crack appears in a beam, this is a failure of the design. There was no safety factor at all; even though the bridge did not actually collapse because the crack went only one-third of the way through the beam. The O-rings of the Solid Rocket Boosters were not designed to erode. Erosion was a clue that something was wrong. Erosion was not something from which safety can be inferred.

There was no way, without full understanding, that one could have confidence that conditions the next time might not produce erosion three times more severe than the time before. Nevertheless, officials fooled themselves into thinking they had such understanding and confidence, in spite of the peculiar variations from case to case. A mathematical model was made to calculate erosion. This was a model based not on physical understanding but on empirical curve fitting.

(Interestingly, Richard Feynman's estimate of the probability of failure in that piece -- one in fifty flights -- seems to track pretty well with our actual experience of two shuttle failures in 114 flights. The "it worked once so it must be safe" mentality also seems to have been a factor in the Colombia disaster; as reported by William Langewiesche in The Atlantic Monthly, managers at NASA treated the problems with foam breaking off as "safe" because they had never caused problems before.)

I'd argue that the same thing happened at the end of the 1990's. For seventeen years, the stock market had basically gone nowhere but up. For seventeen years, traders who "bought on the dips" (buying whenever the market went down) had made a lot of money. Each passing year of gains lessened our fear of the risk inherent in equity investments. Many amateur investors seem not to have understood that there were risks -- I decided the stock market was in a bubble the day I heard one of my co-workers, who didn't know how to read a balance sheet, tell another, who also didn't know how to read a balance sheet, "in the long run the market always goes up." True enough -- but their time frame was closer to twenty days than the twenty years for which that statement holds empirically true.

But even professionals were affected, not because they didn't understand the risks intellectually, but because with each passing successful year, they worried less about them. Everyone, from the greenest trader to the board, was simply less concerned about the risk inherent in equities than they had been in 1981, when the market had gone nowhere for almost fifteen years.

This was not rational. The probability of a bad event hadn't dropped; they worried less about them merely because it is human nature to worry less about things that haven't happened for a while. Indeed, by 1998, the probability of a bad event had become much higher than it was in earlier years, because the market was overvalued. (Yes, my little chickadees, that does mean that I think the market is overvalued now.) But while they had mathematical models for evaluating risk, they had emotional models for deciding how they should worry about it . . . and by the late 1990's, a slightly improbably long series of good outcomes had thrown those models out of whack.

There were other things operating, of course. Many money managers who thought the market was overvalued nonetheless had to invest in it because they were running an equity fund, and that's what equity funds do. Even "value" funds, which try to by stocks that are cheap relative to their fundamentals, were running into trouble -- they had trouble finding stocks, because the bubble had pushed values up so much, and they had trouble getting money into their funds, because while value investing may be a good long-term strategy, it underperforms the market during speculative booms.

Other professionals, and some amateurs, recognizing the bubble, thought that they could get their money out before the idiots driving the bubble. This is another form of self delusion, as most of them found out. Even a booming market wobbles on the way up. If you sell into every decline, you'll lose money; if you don't, you run the risk of being caught out when The Big One comes.

And bad risk assessment isn't the only form of investor psychology in play. But a lot of the others also, I'd argue, have their roots in evolution. For example, people were curiously affected by the experiences of their friends. Apparently research shows that people who had friends who'd made a killing in the market were much more likely to get into the market than those who saw a stranger, no matter how unlikely a candidate, do the same. People seemed to be driven by a need to keep up with their friends. They also seemed to have an irrational fixation on regret -- many investors were driven not only by potential gains, but by fear of the regret they would experience if they didn't invest and the stock went up. Worrying more about potential losses than equivalent potential gains is known as loss aversion, and its probably a sound evolutionary strategy on the veldt, where you're one loss away from death . . . but in this case, as their perception of the risk of one type of loss ebbed, investors simply switched to worrying about another, even more unlikely sort . . . to their vast detriment.

So if we all went a little crazy in the internet bubble, I'd argue that it's not really necessarily our fault. But of course that implies that we can't help doing it again, which is even worse.

From the desk of Jane Galt:

Crisis? What crisis?

Tyler Cowen demonstrates why the plight of the uninsured is less dire than we think. And let me head off some angry comments at the pass . . . until I got my current job, I was uninsured for two years. Yes, I lived in fear that I would be in a messy auto accident or get cancer. Being uninsured is no fun. But I got better quality care during my years off insurance, because I was paying full freight to doctors who weren't trying to herd as many patients as possible through their doors. (Even, oddly enough, the GP I attended who specialized in low-income patients.) And what I was really afraid of wasn't lacking medical care -- it was bankruptcy. I was pretty sure that if I got really sick, a hospital would care for me. But if I couldn't pay their bill, they'd wreck my credit rating.

What I wanted was catastrophic coverage in case something awful happened -- cancer, a car wreck. But the State of New York, in its infinite wisdom, made such policies illegal, so that I could be protected from my foolish desires. Instead, I had to go without insurance at all, because I couldn't afford the $350 a month they were charging for the crappiest HMO I could find. Much better.

From the desk of Jane Galt:

Kyoto gasps for air

Russia is currently dithering about whether to sign the Kyoto Protocol. If it doesn't, it will be the nail in Kyoto's coffin, for without Russia and the US, the signatories cannot reach the critical threshold for the treaty to go into effect. (The threshold is a percentage of the world's emissions, not a number of countries)

What's really interesting, though, is the counterfactuals. They are interesting because even if the US had signed Kyoto, without Russia, the deal would have been dead. Why? Because Russia was the linchpin of the carbon trading system that was supposed to mitigate the economic pain, particularly in the US, of the emissions reduction.

The emissions reductions were based on 1990 levels of emissions. This year was ever-so-carefully chosen. It allowed Britain to claim credit for her (independantly motivated) conversion to natural gas; allowed Germany to take credit for "reducing" the horrific emissions levels in East Germany (the reductions were achieved by shuttering all those inefficient, unprofitable, highly polluting industries that littered Eastern Europe); and allowed Russia to claim massive credits for the greenhouse reductions they achieved through letting their economy slide perilously close to total collapse.

Those credits -- for the emissions that they could be making, at their 1990 levels, but wouldn't be because their economy was in the tank -- were supposed to be traded to nations, like the US, whose economy was still in relatively good shape. Thus we could avoid the catastrophic economic consequences of suddenly trying to dial our production back to 1990.

A report issued under the Clinton administration gave a neither-optimistic-nor-pessimistic estimate for the cost of implementing Kyoto at roughly 2% of GDP -- provided we could buy emissions permits from Russia. The pessimistic scenario, which was dominated by the (according to the report's authors) unlikely possibility that Russia didn't have any permits to sell us, more than doubled that cost. If Russia hadn't signed, we'd be looking at a very hefty bill for implementing Kyoto right about now.

How hefty? Well, our GDP is about $10 trillion. 4% of that is $400 billion -- or roughly the 10 year cost of the new Medicare prescription drug benefit, expended every year. Assuming the pain is distributed evenly, the cost to you is 4% of your annual income, or roughly $1500 a year if you make the median wage.

And what is the benefit from this profligate spending? Well, it seems that the Kyoto protocol would push global warming back by about 6 years. So we all go to hell in 2106 instead of 2100, or whatever the current date set for damnation is.

It seems very unlikely to me that the United States would have remained in the treaty with Russia outside it.

And would Russia have signed the treaty if we had? To that, I don't have an answer. I don't really understand why they aren't signing now -- they stand to make a tidy sum off those emissions permits. There is speculation that they're hoping their industry will stage a miraculous comeback -- unlikely -- or that they're hoping global warming will make more of Russia habitable/arable. Someone even told me he thought they were trying to open up a warm-water port, but I have no idea where he could mean. Would our presence have made their permits sufficiently valuable -- or their pride sufficiently assuaged -- to get them to sign on the dotted line?

I'm afraid I don't have answers, only questions. But I'll be watching this story develop with interest.

From the desk of Jane Galt:

Free at last . . . free at last . . . thank God Almighty, we're free at last!

Bush decides to lift the steel tariffs.

From the desk of Jane Galt:

Where's the rage?

I was reading this Kevin Drum post on a possible Nader candidacy, and musing upon the frothing rage of many on the left who believe (perhaps rightly) that Nader cost them the election. What I was wondering is this: how come conservatives don't get angrier about Ross Perot?

I mean, I'm under the impression that it's pretty much certain that Ross Perot handed the 1992 election to Bill Clinton. Yet while I've heard plenty of conservatives accuse Mr Perot of being a first-class fruitcake, I've never heard them claim that he in some way stole votes which rightfully belonged to Mr Bush, which seems to be the moral attitude of many on the left towards Mr Nader.

Am I wrong? Are there conservatives who betrayed the same anger towards Ross Perot as many liberals do towards George Bush? And if not, why not?

From the desk of Jane Galt:

Special Guest Blog

From my co-worker Lane, who does not have a blog of his own, but should:

i'm just going to send my random miscellaneous thought about a thing i read on the internet to you.

This annoyed me: Rumsfeld won a mocking "award" for his apparently garbled English with his comment about "known knowns", "known unknowns" and "unknown unknowns". Apparently some fusty Brits thought this was the most rib-tickling piece of rubbish-talking they'd ever heard.

But what's the confusion? The British Plain English Campaign says "We think we know what he means... but we don't know if we really know." Ha! That's a good one, Plain English Campaign. But here's a thing I know: you're dumb! The comment made perfect sense to me on the first hearing and has made perfect sense every time I've heard or read it since. I'll explain, in three short sentences: There are things we know we know. There are things we know that we don't know. And there are things we don't know that we don't know. He goes on to say that the third category of things are the most dangerous. Still confused? Repeat third grade, or take an epistemology class, or something, but this is pretty clear to me, and actually a pretty incisive comment, when I think about it.

Duh. It's just like a dumb excuse to take a shot at stupid Americans. Whatever. We invented the internet and nuclear weapons and you don't even have ziploc bags. Wankers.

For some reason I'm kind of defensive of Rumsfeld - he's the only guy in the administration I have an instinctive like for.

From the desk of Jane Galt:

Update on the Republican "hackers"

The Wall Street Journal is reporting that the "hacking" amounted to accessing files on a shared server.

A statement put out last week by Mr. Hatch's office says that the accused staffer "improperly accessed at least some of the documents referenced in the media reports." That accusation bears scrutiny in light of how the committee's computer system is organized: Until Nov. 16, all Judiciary staffers used the same computer server and had access to a shared drive, a system put in place when Sen. Leahy took over as chairman in 2001 and hired his own IT staff.

The Leahy techies neglected to put up a firewall between the GOP and Democratic staff, making it possible for all staffers to read everything posted on the shared drive. No one hacked into anyone's private files. These are, in effect, Leahy leaks.

So why is the hapless staffer being hounded? And why is no one reporting the much bigger story of the memos?

This isn't even "social engineering" -- if the WSJ is correct, this barely merits a slap on the wrist. On the networks I've administered, the rule is that if its in a space that everyone can access, then you can't get too upset if they proceed to access it. Of course, I don't know what the relevant understandings were on the Judiciary committee, but I have a hard time working myself into a high moral dudgeon over it.