Kids These Days: Rap Music, Marijuana Cigarettes and High IQs

Posted on by David Wright

The Flynn Effect is the observation that IQ scores are increasing over time. They’re still trying to figure it out.

Flynn himself hypothesizes (plausibly) that everyday activities require more abstraction today than in earlier eras.  Demand for intelligence creates its own supply. Farmers and line workers needed to read, add and subtract, but today’s kids all figure out Facebook and Twitter.

A recent paper (pdf) provides a measurement of ability with analogies independent of IQ (with something called Ravens Matrices). And it fits.

Here is the abstract:

Secular gains in intelligence test scores have perplexed researchers since they were documented by Flynn (1984, 1987). Gains are most pronounced on abstract, so-called culture-free tests, prompting Flynn (2007) to attribute them to problem solving skills availed by scientifically advanced cultures. We propose that recent-born individuals have adopted an approach to analogy that enables them to infer higher-level relations requiring roles that are not intrinsic to the objects that constitute initial representations of items. This proposal is translated into item-specific predictions about differences between cohorts in pass rates and item-response patterns on the Raven’s Matrices, a seemingly culture-free test that registers the largest Flynn effect. Consistent with predictions, archival data reveal that individuals born around 1940 are less able to map objects at higher levels of relational abstraction than individuals born around 1990. Polytomous Rasch models verify predicted violations of measurement invariance as raw scores are found to underestimate the number of analogical rules inferred by members of the earlier cohort relative to members of the later cohort who achieve the same overall score. The work provides a plausible cognitive account of the Flynn effect, furthers understanding of the cognition of matrix reasoning, and underscores the need to consider how test-takers select item responses.

Money Be Tight (for econ-geeks)

Posted on by David Wright

Romney has (had?) a chance against Obama and the chart below tells you why. No seriously, it does, and I’ll (try to) explain it.

This podcast explains the chart pretty well. Look at the blue line. That is a measure of the change in money (M3) in the economy. Notice that it falls spectacularly starting in 08. That’s  a contraction in the money supply, which causes recessions, basically. Some argue about the importance of M3, but I’m now becoming convinced it matters. How did that happen? And whose fault is it?

Well, it’s the banks doing it. It’s the banks, banks, banks. They hold 85% of the money in the economy (the rest is government money) and so they dictate monetary policy. QE?Drop in the ocean.

So… why? Why are banks working against us (and themselves)?

First policy error: the Basel 3 regulations forced banks to hold more capital, which they don’t have. More capital, you’ll note, is normally a good thing.

Sure, in the long run, but how is a bank in 2009 supposed to operate (lend money, not run tight money) if they need to hold twice as much capital per loan as before? And after a big massive mistake (housing bubble/crisis) that has left them with less (negative?) capital than before? Really don’t want to go to equity markets because they’re paying sub-book and you’re worried about signalling weakness.

How about operations? Can the banks earn their way back out of zombiehood without taking risk?

With the fed’s interest on reserves program they can. Banks take checking deposits (free money, protected by FDIC) and park it at the fed and earn .25% per year on it. Buy longer Treasuries and you juice that more without a penny of allocated capital. Bang, let’s lend to the government then.

This isn’t strictly Obama’s fault but he could have nominating fed board members (to empty seats) and given Bernanke some loose money allies.

In the last two administrations there have been two failed “dream teams” of economic policymakers. First was Bernanke at the Fed and Hank Paulson at Treasury. They managed to not notice that money was incredibly tight and bail out their buddies at the big banks. That latter point still steams me up.

Next came the economic dream team of Obama. These folks also missed the tight money signs went all-in for fiscal stimulus.

We are left with crappy employment, slow growth and, incredibly, a continuing tight money policy.

It’s slowly getting better but it isn’t easy to tell when banks are going to be feeling bullish enough to actually operate again.We could well have years of stagnation ahead of us, folks. YEARS.

My Sandy Timeline

Posted on by David Wright

Mid-April: I move to Hoboken, NJ with my 6-month pregnant wife and Bree and Max, my two 10-pound dogs.

Some time in May: a relatively minor storm floods our parking garage and the nearby street. WTF? Lesson: Hoboken is really bad for flooding and we live in one of the worst parts.

End of July: I sign up for an actuarial exam for the end of October AND my son is born.

October 20: “A strong ridge of high pressure parked itself over Greenland beginning on October 20, creating a “blocking ridge” that prevented the normal west-to-east flow of winds over Eastern North America. Think of the blocking ridge like a big truck parked over Greenland. Storms approaching from the west or from the south were blocked from heading to the northeast.”

Some additional background from the same link:

We expect hurricanes to move from east to west in the tropics, where the prevailing trade winds blow that direction. But the prevailing wind direction reverses at mid-latitudes, flowing predominately west-to-east, due to the spin of the Earth. Hurricanes that penetrate to about Florida’s latitude usually get caught up in these westerly winds, and are whisked northeastwards, out to sea.

Bottom line: normal no longer applies.

October 22th: Tropical Depression 18 forms.

October 24th: Now Hurricane Sandy, the storm hits Cuba hard. The possibility of a US landfall dawns on the NHC for the first time.

October 27th (Saturday): I get a mass email from my building manager saying that the area flooded even during the over-hyped Irene last year and big floods trigger the fire alarm. I reply: as in the building-wide fire alarm? Yep, he fires back, and we can’t turn it off and it’s LOUD.

Well that sews this one up, but where do we go? Here’s our criteria:

  1. Town that has a hotel that wasn’t full
  2. Oh, yeah, and isn’t on a river
  3. That hotel needs to take dogs
  4. Is near a place where I can take my exam (still studying through all this!).

I pull up the intertubes and hit the phones. The answer? Three-hour away Albany.

October 28th (Sunday): no point studying, got to pack up an infant and dogs and supplies and whatnot and hit the road. That takes most of a day. The hotel is great and guest cancellations are rolling in. Papa John’s pizza and a practice exam for me.

October 29th (Monday): Holy Cow this is for real. Glued to CNN. Albany? A brisk wind is the worst we saw. Incredible luck.

October 30th (Tuesday): Hoboken is underwater. Everything is underwater. Uh, oh, when are we going to be able to get back?

October 31st (Wednesday): I write my exam in the morning. I’m the only one sitting it since the CAS let affected folks put it off. Not for me, let’s do this. That’s four hours.

Back at the hotel it’s becoming clear, as I scarf down yet more takeout, that we’re not going home. Looks like it’s back to Canada to my in-laws’. But first someone’s got to go back to Hoboken to get our travel documents. Saddle up!

Driving down the roads I see that about one in ten gas stations in Northern New Jersey is open and each has a gigantic queue of cars at it.

You know what that means: rationing by time instead of price. Far more importantly, however, it means that overall supply is lower. Here’s Yglesias who has been covering this very well:

Chris Christie, also put out a weekend press release warning that “price gouging during a state of emergency is illegal” and that complaints would be investigated by the attorney general. Specifically, Garden State merchants are barred from raising prices more than 10 percent over their normal level during emergency conditions (New York’s anti-gouging law sets a less precise definition, barring “unconscionably extreme” increases).

The bipartisan indignation is heartening, but there’s one problem. These laws are hideously misguided. Stopping price hikes during disasters may sound like a way to help people, but all it does is exacerbate shortages and complicate preparedness

And more:

But when it comes to things like gasoline and bottled water, neither the short-term nor the long-term supplies are genuinely fixed. Transportation routes into the area have been severely disrupted and many gas stations’ supplies are hard to access due to power outages, but it’s not impossible to transport this fuel from where it is into people’s cars and generators. It’s just much more annoying and difficult than usual. But the possibility of windfall profits is exactly the lure we need to get people to start making extraordinary efforts to get more fuel to the people who need it. There are things people will do to sell gasoline for $10 a gallon that they won’t do to sell gasoline for $3.40 a gallon (note that in Norway this is what gas costs all the time) and that’s what we need.

Power lines were down everywhere and electrical crews were working away. Roads were closed, though, and it took forever to get back to Hoboken. Eventually I had to park about a mile away and, now under the cover of darkness, run into town with my rubber boots, flashlight and backpack.

Very post-apocalyptic.

The phone networks were overloaded so there were definitely people around. You could see refugees sitting in cars charging their devices before going back up to, I dunno, play angry birds by candlelight, I suppose. The gold standard of disaster certifications is of course an on-location broadcast by Anderson Cooper, which happened while I was there! I didn’t see AC360 himself, though.

Anyway, got my stuff and booted it back to the car. Back to Albany by 11pm. Phew. what a day.

November 1st: quick check of the newswires. Still flooded. Ok, back in the car for 8 hours to Canada!

Post Scripts:

The insurance loss is getting picked at 10-20bn, which should put this after Katrina and Andrew as the third most costly hurricane in US history. That’s probably about right. There’s also a debate about whether hurricane deductibles (higher than normal storm deductibles) are going to apply to this “Post-Tropical Cyclone”. See here for example.

There is also a debate about the role of FEMA in these kinds of disasters. Here is an interesting point (via MR):

We’ve nationalized so many of the events over the last few decades that the federal government is involved in virtually every disaster that happens. And that’s not the way it’s supposed to be. It stresses FEMA unnecessarily. And it allows states to shift costs from themselves to other states, while defunding their own emergency management because Uncle Sam is going to pay. That’s not good for anyone.

When FEMA’s operational tempo is 100-plus disasters a year, it’s always having to do stuff. There’s not enough time to truly prepare for a catastrophic event. Time is a finite quantity. And when you’re spending time and money on 100-plus declarations, or over 200 last year, that taxes the system. It takes away time you could be spending getting ready for the big stuff.

…I think another issue is some people see the failed response to Hurricane Andrew as the reason George H.W. Bush lost Florida to Clinton. So now, you have presidents who are very concerned about the potential impact, from an election standpoint, of disasters. That created an incentive to nationalize things.

Finally, here’s a statistical wrap-up (great image at the link):

Death toll: 160 (88 in the U.S., 54 in Haiti, 11 in Cuba)

Damage estimates: $10 – $55 billion

Power outages: 8.5 million U.S. customers, 2nd most for a natural disaster behind the 1993 blizzard (10 million)

Maximum U.S. sustained winds: 69 mph at Westerly, RI

Peak U.S. wind gusts: 90 mph at Islip, NY and Tompkinsville, NJ

Maximum U.S. storm surge: 9.45′, Bergen Point, NJ 9:24 pm EDT October 29, 2012

Maximum U.S. Storm Tide: 14.60′, Bergen Point, NJ, 9:24 pm EDT October 29, 2012

Maximum wave height: 33.1′ at the buoy east of Cape Hatteras, NC (2nd highest: 32.5′ at the Entrance to New York Harbor)

Maximum U.S. rainfall: 12.55″, Easton, MD

Maximum snowfall: 36″, Richwood, WV

Minimum pressure: 945.5 mb, Atlantic City, NJ at 7:24 pm EST, October 29, 2012. This is the lowest pressure measured in the U.S., at any location north of Cape Hatteras, NC (previous record: 946 mb in the 1938 hurricane on Long Island, NY)

Destructive potential of storm surge: 5.8 on a scale of 0 to 6, highest of any hurricane observed since 1969. Previous record: 5.6 on a scale of 0 to 6, set during Hurricane Isabel of 2003.

Diameter of tropical storm-force winds at landfall: 945 miles

Diameter of ocean with 12′ seas at landfall: 1500 miles

Nectar of the Sows

Posted on by David Wright

Slate on Milk:

There are no written records from the period when humans invented agriculture, but if there were, they would tell a tale of woe. Agriculture, in Jared Diamond’s phrase, was the “worst mistake in human history.” The previous system of nourishment—hunting and gathering—had all but guaranteed a healthy diet, as it was defined by variety. But it made us a rootless species of nomads. Agriculture offered stability. It also transformed nature into a machine for cranking out human beings, though there was a cost. Once humans began to rely on the few crops that we knew how to grow reliably, our collective health collapsed. The remains of the first Neolithic farmers show clear signs of dramatic tooth decay, anemia, and low bone-density. Average height dropped by about 5 inches, while infant mortality rose. Diseases of deficiency like scurvy, rickets, beriberi, and pellagra were serious problems that would have been totally perplexing. We are still reeling from the change: Heart disease, diabetes, alcoholism, celiac disease, and perhaps even acne are direct results of the switch to agriculture.

…

The plot is still fuzzy, but we know a few things: The rise of civilization coincided with a strange twist in our evolutionary history. We became, in the coinage of one paleoanthropologist, “mampires” who feed on the fluids of other animals. Western civilization, which is twinned with agriculture, seems to have required milk to begin functioning. No one can say why. We know much less than we think about why we eat what we do. The puzzle is not merely academic. If we knew more, we might learn something about why our relationship to food can be so strange.

The Next Movie I’ll Watch

Posted on by David Wright

Cloud Atlas. From Ebert’s 4-star review:

Even as I was watching “Cloud Atlas” the first time, I knew I would need to see it again. Now that I’ve seen it the second time, I know I’d like to see it a third time — but I no longer believe repeated viewings will solve anything. To borrow Churchill’s description of Russia, “it is a riddle, wrapped in a mystery, inside an enigma.” It fascinates in the moment. It’s getting from one moment to the next that is tricky.

Surely this is one of the most ambitious films ever made.

I can’t wait. I’ve actually read the book.

Now I’m not normally a fiction reader but a few years ago I set my heart on reading awesome recent fiction, just to see if I’d like it. So I found these two lists of the top 10 novels of the 2000s, one voted on by critics and one by non-critics.  There were only four books that made both top 10 lists. Perfect, I thought.

And here they were: *The Corrections* by Jonathan Franzen, *The Road* by Cormac McCarthy, *2666* by Roberto Bolano and *Cloud Atlas* by David Mitchell.

So I bought them all and read them. They were all good and interesting but none were as good as I was hoping. Authors have an agenda, I suppose, and it isn’t the same as mine as a reader. Well told stories about real life are ALWAYS more entertaining.

The Corrections was probably the best of the group but was marred, in my view, by Franzen’s jarring take on the Denise character.  His mockery of her archetype was a bit too outrageous. It made me feel like he didn’t really understand her. Enid almost made up for it, but I never recovered.

The Road was my least favorite, so I’ll skip it. 2666 was just weird and not really a novel as I’d previously imagined it. I enjoyed the thing but I feel like it would work better as a series of magazine articles.

Cloud Atlas was easily the most ambitious of all the books. I read a review of it that suggested that Mitchell needs to stop trying to show off as a writer and just write. I see where the reviewer is coming from. Cloud Atlas is an extraordinary mix of genres and character types, humor and fantasy and drama and… everything. And he does it all better than many genre authors can muster in their silos.

And he ALMOST got it all to hang together as a whole piece.

That a film has tried to pull that off is impressive. That it might have actually worked is astonishing.

“Intelligence” = Negativity

Posted on by David Wright

One quick aside.  Last year, the more bearish you were on Under Armour, the better a team scored.  But guess what?  Under Armor rose 15% in the last 7+ months — the team that finished last had the result that was the best, and the winner did the worst.  I know many of my readers don’t like Jim Cramer, but one thing that he said shines through here: “The bear case always sounds more intelligent.”  The same is true in the biases of judges for academic competitions.

That’s David Merkel. I remember a professor at university who said that an MBA gives you a thousand reasons to say “no” to something but no ways of saying “yes”. We systematically overestimate the intelligence of two kinds of people: the articulate and the negative.

But trashing an idea is the easy way out. Being a smart booster is the most difficult job on earth. And the most lucrative.

Why Aren’t Other Apes As Smart As Us? Answer: Brain Food

Posted on by David Wright

Every gram of brain uses up more energy than every gram of body. And bigger brains, which have more neurons, consume more fuel. On their typical diets of raw foods, great apes can’t afford to fuel more neurons than they already have. To do so, they would need to spend an implausible amount of time on foraging and feeding. An ape can’t evolve a brain as big as a human, while still eating like an ape. Their energy budget simply wouldn’t balance.

Our ancestors overcame this constraint when they learned how to cook. Cooked food offers more calories than raw food, and is easier to chew and digest. These early chefs could gain more energy from the same amount of eating time. That, in turn, fuelled more neurons and larger brains.

More here.

Philosophy of a MOOC

Posted on by David Wright

Excellent piece on MRU (endorsed by the profs, no less)

The pedagogical principles in MRU’s course look to be grounded in the learning theory ofconnectivism developed by Downes and Siemens. Connectivistm is based on the concept that knowledge is not acquired but constructed and adjusted by the learner through connections that occur when the learner interacts with nodes in a network. Nodes can be a video, online discussions, Webinars, or conversations on Twitter, Facebook or through blogs. MRU emphasizes connected and dynamic learning, and their motto embodies it –learn, teach and share which also mirrors principles of the connectivist model.

And this:

In other words, the professors of MRU are taking themselves out of the equation. They infer that the course content is the catalyst for further exploration

There’s always this tension between learning in a group and “feeling stupid” in a group. This is one reason why I like online courses. You get the interaction in a semi-anonymous environment. Your ego is safe.

This Year’s Economics Nobel

Posted on by David Wright

Explained by MR:

In honor of the Nobel prizes to Al Roth and Lloyd Shapley, here is a primer on matching theory. Matching is a fundamental property of many markets and social institutions. Jobs are matched to workers, husbands to wives, doctors to hospitals, kidneys to patients.

The field of matching may be said to start with the Gale-Shapley deferred choice algorithm. Here is how it works, applied to men and women and marriage (n.b. the algorithm can also work for gay marriage but it’s a little easier to explain and implement with men and women). Each man proposes to his first ranked choice. Each woman rejects any unacceptable proposals but defers accepting her highest-ranked remaining suitor. Each rejected man proposes to his second ranked choice. Each woman now rejects again any unacceptable proposals, which may include previous suitors who have now become unacceptable. The process repeats until no further proposals are made; each woman then accepts her most preferred suitor and the matches are made.

and more…

And here is a good quote:

Roth has applied heavy-duty theory to the very practical problems of matching doctors to residency programs, children to schools, economists to departments and kidneys to patients in a way that is stable, incentive-compatible, and maximizes the gains from exchange.  In my view, Roth is the most influential economist working today. Influential among other economists?  Yes.  But what I really mean is influential in the world.

Lessons From the Harry Potter Income Statement

Posted on by David Wright

First of all, here it is (source)

-167m net income from 612m gross revenue. What can we learn from this? Well here is some of the original analysis:

In that statement, you’ll notice the “distribution fee” of $212 million dollars. That’s basically Warner Bros. paying itself to make sure the movie “loses money.” There are some other fun tidbits in there as well. The $130 million in “advertising and publicity”? Again, much of that is actually Warner Bros. paying itself (or paying its own “properties”). $57 million in “interest”? Also to itself for “financing” the film. Even if we assume that only half of the “advertising and publicity” money is Warner Bros. paying itself, we’re still talking about $350 million that Warner Bros. shifts around, which get taken out of the “bottom line” in the movie accounting.

Here’s another example:

Here’s a hypothetical example of how this could work in practice, using round numbers just to make the point (these aren’t directly accurate numbers, but the concept is). A studio funds A Movie with a production budget of $100 million. It sets up AMovieCo Inc. and gives it the production budget money. The studio then spends another $50 million on marketing and puts that down as an expense as well — though, with some of the big studios, some of this money involves paying itself for advertising on its own properties. Still, even if we assume that’s real money spent, you might think that AMovieCo now needs to make back $150 million to be profitable. But… the studio (which, again, controls AMovieCo completely) then tacks onto all of that, say, a $250 million “distribution fee.” Now, while there may be some money spent on actually distributing the film, the number is almost completely bogus, and much higher than the actual expense for the studio. Very little actual money needs to change hands here — it’s just a fee on the books (a fee they are effectively charging to themselves). And it’s not just “distribution” but a variety of additional charges. On top of that, the studio may then charge “interest” on that money, even though it’s really just lending money to itself. What it all means is that rather than becoming profitable at ~$150 million (the actual money spent), AMovieCo now needs to earn over $400 million before anyone with a cut of the profits sees an additional dime from the movie, thanks to completely imaginary accounting entries on the books.

Distribution is control. That’s true in insurance, too.