You Digest Data With Your Gut

Posted on by David Wright

Listening to this week’s econtalk with Ed Leamer in which Russ and Ed discuss (among many other things – recommended) this article (weird, I first found this article. WTF?) about Tiger Woods:

Mr. Woods is such a dominating golfer that his presence in a tournament can make everyone else play significantly worse. Because his competitors expect him to win, they end up losing; success becomes a self-fulfilling prophecy.

The article then progresses to the ridiculous:

Ms. Brown argues that the superstar effect is not just relevant on the golf course. Instead, she suggests that the presence of superstars can be “de-motivating” in a wide variety of competitions, from the sales office to the law firm.

Ed and Russ appropriately cut this conclusion up, but I want to focus on their response to the former point. When presented with a counter-intuitive assertion, these two economics professors start talking about their private experiences and those of their friends to validate it. That’s not science, is it?

But that’s the problem that Ed Leamer talks about in his book and on a previous Roberts podcast. In social science, data can cast a new light on a situation, but if the only narrative you have is your own you’re not going to change your mind or learn anything. The likelihood is, of course, the weekend warrior experience is totally irrelevant when considering the psychological context of playing in a tournament with Woods and so, without a narrative (ie, a plausible setting and mechanism of causation), you have no empathy and so no ability to understand the conclusion.

Narrative without data is bullshit. Data without narrative is incomprehensible.

Nassim Taleb

Posted on by David Wright

I listened to the third of Russ Roberts’ Taleb podcasts last week and really enjoyed it. A few comments:

1. I love his idea about it being impossible to estimate events in the statistical tail. Insurers know this very well, which is why covers with a modeled attachment probability of anything less than, say, 2% sell for at LEAST 15%.

2. He loses me on the medical stuff, but I’m happy to endure this. If the price I have to pay for listening to a genuinely interesting contrarian is a few minutes of what I would consider a cross between complete BS and ego-maniacal musings on non-specialty topics, I’ll take it.

3. Convexity is a great thought, which is what he considers his “one idea”. Basically means that he looks for opportunities that have very small but very likely maximum downsides and very large, but very unlikely maximum upsides. In the casino of life, if you will, he’ll pick the 00 and let everyone else bet on black or red.

4. My only real quibble is that he really goes for the pompous public intellectual thing. He loves name-dropping famous thinkers and busting out words you haven’t heard in a while. But, again, I’ll stomach the pomposity for the thought provocation.

Thanks, Nassim.

Transocean Drill Rig Oil Spill Roundup

Posted on by David Wright

I’ve seen lots of stuff out there that have taught me a lot about Drill rigs and oil spills. I start with some deep thinking about risk.

1. When I was working in London at the end of 05, I remember bringing a slip around with a renewal of a Louisiana substandard auto company that got creamed by Katrina (I know: auto insurance!? But why didn’t they just drive away?). I was worried that all the markets would freak out because there was a loss and that I’d fail at filling the placement. Hardly. As one old hand said “well, you never know what the risk really is until you have a loss”.

2. One early summary is here. In particular, I really liked this presentation, which has an awesome summary of the industry at the end of the powerpoint stack. If I’m reading this right, the entire premium for the global energy market is about 5bn and looks like it runs at something like a 90% loss ratio. That means this event, at about 1.1bn – 1.5bn is going to blow that market up (Ha!).

3. Photos here

4. Video here.

5. Narrative-style summary.

6. Another summary – original link here. Good pics.

7. Finally, from MR, under the heading of “Not from the Onion: Hair, Oil, Transvestites”

Update: there’s more! Here’s an answer to the question: what happens when a hurricane hits this oil spill?