Quotulatiousness

March 29, 2014

The “Lehman Sisters” wouldn’t have been more risk-averse, actually

Filed under: Business, Economics, USA — Tags: , , , , — Nicholas @ 10:56

Tim Worstall looks at the occasional claim that if Lehman Brothers had actually been “Lehman Sisters” (that is, an organization with much higher female participation), then they would have taken on less financial risk and therefore not have been the trigger to the financial meltdown:

… there’s very definitely an element of truth to this: but the final story is rather different from what is commonly assumed. It’s only if financial organisations are completely female, or completely male, that risk is reduced. Adding more of either gender to an organisation actually increases risk.

[…]

Mixed gender environments increase risk tolerance in both men and women. So adding women to an all male institution increases, likely, the risk that organisation will tolerate. And so does adding men to an all female one. Not just because the men sway the average but because both men and women become more risk tolerant in the presence of the other sex.

Thus it would be correct to say that Lehman Sisters would have been less risk tolerant than Lehman Brothers. But the reality of what there actually was at the firm was that it was a mixed gender environment and so more risk tolerant than either of the single gender hypotheticals would have been. It is gender diversity itself that increases risk tolerance, reduces risk aversion.

Which leads to an interesting thought. Everyone generally agrees that banking as a whole has become more risk tolerant, and thus more fragile, in recent decades. These are also the decades when women have made significant inroads into that area of professional life. Which leaves us with something of a conundrum. We generally believe that fragility in the banking system is a bad idea. We also all generally believe that gender equality is a good idea. But that gender equality of women going into finance and banking seems to increase the fragility of the system given that rise in risk tolerance from a mixed gender environment.

September 6, 2013

QotD: Risk-taking

Filed under: History, Military, Quotations — Tags: , , , — Nicholas @ 00:01

This necessity for taking risks had previously been stressed by a passage in a letter written by James Wolfe when a colonel on the staff in 1757, a passage that has become justly famous:

    Experience shows me that … pushing on smartly is the road to success; that nothing is to be reckoned an obstacle to your undertaking which is not found really so upon trial; that in war something must be allowed to chance and fortune, seeing it is in its nature hazardous and on option of difficulties; that the greatness of an object should come under consideration as opposed to the impediments that lie in the way; that the honour of one’s country is to have some weight; and that in particular circumstances and times the loss of a thousand men is rather an advantage to a nation than otherwise, seeing that gallant attempts raise its reputation and make it respected; whereas the contrary appearance sink the credit of a country, ruin the troops, and create infinite uneasiness and discontent at home.

General Robert E. Lee puts it in fewer words:

    There is always hazard in military movements, but we must decide between the possible loss from inaction and the risk of action.

Napoleon laconically brings out the same basic idea:

    Shuffling half-measures lose everything in war.

Lt. Colonel Alfred H. Burne, “The Strands of War”, The Art of War on Land, 1966.

September 15, 2012

Our collective maladjusted attitude to small risks

Filed under: Economics, Europe, Italy — Tags: , , , , , — Nicholas @ 09:44

Tim Harford shows that you can learn a lot about economics by looking at the process of hiring a rental car:

Here’s a puzzle. If it costs €500 to hire a €25,000 car, how much should you expect to pay to hire a €50 child’s car seat to go with it? Arithmetic says €1; experience suggests you will pay 50 times that.

This was just one of a series of economics posers that raised their heads during my summer vacation – indeed, within a few minutes of clearing customs in Milan. One explanation is that the apparently extortionate price reflects some unexpected cost of cleaning, fitting or insuring the seat – possible but implausible. Or perhaps parents with young families are less sensitive to price than other travellers. This, again, is possible but unconvincing. In other contexts, such as package holidays and restaurants, children with families are often given discounts on the assumption that money is tight and bargains keenly sought.

[. . .]

After paying through the nose for the car seat we were alerted to a risk. “If your car is damaged or stolen, you are liable for the first €1,000 of any loss.” Gosh. I hadn’t really given the matter any thought but the danger suddenly felt very real. And for just €20 a day, or something like that, I could make that danger vanish.

[. . .]

What’s happening here? Behavioural economists have long known about “loss aversion”: we’re disproportionately anxious at the prospect of small but salient risks. The car hire clerk carefully created a very clear image of a loss, even though that loss was unlikely. I haven’t paid such fees for years and have saved enough cash to write off a couple of hire cars in future.

February 8, 2012

Help combat RRSHS (Relative Risk Scary Headline Syndrome)

Filed under: Britain, Bureaucracy, Health, Media — Tags: , , , , — Nicholas @ 10:38

Timandra Harkness on the latest “scare the shit out of people with blatant propaganda” campaign in Britain:

To put that another way, the campaign is suggesting that if 48,000 women all drank two large glasses of wine every night (it doesn’t specify for how long — a year, 20 years — this is a health campaign after all, so why would we need to see proper research citations?), then out of those assiduous drinkers an extra two would die in a year because they drank more than the government guidelines suggest.

It’s a classic case of RRSHS — Relative Risk Scary Headline Syndrome. Why bore people with a sober assessment of how likely something is to kill them when you can scream a terrifying figure at them instead? So what if they’re far more likely to die of something else?

And in fact, moderate drinking offers significant protection against heart disease, which kills one in three of us. ‘Apparently, two large glasses of wine, or more, a day could make me half as likely to die from a heart attack’, the plasticine figure could truthfully have said.

RRSHS is a variant of the “science by press release” variant of junk science.

Update: Tim Worstall loses his cool over the statistical lies being bandied around in this particular Nanny campaign:

    Prime Minister David Cameron is known to have sympathy with the idea of minimum pricing, which medics say could save nearly 10,000 lives per year if set at 50p per unit.

Gosh, that’s amazing.

    Alcohol related deaths in the UK rose to 9,031 in 2008, up from 8,724 the previous year.

Rilly? A slight rise in the cost of cheap booze will save more lives per year than are lost to all booze?

Hey, why not put it up to £50 a unit and we’ll all live forever?

Forgive me the crudity but I’ve really had it with cunts lying to get their bandwagons rolling.

And in the comments, “PJH” says:

One wonders, of course, if these figures are created in the same way as alcohol related admissions to hospitals.

“30% of this death was due to alcohol, 10% of that teetotaller’s death was due to alcohol, 14.243245% of that other death…”

October 26, 2011

Mis-perception of relative risks

Filed under: Football, Health, Randomness — Tags: , , , — Nicholas @ 00:03

Gregg Easterbrook provides a good example of how difficult people often find to discern the relative weight of risks:

The first consideration is that both absolute numbers of football deaths and rates of death compared to participants are in long-term decline — mirroring the decline in many forms of risk in society. Age-adjusted rates of all deaths in the United States have declined for 10 consecutive years. Auto fatalities have been declining for more than a generation. Winning the War on War, an important new book by Joshua Goldstein [. . .] shows that despite the impression created by cable news, exposure to violence is in decline both in the United States and worldwide.

[. . .]

Data from the National Center for Catastrophic Sport Injury Research reflects a steady decline in deaths caused by football. Table 1 of the center’s most recent report shows that in the past decade, 34 high school, three pro and two college football players have died as the direct result of games or practices, with the primary cause of deaths being heat stroke. That is entirely awful — but much lower than the rate of a generation ago. In 1968 alone, 26 high school players died as a direct result of football; last year, the number was two. Table 3 of the report shows the direct fatality rate from high school football peaked at 2.6 deaths per 100,000 players in 1969 and declined steadily to 0.13 deaths per 100,000 in 2010. That means a 1968 high school football player was 20 times more likely to die than a 2010 player. (The main reason for declining deaths was that football helmets were improved to eliminate skull fractures.)

[. . .]

How to compare the slight risk of a terrible football outcome to other common risks experienced by the young? Consider the risk of being in a car. About 3,000 teens die each year in car crashes. There are about 21.3 million Americans between 15 and 19 years of age. Teens average about 146 miles driven per week, roughly 150 hours per year of driving. These figures yield a roughly one in 1 million chance that a teen will die in an hour of driving. The National Federation of State High School Associations reports that 1.1 million boys (and a few girls) played high school football last academic year. A typical high school football season would include, in games and practice, perhaps 75 hours of exposure to contact. That’s about 80 million total hours of exposure to contact on the part of high school football players. The National Center for Catastrophic Sport Injury Research reports a recent average of three deaths per year directly caused by high school football. That’s a roughly one in 27 million chance of a high school player dying from an hour of football contact.

These are all rough estimates. Taking them together, a teenager has a one in 1 million chance of dying in an hour behind the wheel, compared to a one in 27 million chance of dying in an hour of football contact. Being in pads on a football field is less deadly than driving to high school for class. Many contemporary parents, especially moms, might say, “I don’t want you playing football because it’s so dangerous, but it’s fine for you to drive to the mall.” As regards mortality, this misperceives the risks.

September 5, 2011

False ideas about investment risk

Filed under: Economics — Tags: , , , , — Nicholas @ 10:25

Dan Ariely points out that most people have no idea at all about some of the key questions on investment risks:

To this point, we’ve run a number of experiments. In one study, we asked people the same question that financial advisors ask: How much of your final salary will you need in retirement? The common answer was 75 percent. But when we asked how they came up with this figure, the most common refrain turned out to be that that’s what they thought they should answer. And when we probed further and asked where they got this advice, we found that most people heard this from the financial industry. Sort of like two months salary for an engagement ring and one-third of your income for housing, 75 percent was the rule of thumb that they had heard from financial advisors. You see the circularity and the inanity: Financial advisors are asking a question that their customers rely on them for the answer. So what’s the point of the question?!

In our study, we then took a different approach and instead asked people: How do you want to live in retirement? Where do you want to live? What activities you want to engage in? And similar questions geared to assess the quality of life that people expected in retirement. We then took these answers and itemized them, pricing out their retirement based on the things that people said they’d want to do and have in their retirement. Using these calculations, we found that these people (who told us that they will need 75% of their salary) would actually need 135 percent of their final income to live in the way that they want to in retirement. If you think about it, this should not be very surprising: If you add 8 hours (or more) of free time to someone’s day, they will probably not want to spend this extra time by going for long walks on the beach and watching TV — instead they may want to engage in activities that cost money.

You can see why I’m confused about the one-percent-of-assets-under-management business model: Why pay someone to create a portfolio that’s 60 percent too low in its estimation?

And 60% is if you get the risk calculation right. But it turns out the second question is equally problematic. To show this, we also asked people to tell us how much risk they were willing to take with their money, on a ten-point scale. For some people we gave a scale that ranges from 100% in cash on the low end of the risk scale and 85% in stocks and 15% in bonds on the high end of the risk scale. For other people we gave a scale that ranges from 100% in bonds on the low end of the risk scale and buying only derivatives on the high end of the risk scale. And what did we find? People basically looked at the scale and said to themselves “I am a slightly above the mean risk-taker, so let me mark the scale at 6 or 7.” Or they said to themselves “I am a slightly below the mean risk-taker, so let me mark the scale at 4 or 5.” In essence, people have no idea what their risk attitude is, and if they are given different types of scales they end up reporting their risk attitude to be very different.

July 12, 2011

Have the markets already “priced in” the risk of a US government default?

Filed under: Economics, Government, USA — Tags: , , , , — Nicholas @ 11:48

Along with everyone else, I’ve been watching the US government’s fiscal game of “chicken” with some alarm. What is puzzling is that the opposition in congress doesn’t seem to be all that scared by the risk of default:

The facts, in fact, are plain enough. In the unlikely event that the U.S. government would hit the real ceiling on August 2 as advertised, the federal government would still be on track to collect about $2.2 trillion in the fiscal year. That wouldn’t change. And net interest for the year would still be about $205 billion, or less than a tenth of incoming revenues. And in light of the consequences, there is no doubt that President Obama and his Treasury Secretary would ensure that the interest payments are made on time and in full.

Thus it should not be surprising, as Fox Business News senior correspondent Charlie Gasparino wrote in a New York Post piece some days ago that “just about every private-sector economist I speak to says that Treasury could simply use its ample cash on hand to pay off our creditors first—then begin to prioritize payments for the military and various social programs.”

This view appears to be shared in spades by the credit markets, which so far have reacted to the Obama-media scare tactics with a big yawn. When the markets fear real default, they respond by jacking up interest rates, as we’ve seen in Greece, Italy, Portugal, etc. It’s happening right now in those countries.

In sharp contrast, U.S. long-term rates are actually falling. The 10-year Treasury bond rate, which only a few days ago was around 3.15 percent, has dropped 20 basis points to 2.95 percent. Maybe the markets just aren’t paying attention. Or maybe they know Obama and Company are blowing smoke. Whether the debt ceiling is raised on time or not, markets are confident that the interest will be paid.

June 1, 2011

New report from the Obviousness Bureau: TEPCO underestimated earthquake/tsunami risks

Filed under: Bureaucracy, Japan, Technology — Tags: , , , , , — Nicholas @ 07:55

Hands up, anyone who didn’t see this coming? Okay, put your hands down board members of TEPCO:

Japan underestimated the risk of a tsunami hitting a nuclear power plant, the UN nuclear energy agency has said.

However, the response to the nuclear crisis that followed the 11 March quake and tsunami was “exemplary”, it said.

The Fukushima Daiichi nuclear plant, which was badly damaged by the tsunami, is still leaking radiation.

Japan’s Prime Minister Naoto Kan is facing a no-confidence vote submitted by three opposition parties over his handling of the crisis.

They say he lacks the ability to lead rebuilding efforts and to end the crisis at the Fukushima plant, public broadcaster NHK reported.

Some politicians from Mr Kan’s governing Democratic Party of Japan (DPJ), including former Prime Minister Yukio Hatoyama, are backing the motion.

If it is passed in a vote expected on Thursday, Mr Kan would be forced to resign or call a snap election.

However, given the thousands of dead and missing from the earthquake and tsunami, the attention paid to Fukushima has been rather disproportional. As someone joked yesterday, radiation from Fukushima has killed fewer people (none) than e.coli tainted food in Germany (16 at last report).

Update: In case I’m being too obscure, the “this” I refer to in the initial paragraph is the with-the-benefit-of-hindsight conclusion that the Fukushima plant was inadequately prepared for the earthquake and subsequent tsunami.

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