Tuesday, December 25, 2012

The last book by Nassim Taleb

"Antifragile," the last book by Nassim Nicholas Taleb is about decision making in the face of uncertainty. Its main message is that, given the volatility and unpredictability of the future, it is best to adopt strategies (in life, work, investment) that are not only robust, but that benefit from randomness. Around this main idea, the author explains his preference for facts rather than opinions, and for practitioners rather than academics (especially economists). As an academic economist, it would not be appropriate for me to defend the profession in a corporatist way, but sometimes Taleb sounds a bit like a spoiled child indulging in prejudices (not only against academic economists, also against the Japanese, the Russian, an attitude close to finding excessive deterministic explanations, which he criticized in earlier work). Many of the ideas of the book, for example the problems derived from principal-agent situations, or "commission biases" in public (and other) interventions, or consumption cascades, have been also (and sometimes better) explained by academic economists of the traditional or the behavioural kind. Taleb shows no mercy for authors who saw no excessive risks in the strategies of financial institutions before the crisis, to write books claiming that they had predicted the crisis after it (like Stiglitz), or for central bankers who profited unethically although legally from their knowledge of financial regulations (like Blinder). Other economists, such as game-theorist Rubinstein or climate change expert Stern are mentioned in a much more favourable light. Although the book is the logical continuation of "Fooled by Randomness" and "The Black Swan", and it is full of useful and interesting insights, it does not have in my view the originality and power of the previous ones.

Sunday, December 16, 2012

Europe, better than Spain against corruption

Although it is fashionable to blame Europe for our current economic problems, Spain (and Catalonia) would be much worse without the discipline of European membership. It is the European Commission who stops (or tries to stop) the Spanish government from still committing more public funds to vested interests, or who tries to put pressure on the Spanish legislators to avoid reducing even more the independence of regulators. At the European level, the Spanish lobbies, especially the big corporate interests, have much less sway. This is an idea I would like to test also for soccer. My conjecture, based on my experience as fan (and my knowledge of the literature on soccer and incentive theory), is that referees make less mistakes (in favour of the home team, or in favour of the big teams) in the Champions League than in the Spanish competitions. Since in the last decade and more the same teams have faced each other both in the Champions League and in the national competitions (think of the Barça-R. Madrid games of 2011, but there are many more examples), one can compare the same teams, in front of the same crowds, but with referees under different incentive systems. Pepe was sent off in the Champions League, but could step on Messi and not even be booked in the Spanish League. The R. Madrid players could feel free to ambush the referee since minute 1 of the Spanish Cup final that they won in 2011, but were defeated by Barça with a neutral referee, with some days difference in the semi-finals of the Champions League. The UEFA Champions League is a better league, with better supervision and monitoring, with more regulatory stability and credibility, with less scope for corporate pressure and vested interests. We need more, not less, Europe.

Sunday, December 9, 2012

Important versus measurable

Nate Silver, the statistician, argues in The Signal and The Noise that one of the most serious problems in social sciences is that many important thing are difficult to measure. Then subjective potentially biased information is unavoidable, and one should be open to any way of improving information (through case studies, narratives, personal experience...). It is very important then to keep in mind that the things that are easy to measure, define and monitor are not necessarily the most important ones. Three examples from economics and politics may help understand that this is really a key issue:
-In the provision of incentives in organizations, if targets and monetary incentives focus on measurable dimensions, then important dimensions that are difficult to measure will be neglected. The clearest example, well known in the theory of incentives, is that teachers will spend too much effort in improving the skills of children to pass tests (which are measurable), instead of helping them become good citizens.
-In the assessment of de facto implementation of de iure institutions, de facto issues are much more difficult to measure than de iure ones. This can lead to serious misallocation of resources. For example, if an international institution gives aid conditional on the degree of independence of industry regulators (for example in infrastructure industries), then the risk exists that countries with good laws but awful implementation of them, will unfairly get international aid.
-In the recommendations to overcome institutional crises, or to improve democracy, too often the focus is placed on institutional discrete fixes, such as changing the electoral system (for example, from proportional to majoritary, or from closed to open candidate lists, as recently suggested in Spain by former prime minister Felipe González). Some thought reveals that a system that is tainted by widespread corruption or patronage will persist after any of these changes: for example, if the voter is granted the ability to rank a list of candidates from the same political party, the list on offer may end up being of even lower quality than before the reform.
A final comparison from the world of sports. In baseball, many things are measurable, whereas in soccer everything is much more fluid (except set-pieces or referee decisions like cards or injury time added). Life is more like soccer.

Thursday, December 6, 2012

Global Outcry Against Corruption

Transparency International (TI) has issued the 2012 edition of its corruption index. The least corrupt countries in the world according to this index are Denmark, Finland and New Zealand. The most corrupt countries are Afganistan and North Corea. Spain is in position 30 in the ranking, tied with Botswana. Portugal and Italy are even below Spain.
TI says that "A growing outcry over corrupt governments forced several leaders from office last year, but as the dust has cleared it has become apparent that the levels of bribery, abuse of power and secret dealings are still very high in many countries. Transparency International’s 2012 Index shows that corruption continues to ravage societies around the world. 
Two thirds of the 176 countries ranked in the 2012 index score below 50, on a scale from 0 (perceived to be highly corrupt) to 100 (perceived to be very clean), showing that public institutions need to be more transparent, and powerful officials more accountable."
TI's index is not perfect. It does not take into account some forms of corruption: for example, Chile looks very decent, but no account is made of the fact that one of the richest (perhaps THE richest) man in the country is the president, which is only the tip of the iceberg of a country where the business oligarchy has enormous political and social power (isn't that corruption? If it is not, then they don't need to become corrupt). Another example is the presence of politically connected agents in the board of directors or other positions in large firms.
In any case, it is a very decent effort. Corruption is one of the most serious challenges facing our societies, and as a brief reflection on the top and bottom countries suggests, it is very strongly correlated with social welfare.