Posts filed under “Mathematics”
What a splendid idea: A Consumer Finance Protection Agency whose sole purpose is to provide a set of standards for the finance industry when it comes to marketing their products to otherwise naive US consumers.
The original plan was to have a standard form for major finance purchases — mortgages, cars, revolving credit. This would allow consumers to 1) Understand the amount of money the financing would cost them; 2) Determine if they could afford this product; 3) Allow them to shop competitively for the best rates.
Good idea, right? Considering that we people made the Snuggie, the Sham-Ease, and Hair-in-a-Can all best sellers, perhaps a little impulse control is a good idea. More accurate cost disclosures of credit will also help. Americans need help figuring out exactly what all this stuff costs when you include finance charges. We are, after all, a country of math-phobic shopaholic shit junkies. Anything that can help us figure out whether we can afford our bigger purchases — like cars and houses — should be a no-brainer.
Unfortunately, the banking lobby, in conjunction with the auto dealers lobby, had other ideas. A simple mandate to have all mortgages shown compared to a plain vanilla 30 year fixed was thwarted. It was to be similar to the FDA nutrition disclosures on the side of your kid’s cereal box. Who, could possibly object to that?
That the banking lobby stopped this simple consumer disclosure in its tracks reveals they want nothing to stand in between themselves and any profit, no matter how ill-gotten. The less informed of a shopper, the better. That even this simple consumer disclosure was thwarted is testament to how corrupt Congress has become. They can’t even get something this modest — and needed — passed.
Think back to the boom times of yesteryear. How many Americans actually understand the mortgages they were applying for? Did they calculate the costs, obligations and risks of their loans? Did they understand the cost and differences between Refis, HELOCs, and piggyback loans? The answer for the vast majority of US citizens is an emphatic NO. If anyone needs better disclosure of financial costs, it is the mathematical illiterates — innumerates — here in the USA.
Over the years, I have had countless conversations with home buyers about their mortgages. From 2003 to 2008, a typical a cocktail party or a BBQ invariably went something like this:
Home-Buyer: We got a great deal on our new mortgage.
Me: Did you do a 30 year fixed or something more exotic?
HB: 30 year fixed — at 4.5% !
BR: Sorry, but that’s not 30 year fixed — rates are 6.5% today. That’s probably a 2/28, with a reset in 200X.
HB: No, we definitely asked for a 30 year fixed.
BR: Well, that’s not what you got — its impossible to get that loan at that rate today.
HB: We’re good negotiators.
BR: Mortgage rates are set by the bond market. Banks charge a mark up ABOVE the rates that they can borrow money. They can’t get 30 year money at 4.5%, so you can’t get 4.5%. There is only so much negotiating you can do with the bond market.
HB: Well, its definitely a 30 year fixed.
BR: Please make the pain stop . . .
And so on.
Huge swaths of people, did not understand what they were buying, what it cost them, what their other options were, whether they could afford it or not.
I am not saying this to exonerate their ignorance — it is inexcusable in my opinion. Adults must take responsibility for their decision making, regardless of how foolish it may have been. That home buyers cannot figure out a basic financing document is beyond my comprehension. However, that is the way it is. We must acknowledge the simple reality, if we wish to avoid this problem in the future. That’s why we need to insure consumers understand what they are purchasing.
Currently, there are several proposals floating around to change the basic concept of a consumer protection agency. For the most part, these proposals are meaningless, watered down foolishness, bordering on idiotic. Let the Fed do it? They were already charged with doing this, and under Greenspan, committed Nonfeasance — they failed to do their duty.
The Fed is the wrong agency for this.
It does not need to be a giant bureaucracy, just a relatively simple set of disclosure laws to make sure consumers understand, in plain English, what they are buying. And the teeth to enforce them.
Americans have a hard time with complex math. And in Finance, we have a carnivorous sales force that eats its young, and sells their grandmothers near worthless CDS at par. Forcing this rapacious group of Ferengi to comply with fair cost disclosure is not asking too much.
If we are going to have an informed consumer class making intelligent financial decisions, a Consumer Protection Agency is a good place to start . . .
via Tom Toles
Here is a deceptively complex and subtle legal question involving Ponzi schemes and fraud: What are “losses” in the legal sense of the word? The question arises in the case of Bernie Madoff, whose offices cranked out account statements like they were junk mail. As it turns out after the fact, that was all they…Read More
Last week, we discussed a highly politicized, misleading front page article about new bank rules (WSJ Jumps the Shark). If you recall, that story included a large chart showing much various banks declined, in dollar and percentage terms. Turns out the data was wildly wrong. The Journal ran a milquetoast correction, under the heading “Corrections…Read More
Matthew Greenfield of StoneWork Capital answers the above question thusly: “Using ten racks of co-located blade servers, one quant can detect a janitorial inefficiency, step in between janitor and light fixture, and screw in 49,500 bulbs in less than a millisecond, keeping five hundred lightbulbs of profit. Two quants competing with each other can screw…Read More
A successful fund manager friend is developing a new Model for running assets. He has a solid math background, but needs a good quant to help him develop and refine his approach. He is looking for two people — a college grad/student, and a PHD mathematician. They run a variety of different types of long…Read More
One of the memes I’ve heard recently in the climate debate is that there is no scientific consensus — that there is actually strong disagreement. The main basis of this argument is that 31,486 dissenting scientists have signed a petition against the belief that Global Warming is man made at the PetitionProject.org. I don’t want…Read More
> Some good learnin’ here: This web site stems from a personal interest in critical thinking and is a collection of links to articles and sites pertaining to numeracy and critical thinking. Links should be good for at least the date posted. After the posting date, link reliability depends on the policy of the linked…Read More
On Tuesday, the 2nd most emailed article on WSJ.com was Crisis Compels Economists To Reach for New Paradigm.
It is an intriguing look at the problems of the the field of economics. It went, however, way too easy on both the profession and its practitioners. The article fails to ask some very basic questions about the soft science, and does not discuss the fundamental incompetency of many economists.
Given the failures of the profession — failing to anticipate the worst recession in decades, missing the warping effect of the housing boom, not recognizing the credit collapse until too late — a damning indictment of the dismal science might have been more appropriate.
Perhaps I can be of assistance.
There are many areas I would have liked to see the Economics Crisis article explore: The lack of Scientific Method, the mostly awful performance of economists, its misunderstanding of the value of modeling, the bias inherent in Wall Street variant of economics, and lastly, the corruption of economics by politics. I will just touch on some of these; you can fill in much of the blanks yourself.
Let’s start with the basics. Hard “science” — Physics, Biology, Chemistry, and all variants thereto — begins humbly. They try to describe the universe around us by creating theories, and then testing them. These theorems are always preliminary. Even when testing validates them, Science is always prepared — even eager — to replace them with newer theories that are proven to be even more valid.
The humility of science begins with an admission: We know nothing. We seek to learn through experiment and logic, and constantly evolve more and more accurate explanations. Scientific belief evolves gradually over time. Nothing is assumed, presumed, or hypothesized as true. Indeed, research is a presumption that current theories are inadequate or incomplete. The practice of science is a an ongoing search for better explanations, more proof, further verification — for Truth.
Science is the ultimate “show me” state.
Economics has a somewhat, shall we call it, less rigorous approach. Indeed, the arrogance of economics is that it is the polar opposite of Science. It begins with a few basic assumptions, many of which are obviously untrue; some are demonstrably false.
No, Mankind is not a rational, profit maximizing actor. No, markets are not perfectly, or even nearly, efficient. No, prices do not reflect the sum total of all that is known about a given market, sector or stock. Those of you who pretend otherwise are fools who deserve to have your 401ks cut in half. That is called just desserts. The problem is that your foolishness helped cut nearly everyone else’s 401ks in half. That is called criminal incompetence.
Where was I? Ahhh, our sad tale of the practitioners of the dismal arts.
Starting from a false premise that fails to understand the most basic behaviors of the Human animal, economics proceeds to build an edifice of cards on a foundation of sand. (How could that possibly go astray?) Like a moonshot off by a few inches at launch, by the time the we reach further into time and space, the trajectory is off by millions of miles . . .
Economics has had a justifiable inferiority complex versus real sciences the past century. It has attempted to overcome this by throwing lots of smart mathematicians at its practice, in an attempt to make the social art seem more “sciency,” and thus more credible. This had led to lots and lots of formulas and models. The problems is, Economics places way too much weight on these. It creates an illusion of precision where none exists. The belief in their models led to all manner of mischief, from subprime to derivatives to risk management.
Economics forgot George E. P. Box’s most basic rule:
“Essentially, all models are wrong, but some are useful”
Box was a statistician who recognized the fundamental truth of all attempts to depict the universe mathematically: They are inherently flawed.
He also understood that these flawed attempts can at times have value. His insights contextualize what mathematical modelers do — and fail to achieve.
Economics fails at this often. The belief in the validity of their models — like the theories they are based upon — is the Achilles heel of the profession.
This is not to say there are not good, even great economists (some are even friends of mine!) who foresaw the coming crisis and warned about it. Many are aghast at the rigor mortis in the academic establishment; some are horrified at how poorly the profession has done. Forget forecasting the future, too many economists cannot accurately describe what happened yesterday.
The Behaviorists have been fighting the mainstream for decades now, trying to correct the errors of the basic building blocks of the dismal science.
Excerpt after the jump.
The Mystery of the Awful Economists
RealMoney.com, 3/2/2005 3:42 PM EST
(If you cannot access the Real Money piece, click here).
Mystery of the Awful Economists, part II (April 8th, 2005)
Mystery of the Awful Economists part III (April 13th, 2005)
RIP Chicago School of Economics: 1976-2008 (December 23rd, 2008)
Why Economists Missed the Crises (January 5th, 2009)
Crisis Compels Economists To Reach for New Paradigm
WSJ, NOVEMBER 3, 2009
An odd article in the today’s WSJ laments The Cruel Math of Big Losses. What a terrible misonomer: This article should have been called “The Basic Mathematics of the Stock Market.” Not understanding the simple percentages of losses and gains is a goodly part of the reason so many investors buy into the myth of…Read More