Book review: Business Fairy Tales by Cecil W. Jackson.
This book provides a better analysis of financial accounting problems than you can find in the news media. But it’s not thoughtful enough for me to recommend it. The author sounds like an academic who has little experience as an investor.
The book provides little perspective on which mistakes did the most harm. I can’t tell whether the author sees any difference in seriousness of Enron’s inconsistent reports to the SEC about when it adopted mark-to-market accounting and the absence of market prices to guide its so-called mark-to-market accounting (it seems obvious to me that the former is trivial and the latter is outrageous, but I wouldn’t have learned that from reading this book).
I’m also disappointed that the book never takes the perspective of the villains to ask why they thought they could get away with bad accounting. Were they all confident that perpetually rising stock prices would ensure that investors would never complain? Could they have have thought they would make enough money before getting caught to profit even if they were punished? In some cases I can guess why the answer might have been yes to one of these, but in most cases I’m as puzzled as I was before reading the book.
The book suggests a number of signals that investors might look for to detect fraud. But none of them are valuable enough to change the way I read financial reports. A few, such as sales growth not meeting expectations or rising inventory / sales ratios, are valuable signs of an overrated company even though they rarely indicate accounting problems. Most of the signals the book recommends involve things like increases in receivables where there’s no obvious way to distinguish routine fluctuations from changes that indicate problems, so I suspect the number of false alarms would make these signals useless.
I suspect that avoiding the stock market during bubbles is a more practical and effective way of avoiding harm from accounting fraud than trying to follow this book’s advice. I’d guess that 10% of investors will learn to avoid bubbles if they try, but I doubt more than 1% will succeed at identifying fraud. If you do try to identify fraud, pay more attention to people such as Jim Chanos who have found ongoing frauds than to books such as this that only do post-mortem analysis.
The book claims that a benefit of Sarbanes-Oxley is that it restored investor confidence in corporate financial statements. This seems misguided. The stock market decline that prompted Sarbanes-Oxley was largely due to mistaken extrapolations of real trends in internet-related profits. Many investors prefer to exaggerate the role played by fraud because it distracts attention from the mistakes they made at the peak of the bubble. It’s unclear whether increased investor confidence is desirable. Accounting fraud is most common at peaks of bubbles because investor confidence makes it temporarily easier to avoid questions about suspicious accounting practices. Stock markets appear to function best with moderate amounts of suspicion among investors to help keep corporate reports honest.
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Restaurants almost universally try to bundle cheap food with cheap service and expensive food with expensive service. Often this makes sense. But when I just want food, expensive service can be slow enough to be less desirable than McDonald’s style service. But that doesn’t mean I want cheap food.
A few weeks ago I ate at the Mobil station in Lee Vining (just outside of Yosemite) with some fellow backpackers just before heading to the mountains. We each paid more than $25 a person for our dinner, and got food that looked and tasted like I would expect from a $25+ meal at a moderately fancy restaurant, yet the service was fairly close to fast food service – we ordered at a cash register, and picked our food up at a counter (although it probably took 3 or 4 minutes longer than McDonald’s does).
Why haven’t I seen any other restaurants that imitate this style? It appears to work there (it was crowded, but since that was a holiday weekend, I can’t tell how typical that was). If there were such restaurants near my home, I’d expect to eat at them more than once a month.
Book review: Black Rednecks And White Liberals by Thomas Sowell.
Thomas Sowell is a pretty smart guy. It’s unfortunate that he wastes his skills on reinforcing peoples’ existing political opinions. Much of what he says in this book is right, but the new ideas it offers don’t seem like they ought to change the political opinions of anyone who has thought much about racial politics. And the old but wise arguments are written in a style that seems designed to turn off anyone who isn’t already a fan of Sowell’s ideas.
He presents interesting evidence that the culture of black ghettos came from parts of Britain that were uncivilized at the time its bearers moved to the southern U.S. This is the kind of subject where it’s virtually impossible for most readers to tell whether he’s being objective or selecting evidence to fit his biases. More importantly, it’s hard to tell why it matters. Some people pay lip service to the authenticity of black culture, but I find it hard to believe that the origins of the culture several centuries ago plays an important role in peoples’ choice to adopt the culture.
One interesting aspect of Sowell’s story is that the large migration from the rural south to the urban north after WWII did not result in the usual assimilation of the migrants into the culture of the area they moved to. How much of that was due to the number of migrants, to their culture, or to their race? Sowell ignores this subject.
Sowell’s argument that western civilization was responsible for the nearly worldwide abolition of slavery seems mostly right, but I’m disturbed by his exaggerations. He misleads readers into thinking that the first abolitionists were western, but a quick web search told me that Cyrus the Great wanted to abolish slavery worldwide two millennia earlier.
There are several places in the book where he makes confident, unsupported assertions as if they were certain, when I doubt anyone has enough evidence to make anything better than a rough guess. For instance, he thinks George Washington couldn’t have gotten a prohibition on slavery into the constitution without driving the south out of the union (plausible, but it depends on hard-to-verify assumptions about his powers of persuasion), and that slavery would have lasted longer without the union (a controversial enough claim that abolitionists such as William Lloyd Garrison seemed to reject it, claiming the north would be a better haven for runaway slaves if it seceded and repealed the Fugitive Slave Law). There are probably some leftists who unfairly attack Washington for failing to accomplish more than he could possibly accomplish, but I don’t see signs that they get respect from anyone who would listen to Sowell.
I’m quite suspicious of Sowell’s claim that Hitler’s pretenses of having been provoked into military action were intended only to fool people in Germany. Even if people in other countries had enough information to know Hitler was lying, it’s easy to imagine that a fair number of them were looking for a way to rationalize neutrality, and that Hitler was helping them to fool themselves.
Nick Bostrom has a good paper on Astronomical Waste: The Opportunity Cost of Delayed Technological Development, which argues that under most reasonable ethical systems that aren’t completely selfish or very parochial, our philanthropic activities ought to be devoted primarily toward preventing disasters that would cause the extinction of intelligent life.
Some people who haven’t thought about the Fermi Paradox carefully may overestimate the probability that most of the universe is already occupied by intelligent life. Very high estimates for that probability would invalidate Bostrom’s conclusion, but I haven’t found any plausible arguments that would justify that high a probability.
I don’t want to completely dismiss Malthusian objections that life in the distant future will be barely worth living, but the risk of a Malthusian future would need to be well above 50 percent to substantially alter the optimal focus of philanthropy, and the strongest Malthusian arguments that I can imagine leave much more uncertainty than that. (If I thought I could alter the probability of a Malthusian future, maybe I should devote effort to that. But I don’t currently know where to start).
Thus the conclusion seems like it ought to be too obvious to need repeating, but it’s far enough from our normal experiences that most of us tend to pay inadequate attention to it. So I’m mentioning it in order to remind people (including myself) of the need to devote more of our time to thinking about risks such as those associated with AI or asteroid impacts.
Book review: Why Not?: How to Use Everyday Ingenuity to Solve Problems Big And Small by Barry Nalebuff and Ian Ayres.
This is a very entertaining and somewhat thought-provoking book. I’m uncertain whether it had much effect on my creativity. It certainly demonstrates the authors’ creativity, and gives some insights into how their creative thought processes work. But it’s probably more valuable as a collection of interesting ideas than it is as a recipe for creativity.
While they focus more on presenting interesting ideas than on evaluating how well they would work, the do a decent job of anticipating problems and understanding the relevant incentives.
Possibly the most important idea is mandating anonymity of political campaign contributions (see also the book Voting with Dollars) as an alternative way of ensuring that it’s hard for contributions to influence politicians votes, with plausible suggestions about how to ensure that it’s hard for donors to evade the anonymity rule.
Their examples often leave me wondering why the ideas they describe are so little known (e.g. the anonymity requirement has been tried in 10 states for judicial elections – why hasn’t that been reported widely?).
Another interesting idea is how tests of black boxes in cars (similar to those in planes) cause drivers to drive much more safely (20 to 66 percent declines in accident rates – “Fear of getting caught may be a more powerful motivator than fear of getting killed”).
I am disappointed that it doesn’t have an index.
Book review: How to Spend $50 Billion to Make the World a Better Place, edited by Bjorn Lomborg.
This book makes plausible and somewhat thought-provoking claims about how an altruist ought to spend money to provide the most benefit to the needy. It concludes that high priorities should include control of HIV, malaria, malnutrition, and trade barriers.
It appears to come close to being a good book. It addresses fairly good questions about important issues. Unfortunately, it has been simplified for readability to such an extent as to prevent it from accomplishing much. Its arguments aren’t sufficiently detailed or backed by references for me to evaluate them. So they were probably intended to be accepted as a result of the authors’ authority. But their credentials leave plenty of room for doubt about how much deference their authority deserves.
So I’m left unsatisfied, and highly uncertain whether I ought to read the more detailed version of this book (Global Crises, Global Solutions).
Book review: The Purchase of Intimacy by Viviana A. Zelizer
This book provides a convincing argument that even though many people talk as if intimacy and the exchange of money belong in separate spheres that would contaminate each other if mixed, most people regularly behave in ways that mix them. She provides an alternate view under which a more narrow set of restrictions on the use of money helps prevent specific types of relationships from being transformed into some less desired category of relationship.
The arguments are phrased to appeal to a wide range of ideologies (but probably not the religious right). But the style is dry, and the numerous legal cases and other examples quickly become tedious and often unneeded. It’s hard to imagine what kind of person would want to read more than the first 100 pages plus the final chapter.
She uses a broader definition of intimacy than I expected, but provides plenty of hints as to why that is appropriate.
One nice example of her evidence is the fact that buying a pet doesn’t prevent people from loving the pet.
One strange passage which raises a few doubts about the otherwise apparently good research behind the book is the definition of “the unfamiliar term polyamory” which makes no reference to love and hints that it typically refers to non-romantic relationships.
One obstacle to replacing proprietary peer-reviewed journals with open alternatives is the difficulty of getting good peer review.
The approach of having authors pay publishers to arrange the peer review will probably have some success, but appears to be a recipe for much slower than optimal migration to open publishing due to the incentives it provides for authors to stick with proprietary journals.
More radical alternatives usually raise doubts about whether their quality will rival traditional peer review, due to lack of incentives for someone to ensure that the peer review is done by disinterested peers.
My idea is to have a system where anyone can review papers that have been registered within the system. The reviews would be made public, without identifying the reviewer.
The system would reward reviewers with a reputation. Reviewers would have their reputation score increased if a paper they positively review is widely cited, or a paper they negatively review is retracted (by a larger amount, to offset the lower frequency of this result).
It ought to be possible to convince universities to give this score some weight in tenure decisions, and if so that would ensure an abundant supply of reviewers who are at least as objective as under the current system.
The simplest implementation of this would impair the anonymity of reviewers by enabling people to connect changes in scores with the timing of citations and retractions. That could probably be dealt with by adding a random delay before a score is recalculated.
The ideas I recently described about the similarities between abolishing slavery and debtors prisons have got me thinking about the similarities between no-fault divorce and the ease with which an employer can dismiss employees.
Attitudes about whether the breakup of a romantic relationship indicate that someone was at fault have influenced how easy it is to end such relationships. In subcultures I see here in Silicon Valley where it isn’t expected that people will assign any blame when a relationship ends, there is less cost to breakups (the people involved are more likely to remain friends). This means there is probably more trial and error in picking relationships (possibly at the cost of each individual relationship being valued less than in cultures where people are expected to make a marriage last a lifetime).
Silicon Valley also has a culture which attaches little importance to an employee leaving a job, and I suspect this extends to employees who get fired as well. The relatively high turnover means more acceptance of trial and error by both employees and employers, less damaging disputes when an employee leaves, and ease of a former employee getting a new job. This contributes to Silicon Valley’s success at enabling startups. (These comments are loosely based on my recollection of Annalee Saxenian’s book Regional Advantage).
Are these two sets of phenomena symptoms of one underlying attitude?
Is the casual attitude toward romantic relationships producing advantages similar to the advantages that Silicon Valley produces for startups?
Can a better understanding of these similarities help spread the Silicon Valley attitude toward employment to other regions?
The jury system in the U.S. originated in times when most communities were small enough that jurors were likely to feel close enough to defendants to have tribal/friendship/etc desires not to convict someone without cause, and to be sufficiently at risk from a defendant’s future crimes to take some care not to acquit the guilty. But today, those motives have broken down in many urban and suburban places, and trials are often decided by those who are too dumb to get off jury duty.
I don’t have good ideas for ensuring that jurors are chosen so that they feel like they’re part of the same small community as the defendant, so I’m hoping instead to create new incentives for jurors to care about verdicts.
Simply increasing the pay for serving on a jury would help to avoid the problem of jurors being selected for low intelligence, but I can’t tell how much of the problem that would solve.
I propose a additional ways of rewarding jurors based on results. If the jurors acquit, the jurors could get some large payment in 5 or 10 years if the defendant commits no crimes during that time, but no further payment if the defendant commits a crime. If the jurors convict, the jurors could get some large payment in 5 or 10 years unless the defendant has been exonerated or the conviction reversed on appeal.
The size of the payments would need to be carefully calibrated so that the average award is the same for juries that convict as it is for those that acquit.
Since it would take forever for the government to work out all the details needed to translate these ideas into a fair and predictable system, I’m wondering whether a private charity could implement them. Presumably there are significant legal obstacles to many kinds of payments to jurors, since it’s easy for such payments to be intended to serve the interests of one party to the trial. I can’t tell whether the relevant laws are broad enough to prohibit desirable incentives, or if so whether it’s feasible to relax those restrictions.