Book review: The Misbehavior of Markets: A Fractal View of Risk, Ruin & Reward by Benoit Mandelbrot.
Mandelbrot describes some problems with financial models that are designed to provide approximations of things that can’t be perfectly modeled. He pretends that pointing out the dangers of relying too much on imperfect approximations shows some brilliant insight. But mostly he’s just translating ideas that are understood by many experts into language that can be understood by laymen who are unlikely to get much value out of studying those ideas.
His list of “ten heresies” is arrogantly misnamed. Sure, there are some prestigious people whose overconfidence in financial models leads them to beliefs that are different from his “heresies”, but those “heresies” are closer to orthodoxies than they are to heresies.
His denial of the equity premium puzzle is fairly heretical, but his argument there is fairly cryptic, and relies on suspicious and poorly specified claims about risk.
He says market timing works, but the strategy he vaguely hints at requires faster reaction times than are likely to be achieved by the kind of investor this book seems aimed at.
His use of fractals doesn’t have any apparent value.
Mandelbrot is primarily a mathematician with limited interest in understanding how markets work. One clear example is his mention of a time when Magellan “was still a small fund, too small for any detractors to argue that its size alone gave it a competitive edge”. Any informed person should know that’s completely backward – larger funds have a clear disadvantage because they are limited to trading the most liquid investments.
Another example of a careless mistake is when he claims the evidence suggests basketball players have hot streaks, seemingly unaware that Tversky and others have largely debunked that idea.
Book Reviews
Book review: Global Catastrophic Risks by Nick Bostrom, and Milan Cirkovic.
This is a relatively comprehensive collection of thoughtful essays about the risks of a major catastrophe (mainly those that would kill a billion or more people).
Probably the most important chapter is the one on risks associated with AI, since few people attempting to create an AI seem to understand the possibilities it describes. It makes some implausible claims about the speed with which an AI could take over the world, but the argument they are used to support only requires that a first-mover advantage be important, and that is only weakly dependent on assumptions about that speed with which AI will improve.
The risks of a large fraction of humanity being killed by a super-volcano is apparently higher than the risk from asteroids, but volcanoes have more of a limit on their maximum size, so they appear to pose less risk of human extinction.
The risks of asteroids and comets can’t be handled as well as I thought by early detection, because some dark comets can’t be detected with current technology until it’s way too late. It seems we ought to start thinking about better detection systems, which would probably require large improvements in the cost-effectiveness of space-based telescopes or other sensors.
Many of the volcano and asteroid deaths would be due to crop failures from cold weather. Since mid-ocean temperatures are more stable that land temperatures, ocean based aquaculture would help mitigate this risk.
The climate change chapter seems much more objective and credible than what I’ve previously read on the subject, but is technical enough that it won’t be widely read, and it won’t satisfy anyone who is looking for arguments to justify their favorite policy. The best part is a list of possible instabilities which appear unlikely but which aren’t understood well enough to evaluate with any confidence.
The chapter on plagues mentions one surprising risk – better sanitation made polio more dangerous by altering the age at which it infected people. If I’d written the chapter, I’d have mentioned Ewald’s analysis of how human behavior influences the evolution of strains which are more or less virulent.
There’s good news about nuclear proliferation which has been under-reported – a fair number of countries have abandoned nuclear weapons programs, and a few have given up nuclear weapons. So if there’s any trend, it’s toward fewer countries trying to build them, and a stable number of countries possessing them. The bad news is we don’t know whether nanotechnology will change that by drastically reducing the effort needed to build them.
The chapter on totalitarianism discusses some uncomfortable tradeoffs between the benefits of some sort of world government and the harm that such government might cause. One interesting claim:
totalitarian regimes are less likely to foresee disasters, but are in some ways better-equipped to deal with disasters that they take seriously.
Book review: Monkeyluv: And Other Essays on Our Lives as Animals by Robert M. Sapolsky.
This collection of essays starts out by rehashing nature/nurture arguments that ought to be widely understood by now, but then becomes mostly entertaining and occasionally quite informative.
He mentions one interesting study which questions sexual selection arguments put forward by Geoffrey Miller and others about animals selecting mates with better genes. The study shows that female Mallards produce stronger offspring after mating with more attractive males because they invest more resources in those eggs, rather than because of anything that seems connected to the genes provided by the males.
He helps explain the attraction of gambling by describing experiments which show larger dopamine releases due to rewards that are most uncertain (the subject thinks they have a 50% chance of happening) than is released when there’s more certainty (e.g. either a 25% chance or a 75% chance) of the same reward.
One place where I was disappointed was when he described “repressive personalities”, which he made seem quite similar to Aspergers, and made me wonder whether I fit his description. “dislike novelty”? My reaction to novelty is sufficiently context-dependent that any answer is plausible. “prefer structure and predictability”? Yes and usually. “poor at expressing emotions or at reading the nuances of emotions in other people”? That’s me. “can tell you what they’re having for dinner two weeks from Thursday”? I could probably predict 5 days in advance with 50% accuracy, so I’m probably closer than most people. So I Googled and found another description (mentioning the same researcher that Sapolsky mentioned) in the Sciences and find descriptions of “repressive personality” that seem wildly different from me (“a strong personal need for social conformity” and “agreement with statements framed as absolutes, statements loaded with the words never and always”). Who wrote this competing description? Wait, it’s the same Sapolsky! It looks like his current description reuses a small piece of an older article with inadequate thought to whether it’s complete enough.
Book Review: Let Their People Come: Breaking the Gridlock on Global Labor Mobility by Lant Pritchett.
This book is primarily written for economists and academics in related fields, but most of it can be understood by an average person.
I was a little hesitant to read this book because I suspected it would do little more than reinforce my existing beliefs. There were certainly parts of the book that I would have been better off skipping for that reason.
But one important effect of the book was to convince me that the effects on the poor of migration to wealthier countries is so large compared to things like “foreign aid” and free trade that anyone trying to help the poor by influencing government policies shouldn’t spend any time thinking about how to improve “foreign aid” or trade barriers.
I’ve long been wondering how to respond to remarks such as Jimmy Carter’s ‘We are the stingiest nation of all’ based the U.S.’s low “foreign aid” to GDP ratio. Pointing out that “foreign aid” is mostly wasted or even harmful requires too much analysis of lots of not-too-strong evidence. Pritchett shows that the wealth affects of allowing the poor to work in rich countries should dominate any measure of how those rich countries treat the poor. By that measure, adjusting for country size, the U.S. ranks better than countries in the EU, but is embarrassingly callous compared to the United Arab Emirates, Kuwait, and Jordan.
The book addresses both moral and selfish arguments for restricting immigration. It treats the selfish arguments (even those based on myths) as problems that can’t be overcome, but which can be reduced via compromises. These pragmatic parts of the book are too ordinary to be worth much.
The sections about moral arguments are more powerful. He clearly demonstrates a large blind spot in the moral vision of those who think they’re opposed to all discrimination but who aren’t offended by discrimination on the basis of the nationality a person was assigned at birth. But he exaggerates when he claims that nationality is the only exception to a widely agreed on outrage at discrimination based on “condition of birth”. Discrimination based on date of birth still gets wide support (e.g. the drinking age). And if you’re born as a conjoined twin, don’t expect much protection from surgery that looks about as moral as brain surgery designed to cure a child’s homosexuality should.
Perhaps this book is one small step toward creating a movement with a slogan such as “Tear down that kinder, gentler Berlin wall!”.
F.M. Busby’s The Breeds of Man was written in 1988. Many of his expectations for what was then the future are surprising not just because they’re wrong, but because it took me a fair amount of effort to remember that back in 1988 I wouldn’t have dismissed them as silly.
Most of the book takes place in an unspecified year that is no earlier than 2005 and probably no later than 2020. One of the most striking features of the story is that a powerful person is able to exert pressure on the news media to kill a story that at least one reporter is working on. The story would have generated enough publicity that in 1988 it would have been somewhat doubtful whether it could have been suppressed, but it would have been the kind of possibility that in 1988 I would have expected to generate some entertaining debates. But today, the idea that the reporter couldn’t advance her career by taking the story to an alternate news channel seems too foreign for even a moderately crazy conspiracy theorist to propose.
The book is not particularly bad as science fiction goes, but it’s full of places where I’m almost shocked at how primitive the flow of information seems. And when I think back, I remember that for more than half my life I lived in that primitive world.
Book review: Human Accomplishment: The Pursuit of Excellence in the Arts and Sciences, 800 B.C. to 1950 by Charles Murray.
I was reluctant to read this book but read it because a reading group I belong to selected it. I agree with most of what it says, but was underwhelmed by what it accomplished.
He has compiled an impressive catalog of people who have accomplished excellent feats in arts, science, and technology.
He has a long section arguing that the disproportionate number of dead white males in his list is not a result of bias. Most of this just repeats what has been said many times before. He appears do have done more than most to check authorities of other cultures to verify that their perspective doesn’t conflict with his. But that’s hard to do well (how many different languages does he read well enough to avoid whatever selection biases influence what’s available in English?) and hard for me to verify. He doesn’t ask how his choice of categories (astronomy, medicine, etc) bias his results (I suspect not much).
His most surprising claim is that the rate of accomplishment is declining. He convinced me that he is measuring something that is in fact declining, but didn’t convince me that what he measured is important. I can think of many other ways of trying to measure accomplishment: number of lives saved, number of people whose accomplishment was bought by a million people, number of people whose accomplishment created $100 million in revenues, the Flynn Effect, number of patents, number of peer-reviewed papers, or number of meta–innovations. All of these measures have nontrivial drawbacks, but they illustrate why I find his measure (acclaim by scholars) very incomplete. An incomplete measure may be adequate for conclusions that aren’t very sensitive to the choice of measure (such as the male/female ratio of important people), but when most measures fail to support his conclusion that the rate of accomplishment is declining, his failure to try for a more inclusive measure is disappointing.
His research appears careful to a casual reader, but I found one claim that was definitely not well researched. He thinks that “the practice of medicine became an unambiguous net plus for the patient” around the 1920s or 1930s. He cites no sources for this claim, and if he had found the best studies on the subject he’d see lots of uncertainty about whether it has yet become a net plus.
Book review: Ending Aging: The Rejuvenation Breakthroughs That Could Reverse Human Aging in Our Lifetime by Aubrey de Grey and Michael Rae.
This book makes a strong argument that the most important medical need in developed countries is to cure the damage associated with aging, rather than to combat the diseases which become serious as a result of that damage. It outlines a set of solutions which, if they can be implemented, look like they would add at least a decade or two to healthy lifespans.
All of the solutions look like they have a reasonable chance of being implemented within 20 years. But the probability of all of them working within that time is a good deal lower than the probability of any one solution working, and there’s no obvious way to analyze whether we can get significant health benefits without implementing all of the solutions.
The authors seem somewhat overconfident about most aspects of their proposed solutions, but that doesn’t affect the substance if their arguments very much. Even a small chance of postponing death and disability is worth a good deal of effort.
The parts of the solutions that appear hardest are the ones that rely on techniques similar to what are already being attempted by mainstream scientists (genetic engineering to add and delete genes from most cells in the body, massive use of stem cells, and moving enzymes across the blood-brain barrier). My impressions about the effort that has been put into these techniques and the results that have been produced so far suggest that at least one of these is likely to take much longer than the book asks us to hope for. The book gives one clear example of important research not living up to the hype surrounding it when it gives arguments that most cancer research is directed toward modestly postponing cancer rather than providing a full solution to cancer. I see no obvious way for a layman to tell whether the authors are relying on similarly overhyped research.
So even though the book gives convincing arguments that the goals of medical research ought to be reframed to focus on aging as the primary threat to be solved, it’s far from conclusive about whether that should imply a large change in actual research. It may be that the hardest and most valuable tasks are the ones that are already being worked on. Or it may be that one of the critical tasks is sufficiently hard that the most important need is to invent tools that are substantially more sophisticated than what’s used in existing research (i.e. that we most need something more radical that what’s proposed in the book, such as nanomedicine).
Book review: Infotopia: How Many Minds Produce Knowledge by Cass R. Sunstein.
There’s a lot of overlap between James Surowiecki’s The Wisdom of Crowds and Infotopia, but Infotopia is a good deal more balanced and careful to avoid exaggeration. This makes Infotopia less exciting but more likely to convince a thoughtful reader. It devotes a good deal of attention to conditions which make groups less wise than individuals as well as conditions where groups outperform the best individuals.
Infotopia is directed at people who know little about this subject. I found hardly any new insights in it, and few ideas that I disagreed with. Some of its comments will seem too obvious to be worth mentioning to anyone who uses the web much. It’s slightly better than Wisdom of Crowds, but if you’ve already read Wisdom of Crowds you’ll get little out of Infotopia.
Book review: Why Humans Cooperate: A Cultural and Evolutionary Explanation by Joseph Henrich, Natalie Henrich.
This book provides a clear and informative summary of the evolutionary theories that explain why people cooperate (but few novel ideas), and some good but unexciting evidence that provides a bit of support for the theories.
One nice point they make is that unconditional altruism discourages cooperation – it’s important to have some sort of reciprocity (possibly indirect) for a society to prevent non-cooperators from outcompeting cooperators.
The one surprising fact uncovered in their field studies is that people are more generous in the Dictator Game than in the Ultimatum Game (games where one player decides how to divide money between himself and another player; in the Ultimatum Game the second player can reject the division, in which case neither gets anything). It appears that the Ultimatum Game encourages people to think in terms of business-like interactions, but in the Dictator Game a noncompetitive mode of thought dominates.
Book review: Reasonable Rx: Solving the Drug Price Crisis by Stan Finkelstein and Peter Temin.
This book provides a mediocre analysis of what is wrong with drug prices, and presents a solution that is probably a nontrivial improvement on the status quo, but isn’t the most thoughtful solution I’ve seen.
The most important complaint of the book boils down to the fact that knowledge about drug safety and effectiveness is a public good, and the current method of rewarding drug companies for producing that knowledge is mediocre (although the book presents it less clearly than that and seems as interested in blaming drug companies’ lack of altruism as it is in analyzing the incentives).
For example, it is sometimes possible to identify biomarkers which indicate that a drug will be ineffective in a patient, but that would often reduce sales of the drug.
They complain that the current focus on producing a few very profitable drugs is an obstacle to creating personalized treatments. But they do little more than imply that drug companies are misjudging the available opportunities, without presenting any clear evidence that the authors’ have better judgment about what’s feasible.
Their proposed changes to the drug industry involve separating drug development and drug marketing/manufacturing into two different sets of companies, and using a combination of subsidies and contractual price controls (negotiated by a government sponsored nonprofit) to lower the prices of drugs.
They didn’t convince me that splitting drug companies will produce any significant benefits, although I also don’t see it producing harm.
The subsidies and price controls are likely to help mitigate some of the problems created by the patent system. Their attempts to show that this solution is better than Kremer’s patent buyout proposal suggest they don’t understand how much harm patent monopolies cause. Their subsidy mechanism isn’t clearly tied to benefits (unlike proposals for prizes based on Quality Adjusted Life Years). They claim drug prize proposals set arbitrary values for drugs and that their auction system produces a less arbitrary market price, but the subsidy part of their part of their system is at least as arbitrary, and their market based prices reflect the value of an arbitrary patent duration.
Their claim that Medicare savings will pay for their subsidies seems deceptive. When estimating the Medicare savings, they appear to rely on an assumption that prices of existing drugs will drop by a large amount. Yet when estimating the subsidy costs, they appear to count only the costs of subsidizing newly introduced drugs.
They are too quick to complain about drug companies medicalizing conditions that are mere inconveniences. E.g. they say Flomax does nothing more important than reduce sleep disturbances. This ignores the evidence that sleep disturbances cause significant health problems.
The chapter “Are Drug Companies Risky?” is pointless because it only evaluates the most successful companies (i.e. those whose gambles have already paid off).