Hugh Hendry channels his anti-Douglas Adams...

...and calls out Jeffrey Sachs at the same time (about time somebody did).

"When you bring on a professor, and when you bring on a politician, they are unaccountable. If Jeffrey's wrong, you know what, he will survive in tenure. If I'm wrong, I'll go bankrupt, right? Who do want to bet with?"

That statement, in all its simplicity, is a succinct, powerful argument at the heart of prediction markets, and more generally, for using all different types of markets as a discovery mechanism.

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People who have an economic

People who have an economic incentive to be right (about particular subject matter) are specialists working for a living in the market economy. They tend to be right about their domain. (In particular, pretty much everybody including small children selling candy and shoeshines in third world cities tends to be right about the simple arithmetic of money, since everyone deals with it and anyone who fails will starve.) Someone who specializes in lens making has an economic incentive to be right about optics - etc. (that comes to mind because of Galileo). Good science is economically interested science. The science that we should suspect is science whose funding is not directly tied to its truth or falsehood. Professors are an example but this extends generally to all researchers to the extent that they are insulated from the practical application of their discoveries. This applies especially to government-funded researchers, making government-funded science an especially dubious activity.

This is less true of bullshit specialties, such as religion (whose proof is to be sought in the afterlife) and medicine (at least until recently). The placebo effect presumably has had a great deal to do with the tendency of medicine to be overrun with quacks such as the goat testicle millionaire. But most people need to know the reality of their business in order to prosper.

This is not to say that every lens maker is a Galileo, but that we should not be too surprised that Galileo was a lens maker. Nor does it preclude others from building upon the discoveries of those immediately involved in the economy, though it suggests that the closer the relationship, the better. A possible example is the development of probability, in which "experimentalists" who actually gambled their own money, cooperated with mathematicians who were able to come up with general theories accounting for the observations of the gamblers.

I didn't get the biographical

I didn't get the biographical detail on Galileo exactly right, but as far as I can determine he was trying to make money from his telescope, which had obvious uses for navigation.

A distinction.

A distinction. Clarifying:

The science that we should suspect is science whose funding is not directly tied to its truth or falsehood.

I don't have in mind a panel of peers who decide whether to extend funding based on their assessment of the truth or falsehood of the science. What I have in mind is a situation in which truth and falsehood lead to economic success or failure regardless of what anyone thinks. For example, a telescope will either show true magnified images of faraway things or not, and therefore will either help navigators or not. If Galileo's telescope didn't actually work, then if merchants went ahead and bought them anyway, they would experience failure, and after a while Galileo would experience failure.

For a more recent example, a hard drive will either fail or not. If a company's hard drives fail, then even if the consensus opinion of the company's customers is that the drives work, nevertheless the drives will fail, and failing, will ruin the customers, whose ruin will lead to the ruin of the company.

In this way, Galileo's telescope, and WD's hard drives, are tested in a way that overrides consensus, and ultimately defeats false consensus. In this way, then, science is tested by reality in a way that overrides "scientific consensus". False consensus is defeated, and scientific truth prevails despite false consensus.

But the more a scientist's funding depends on the state, the more insulated he is from any real test of his output. The employee of the government is immediately answerable to his employers, and only distantly answerable to reality. And the state can effectively hold reality at bay for a very long time.

When you bring on a

When you bring on a professor, and when you bring on a politician, they are unaccountable. If Jeffrey's wrong, you know what, he will survive in tenure. If I'm wrong, I'll go bankrupt, right? Who do want to bet with?

There is one important distinction worth making. If Hugh Hendry is wrong he will go bankrupt, but by itself this only gives us greater confidence that Hugh Hendry is willing to bet his future on his claim. This by itself does not go very far toward reassuring us that Hugh Hendry is actually right. History is littered with the corpses of people who thought they were right and were wrong.

What would give us greater reassurance is a track record. Over time, the overconfident fools are ruined and eliminated from the market, so that the ones still standing are the ones who have been proven right often enough to stay in the game.

The reason I think this is important is that often I read about somebody challenging somebody else to a bet, and usually when the challenged is issued, the topic of prediction markets comes up. What I'd like to point out is that a single bet is unlike a prediction market in that the overconfident fools have not yet been eliminated.

And similarly, if I am to believe Hugh Hendry, it is not merely because, today, he stands to go bankrupt if he's wrong. A lot of people go bankrupt. If I am to believe him, it is also because he has participated in the market for long enough, and experienced enough success, to demonstrate that he is probably not a fool.

But a final problem with believing Hugh Hendry is that the financial markets are littered with the corpses of people who had grown rich off a string of good luck, who seemed to know the future, but who in the end proved merely to have been lucky - up to a point.

My comment...

...was made under the assumption that prediction markets are an iterative environment.

Clearly, this one data point alone does not prove that Hendry is more correct than Sachs.

Confidence racket

"When you bring on a professor, and when you bring on a politician, they are unaccountable. If Jeffrey's wrong, you know what, he will survive in tenure. If I'm wrong, I'll go bankrupt, right? Who do want to bet with?"

That statement, in all its simplicity, is a succinct, powerful argument at the heart of prediction markets, and more generally, for using all different types of markets as a discovery mechanism.

Three thoughts:

1. That statement, in all its simplicity, is a succinct, powerful example of how we got into the latest economic meltdown. Why regulate financial markets? Surely those guys buying and selling the credit default swaps know what they’re doing. After all, they’d go bankrupt if they didn’t!

2. Yes, a person can lend greater credibility to his words by backing them up with deeds. However, a person can reduce the credibility of his words by entering into financial arrangements that give him a financial interest in influencing the beliefs of others.

True, Sachs may not suffer much of a financial loss if his predictions prove to be inaccurate. But as far as I know, Sachs also has no incentive to say anything OTHER than what he believes to be accurate. In contrast, Hendry seems to imply that he has placed such a large bet on the collapse of the Greek economy (or something) that he is at risk of going bankrupt if he’s wrong. That would indicate that he has a very substantial interest in discouraging people from going to the aid of the Greek government (or whatever). This greatly diminishes the confidence I have in his words.

In sum, I’m not saying that Hendry’s predictions about the future are less reliable than Sachs’s. I’m saying that I have no cause to doubt that the predictions Sachs TELLS US ABOUT are a candid reflection of Sachs’s beliefs; I can’t make an analogous claim about Hendry.

3. Finally, what exactly is the “bold prediction” Hedry is asking us to rely on? He’s predicting that the Greek economy (or something)can’t be saved, so we shouldn’t even try. And he says that if he’s wrong, he’ll go bankrupt. Golly, with such a big downside, I guess we should believe him.

But what is the downside to believing him if he is wrong? Following his bold statement about going bankrupt, he acknowledges that following his advice would mean dooming Greece (or Europe in general?) to greater economic turmoil; millions might go bankrupt. And if Hedry is wrong, they would endure this fate needlessly. Yet Hendry would nevertheless come out smelling like a rose, because if we give up any effort to save Greece then OF COURSE Greece will fail. Absent an effort to save the Greek economy, Hendry would face NO risk of falsification. Far from making a bold prediction, he’s making a self-fulfilling prophecy.

Sachs may well be mistaken; Greece’s economic collapse may be unavoidable. But Sachs is at least engaged in the pursuit of an interesting objective: staving off economic collapse.

Hendry implies that Sachs is free to be cavalier in his assessment because Sachs doesn't have anything at stake. And I’m not saying Hendry’s wrong. But given the choice between one guy who is struggling with the challenge of sparing millions of people from the consequences of a (greater) economic collapse, or a second guy who is disparaging the first guy’s efforts, I’m not sure I’d apply the label “cavalier” to the first guy.

Hendry is like the vet who says, “Nope, we can’t fix this horse; let’s shoot it.” Sachs is like the vet who says, “Wait, I think there’s one more thing we can try.” Hendry may be right, but if you love the horse then you’re going to be inclined to give Sachs a very sympathetic hearing. Ironically, the only way Hendry can be vindicated is if politicians implement Sachs’s plan and it fails to save the Greek economy. If politicians agree with Hendry and abandon the effort, then we’ll never know if his predictions were right or not.

That statement, in all its

That statement, in all its simplicity, is a succinct, powerful example of how we got into the latest economic meltdown. Why regulate financial markets? Surely those guys buying and selling the credit default swaps know what they’re doing. After all, they’d go bankrupt if they didn’t!

Actually, half of them did, and the other half didn't.

Your sarcastic statement is actually right on the money. Why exactly would a regulator know any better about the toxicity of various assets like CDOs if people who are betting their money don't? Back in 2005, there were about 5-6 people who figured out exactly how bad the CDOs were. Eventually, more and more people figured it out, but most people on the Street had no idea until the very end.

The ones who figured it out early made out handsomely. They had all the incentive in the world to seek out information, opportunities, inefficiencies because they were looking to profit. Michael Burry had to "bury" his head in mountains of paperwork to trace the packaging of subprime mortgages into bonds into CDOs. Why did he take the time and effort to do so? Because he was managing a shitload of money and wanted to make a shitload of money.

What are the chances that a Regulation Czar, even with a horde of minions at his service, would have figured out what Burry figured out? I'd say small to none.

It's easy to say, "Yes, more regulation." Here, "regulation" takes on a divine quality like manna from heaven, something we could instantly produce by wishing it true. Financial industry regulation is inherently fruitless for the same reason that it's difficult to beat the market: the information is dispersed and quickly incorporated.

What should've happened? Failure. The Burrys of the world deserve more capital because they figured out the market better than anyone else. The retards at AIG deserve to lose their money because they bet a shitload of money on CDSs on CDOs they didn't understand. The big firms on Wall Street were bloated elephants that were ready to get slaughtered in the evolutionary information-maximizing arms race of the financial ecosystem. The end result would've been a leveling of Wall Street. Most of the firms that were on the right side of the CDSs were small smart firms and those on the other side were large bloated 10,000+ employee firms.

But our masters' testicles shriveled up, and in the folly that defines the modern age of policy, the big retarded firms were actually rewarded for their shittiness!

Sachs may well be mistaken;

Sachs may well be mistaken; Greece’s economic collapse may be unavoidable. But Sachs is at least engaged in the pursuit of an interesting objective: staving off economic collapse.

Hendry is like the vet who says, “Nope, we can’t fix this horse; let’s shoot it.” Sachs is like the vet who says, “Wait, I think there’s one more thing we can try.” Hendry may be right, but if you love the horse then you’re going to be inclined to give Sachs a very sympathetic hearing.

If we're going with analogies, then the death of a horse doesn't fit. After defaults, societies survive and move on. They're usually much healthier for it.

Note how early on Hendry says that we can either have 20 years of moderate pain or 3 years of intense pain. He favors the latter. I've mentioned the same on this blog wrt the US. I wish it would default tomorrow.

A better analogy is an alcoholic who you're trying to enlist in a rehab program, but he insists he can change his ways alone. He can continue spending all the family's money on booze for the next few years while he tries to fix himself and in all likelihood still end up addicted, or he can swallow his pride and enter rehab now. And let's face it, our govts are junkies, plain and simple.

Except in this case, when the

Except in this case, when the compassionate vet says "wait, lets do this one more thing" it means that the horse is about to receive all sorts of tax payer sponsored goodies to stave off the consequences of its prior stupidity.

If Sachs were referring to something that didn't require so much government action and financial support it would be a different story, but he's not. Billions will be spent to continue propping up wastefulness.

Whereas with Hendry, he says a very basic and common sense thing, which one would have to be an idiot or charlatan not to support; Let them all, the entire system sink or swim on its own. based on it's real merits and defects, instead of whitewashing it all in a sea of bailouts and more "loans". If they are indeed in no danger of default (the Euro countries, as Sachs seems to think they aren't) then let them handle their own debts, no bailouts.