Passion, data, math & bullshit, Part 2

Well it appears that you have followed the advice of the narrator from Rocky & Bullwinkle and “tuned in next time” to read Part 2 of my rant on what I am passionate about, which happens to be data, math and cutting through the bullshit.

Hmm … may I respectfully suggest that you consider getting a hobby to fill your spare time, or failing that, a job? Suit yourself ….

As I was saying, much of our social and economic problems, both national and personal, are a result of believing  the wrong data, which is related to not understanding how to evaluate data. This is compounded by the fact that some people have a vested interest in promoting false data.

I never lost any money on derivatives because I never invested in them. It never made sense to me that you could bundle up a bunch of mortgages by people who were high risk of not paying their loans and adding them all together made a good investment. It shouldn’t have made sense to you either.

To give another example, one of the reasons that Bernie Madoff was able to get away with his scheme for so long is that his victims didn’t even know what their financial advisers were investing in. Those advisers apparently did not understand the contradiction between Madoff’s results and all of the data on financial markets.

What about all of those people with graduate degrees who are supposed to be monitoring investments? Didn’t they raise a red flag? According to The Economist, a few people did and their firms advised investors to stay away from Madoff’s fund.

What about the others? Funny thing, that, but a very large percentage of students over the years have told me they didn’t need to learn all of that math because they were never going to use it. I have to agree that it’s pretty logical that you aren’t going to use something you don’t know. Fact is, if you don’t feel very comfortable with the equations and programs that are supposedly telling you that you are getting 10% returns year after year or that batches of high-risk loans can be bundled together to be a giant low-risk, then you don’t assume it’s bullshit, you just assume you don’t understand it. You’re afraid to say the emperor has no clothes because you think it might reveal that you’re not as brilliant as you think you’re supposed to be.

I’ll reveal my deep, dark statistician secret. There are times when I read some conclusion, procedure, equation or program and I don’t understand it. Sometimes I have to read it two or three times and still don’t get it. Sometimes I ask the house rocket scientist and he doesn’t get it. So, I download articles, buy a book or two, ask other people I know, ask questions on a forum or mailing list, read another book, try coding it myself, write equations on a piece of paper, scratch those out, swear, and try again. Sometimes the rocket scientist will get interested, too, and the housekeeper will come in the morning to find scraps of paper with equations, all of them wrong, littering the house, and the world’s most spoiled twelve-year-old complaining that she is dying because no one would quit what they were trying to figure out and make her chocolate milk.

If someone claims that the Beijing Multiplier (something I just made up) triples the accuracy of predictions of the birth rate compared to a regular regression equation with the same independent variables, I’m likely to download a set of data on birth rates in 40 countries over the past ten years and check.

I was watching a documentary on the whole Madoff scandal where the interviewer asked one of his early partners, who had made millions,

“Did you ever ask to see the equations he was using, how he was doing this?”

and the man laughed and said,

“No, I wouldn’t have understood it if he’d shown them to me.”

I thought to myself, how could you invest millions of dollars and not know what was going on?

Lately, I have been hearing things that are just as stupid and not many people seem to be questioning them. For example, that the effect of laying off government workers will be to decrease unemployment.

Let me explain this in simple terms. Unemployment is the number of people without jobs who are looking for one. If a bunch of people lose their jobs, then there will be more people without jobs. Those people all bought stuff like cars, houses, Pomeranians, dog food to feed to the Pomeranians, pet-sitting services, car washes and McDonald’s cheeseburgers. If you lay those people off, the immediate effect is that they will buy less stuff and so all the car-, hamburger- and Pomeranian-salespeople will have less money.

There is a theory that by laying those people off that EVENTUALLY deficits will shrink, credit will become more available and businesses will add jobs. I haven’t seen a lot of data to support that theory. In fact, what data I have seen shows that businesses add jobs when they expect to have increased work  – sales, production – for those workers and it seems that laying off workers will have the opposite effect.

I’ve seen no data at all to support that it will be reasonable to REDUCE taxes because the numbers of dollars saved by laying people off never add up to the whole deficit, much less a surplus.

Here’s another example – arguments have been made that if we don’t award multi-million dollar bonuses to Wall Street financiers that they will not work as hard to make money and that we won’t get people who are as smart. Somehow this argument ignores that the people investing with Madoff and running banks that received billions in government bailout funds got bonuses anyway. One has to ask how smart they really are, unless smart is defined as being able to get other people to give you money, in which case Madoff and his fellow fund managers are very smart indeed.

I would like to see some data correlating salaries on Wall Street including bonuses with figures like GNP and unemployment. I’d also like to see data correlating tax rates on the highest 1% and 10% of incomes with unemployment rates, GNP and GDP, both in the U.S. and globally.

What good are data? Data give us the raw materials and mathematics gives us the tools to cut through the bullshit that is thrown at us far too often, both intentionally and by others who have accepted and passed on, unquestioning, whatever they were told.

What really gets me is the latter, the people like Madoff’s colleague who said he wouldn’t have understood the equations if he’d seen them.

DON’T ACCEPT NOT KNOWING WHAT’S GOING ON !!!!!

Getting rid of the bullshit – I think that’s something worth being passionate about.