Sunday, July 31, 2011

Welcome to California, Elliot Hirshman

San Diego State University, a place I admire a lot, just hired Elliot Hirshman as its new president, at a controversial salary. I am not exactly sure what I believe about how much public university presidents and provosts should be paid, but I do know that Elliot was an excellent hire for SDSU, and therefore for California.

Elliot was Chief Research Officer at George Washington when I was there, and I served on a university committee that he chaired.  He was and am sure still is a good leader, good listener, and problem solver.  Research service for faculty at GW improved considerably during his tenure.  

If I am reading the deal correctly...

....this is not a compromise, this is a capitulation.  I am starting to think that Cornell West's characterization of Obama was correct.

Friday, July 29, 2011

Jenny Schuetz, Elizabeth Currid-Halkett and I have a new paper that has nothing to do with the debt crisis

It is here.


The art market is famous – or notorious – for auctions at Sotheby’s and Christie’s at which works by well-known artists are sold for stratospheric prices. Researchers have argued that such prices are volatile and unpredictable based on economic fundamentals, implying that at least some segment of the art market behaves irrationally. In this paper, we examine whether the broader art market, composed mostly of small galleries, is more consistent with standard economic models. In particular, we ask whether the location patterns of art galleries exhibit behavior consistent with agglomeration economies, as would be predicted for retail firms selling highly differentiated and expensive products. Using a newly developed database, we find strong evidence of agglomeration economies among Manhattan art galleries from 1970-2003. Galleries locate in highly concentrated spatial clusters, and these clusters are more likely to occur in neighborhoods with affluent households and older, more expensive housing, consistent with locating near potential consumers. We find no evidence that galleries locate in cheap, “bohemian” neighborhoods. The highest quality tier of the art market, which has been most widely studied, contains a relatively small share of gallery establishments, although these “star” galleries have a longer average lifespan than non-star galleries. Locating near other galleries also increases the longevity of firms and establishments.

Client's Traditional Living Room: Before & After

I just got photos back from a recent photo shoot with my good friend & photographer Helen Norman & her assistant, F.J. Hughes.  Remember the install I wrote about a couple of weeks ago here?   Well, my clients went on a family vacation & while they were gone, we installed the living room so they got to come home to it {almost} finished. (Minus the delayed sofa.)  Here is what the living room looked like at our first meeting:

{Now also remember my photography skills are nowhere near Helen's}

It's one of those long rooms that can be tricky with furniture-arranging. 

My client's style is traditional and she was looking for sort of a fresh, comfortable "traditional"/ for their Colonial home.  She's attracted to architectural drawings and Colonial fabrics and blues, and there's a real "Virginia" feeling about their house.  We were keeping the existing end tables, chest and bookcase and everything else would be new (or atleast new for the space.) 

For clients' designs, I typically start with a general floorplan and then get started on soft goods, which inspire me the most, and in this case it was the fabrics.  I knew I wanted to do something fairly bold on the plan's settee, and I fell in love with this overscale floral chintz, "Hollyhock," by Schumacher:        

From there we started pulling other fabrics to develop a general palette.  We selected a combination of neutral velvets and some patterned linens & cottons.  I spec'd a beautiful antique-washed wool rug that I'd seen the previous summer & couldn't get out of my mind. 

Being so overscale, and being a floral, doing the Hollyhock on a settee was a stretch for my client, but I urged her to mull it over.  It was our linchpin & I'd based the entire palette around it.  If we switched the fabric to a safer one, I knew the results wouldn't make her as happy.  {Presenting plans with a bit of "risk" in them to your clients can be challenging.  I think a designer's job is to push his or her clients a bit outside of their box, but not so far that they don't love the end results.  It's walking this line that creates a room clients really love...  I find that lots of clients push back a little on one or two presented items, which I think is good.  On items like these, I like to give my clients time to think & let the new idea sink in before we axe it all together.  Sometimes it just takes finishing up the presentation and sometimes is takes weeks to get used to an unexpected idea, but I feel that we all need to go a bit outside of our comfort zones a bit in our homes to get a really special result that will excite us...  }  My client was very willing to think on the fabric and I was thrilled when she decided to go for it.       

Here's one last pic of what the living room looked like before:

And here it is now:

We rearranged the long room so that the sofa now faces the windows and a pair of chocolate-milk-colored velvet wing chairs.  The walls were painted a soft cream to lighten up the space and we had a seagrass rug custom made (by Tolvin at the Carpet Customizer-  he's THE BEST) and layered the antique-washed wool rug over it.    

We layered the coffee table with a wooden tray holding pretties like this clay pot by Lindsey Augustine, a pair of old brass candlesticks, and an "M" candle:

I placed a large console behind the sofa and used a pair of  blue lamps by John Rosselli on top:

{The basket under the table holds a coiled snakeskin my clients found}

There are a couple of areas we didn't get photos of.  I layered in artwork - both new & old (found at Spurgeon Lewis Antiques in Old Town/ 1st Dibs).   I also created a gallery wall of my clients' collected family photos.   It's such a large wall & it has photos that span years so it really tells a story about them & who they are.   Here's a close-up of the neutral/ wheat-colored fabrics on the english arm sofa:

{The pillows are by Schumacher and the paisley throw is from my line of textiles} 

This next photo is my favorite one.  I had this image in my mind long before the room even came together & was so excited to see it in person!!  

(A couple of weeks before the room was installed -ie months after we'd ordered the furniture & selected the fabrics, I was looking through old House Beautiful Magazines and I came accross a project by Albert Hadley titled "Colonial Design"  using this exact same fabric 40 years ago in a living room and reusing the same pieces again in a 2009 project when the same clients moved to another Colonial...  I was at once both thrilled and disappointed.  Thrilled because it's Albert Hadley and because I got the instant gratification of seeing what the fabric would look like on a settee when before, I'd only imagined it, and disappointed because I felt extremely unoriginal & slow on the uptake.)

Anyway, here's what the foyer looked like before:

Small drawings were placed around the foyer on different walls.

And here's an after shot:

I reunited the collection of drawings all in a row above the chair my client found.  We restyled the table/ print in the background for this shot because we couldn't get a good one of them in their original position. (I've learned so much working with Helen!)

Without knowing about the Hadley project, F.J. dubbed the project "Colonial Chic"  which is hysterical, especially if you knew F.J.   

Anyway, I hope you liked the before & afters, and getting details of the in-between. 
Thank you so much to my very patient clients who were a dream to work with!
Have a great SUMMA weekend!

xoxo, Lauren

We're taking on new clients for this Fall!  If you'd like help creating a home you absolutely love, contact me about our design services.  We work locally around the DC area and travel for select projects.  :)

Democracy Crisis

I've long felt that while we need a better science of markets and economics in general, one that embraces ideas from other areas of modern science and brings economics up to date, this will never be enough. The recent crisis wasn't just a puzzling episode, a strange and unpredictable financial hurricane; it emerged directly out of the deep influence of financial industry money on governance. There's no solution to financial stability without good governance.

It's a depressing read, but this long essay by Numerian paints a rather bleak -- and all too realistic -- picture of US democracy. Plus some perspective on the debt-ceiling crisis (which I don't pretend to understand in any detail):
"Financial Armageddon may not ensue from this downgrade – the market may just have to get used to the benchmark “risk free rate” being less than stellar, because there is no alternative in market size and liquidity to US Treasuries. Still, it will be a landmark event – an exclamation point to the closing out of the American Century."  (h/t The Agonist)

Leverage Control -- A Subtle Story

I mentioned recently some work (in progress) by Stefan Thurner and colleagues exploring how leverage influences stability (price volatility) in a competitive, speculative market. Thurner spoke about this at a meeting on Tipping Points in Durham, UK. What I find most appealing about this work is that is explores this question with a model that is rich enough to exhibit many of the basic features we see in speculative markets -- competition between hedge funds and other investment firms to attract investors' funds, the use of leverage to amplify potential gains, the monitoring of leverage by banks who lend to the investment firms, occasional abrupt crashes and bankruptcies, etc.

Is it a perfect model? Of course not, there is no such thing; models are tools for thinking. But it is arguably better than anything else we currently have for running "policy experiments" to test what might happen in such a market if regulators take this or that step -- establishing tight limits to allowed leverage, for example. 

Stefan kindly sent me the slides from his talk, a few of which I'd like to mention here. As I said, this is work in progress, so these are preliminary results. They're interesting because they suggest that avoiding dangerous market instability through leverage limits comes with costs, and that our intuition isn't at all a reliable guide -- we need these kinds of models in which we can discover surprising outcomes (before we discover them in reality).

I won't give a detailed description of the model; it can be found in an early draft of the paper available here. Thurner and colleagues have been working to improve the model over several years, and it now reproduces a number of realistic market behaviors quite naturally. Thurner summarized these as follows:

In other words, the hedge funds act to eliminate mis-pricings (taking volatility out of the market), and profit by doing so. Funds have to be aggressive to survive in the face of stuff competition, but suffer if they get too large. Risks shorten the lifetime of a fund. Overall, the models also reproduces the right statistical fluctuations in the market.
As I discussed in my earlier post in this work, competition between hedge funds leads naturally to increasing leverage and drives the market to have a fat-tailed distribution of returns; it becomes subject (like real market) to large price fluctuations as a matter of course driven by its own internal dynamics (no external impacts required). In this condition, the market is highly prone to catastrophic crashes triggered by nothing by small price fluctuations linked to noise traders (unsophisticated investors buying and selling more or less at random). The figure below shows a typical example, plotting the wealth of various funds versus time, with a dramatic crash that affects all funds at once (different colors for different funds):

Now, a natural question is -- could these kinds of events be avoided with proper regulations? One idea would be to restrict the amount of leverage allowed with the aim of keeping the market returns in a mode Gaussian regime, i.e. eliminating fat tails. People could probably argue for decades about whether this would work or not without coming to an answer; this model makes it possible to do an experiment to find out, which is what Thurner and colleagues have done.

Two figures (below) show some of the results, and require some explanation. The different colors correspond to different possible regulatory regimes, and show how behavior changes with maximum allowed hedge fund leverage : BLUE (no other regulations), PALE GREEN (regulations akin to Basel I and II, in which banks loaning to hedge funds are restricted by capital requirements) and RED (a situation in which banks monitor hedge funds and reduce a hedge fund's allowed leverage below the maximum when the volatility in its assets grows; a kind of adaptive leverage control). 

First, consider a figure showing how how the action of hedge funds, and their use of volatility, actually benefits the market -- making it more efficient (in one sense). 
The figure shows the mean square price volatility versus allowed leverage. Increasing leverage lets the hedge funds pounce on opportunities more aggressively and wipe out mis-pricings more effectively. Die hard free market people should love this as it shows that the effect is strongest in the absence of any regulation. The regulated markets require higher leverage to get the same reduction in volatility.

But this isn't the whole story. Now consider another figure for the probability (per unit time) of a failure of one of the hedge funds:
Here the pure free market solution isn't so good, as this probability rises rapidly with increasing leverage. There is a relatively low value of leverage (around 5 in the model's units) where the market benefits of leverage have already been realized, and more leverage only leads to more failures (because it takes the market into the regime of fat-tailed returns; this can happen even if the mean square volatility remains small).
The regulated markets in this case perform marginally better -- the regulations reduce the number of failures, and the cost for this is marginally increased volatility.

A surprising outcome is that these same regulations, in the regime of very high leverage, actually do worse than no regulations at all -- they lead to higher market volatility AND more failures as well, a truly perverse regime.

All in all, then, this model offers a sobering perspective on how regulators might go about trying to avoid crashes linked to fat tails by limiting leverage. Some limitation clearly seems to be good. But too much can be bad, especially when coupled with other market regulations. You can't test out one idea in isolation, because they interact in surprising ways.
I'll probably have some further comments on this in the near future. It's a work in progress, as is my understanding of it -- and of what it means for the bigger picture.