Monday, October 31, 2011

Well, that straightens things out

I found this on my cousin's web page:


We are having a costume party here in the office today.  There are only two of us.  And we're having a contest. 

{I am Pumpkin Head}
..And yes, that is a torn open bag of candy that I got into...
...And yes, I am pregnant...

And Meghan...
Is a ghost.

We're taking votes.

The winner will take this beauty home:

No, I'm just kidding.  I'm not giving Meghan my dog. 

But the winner will get THIS:

Happy Halloween!!  Feel free to cast your vote in the comments section.

xoxo, Lauren

If you'd like help creating a home you absolutely love and you are not frightened away by this post, contact me about our design services.

pps- We just moved offices a week or 2 ago & are in the midst of redoing it.  Will be sure to post pics as soon as we have them!

Sunday, October 30, 2011

Sharing risk can increase risk

I have a column coming out in Bloomberg Views sometime this evening (US time). It touches on the European debt crisis and the issue of outstanding credit default swaps. This post is intended to provide a few more technical details on the study by Stefano Battiston and colleagues, which I mention in the column, showing that more risk sharing between institutions can, in some cases, lead to greater systemic risk. [Note: this work was carried out as part of an ambitious European research project called Forecasting Financial Crises, which brings together economists, physicists, computer scientists and others in an effort to forge new insights into economic systems by exploiting ideas from other areas of science.]

The authors of this study start out by noting the obvious: that credit networks can both help institutions to pool resources to achieve things they couldn't on their own, and to diversify against the risks they face. At the same time, the linking together of institutions by contracts implies a greater chance for the propagation of financial stress from one place to another. The same thing applies to any network such as the electrical grid -- sharing demands among many generating stations makes for a more adaptive and efficient system, able to handle fluctuations in demand, yet also means that failures can spread across much of the network very quickly. New Orleans can be blacked out in a few seconds because a tree fell in Cleveland.

In banking, the authors note, Allen and Gale (references given in the paper) did some pioneering work on the properties of credit networks:
... in their pioneering contribution Allen and Gale reach the conclusion that if the credit network of the interbank market is a credit chain – in which each agent is linked only to one neighbor along a ring – the probability of a collapse of each and every agent (a bankruptcy avalanche) in case a node is hit by a shock is equal to one. As the number of partners of each agent increases, i.e. as the network evolves toward completeness, the risk of a collapse of the agent hit by the shock goes asymptotically to zero, thanks to risk sharing. The larger the pool of connected neighbors whom the agent can share the shock with, the smaller the risk of a collapse of the agent and therefore of the network, i.e. the higher network resilience. Systemic risk is at a minimum when the credit network is complete, i.e. when agents fully diversify individual risks. In other words, there is a monotonically decreasing relationship between the probability of individual failure/systemic risk and the degree of connectivity of the credit network.
This is essentially the positive story of risk sharing which is taken as the norm in much thinking about risk management. More sharing is better; the probability of individual failure always decreases as the density of risk-sharing links grows.

This is not what Battiston and colleagues find under slightly more general assumptions of how the network is put together and how institutions interact. I'll give a brief outline of what is different in their model in a moment; what comes out of it is the very different conclusion that...
The larger the number of connected neighbors, the smaller the risk of an individual collapse but the higher systemic risk may be and therefore the lower network resilience. In other words, in our paper, the relationship between connectivity and systemic risk is not monotonically decreasing as in Allen and Gale, but hump shaped, i.e. decreasing for relatively low degree of connectivity and increasing afterwards.
 Note that they are making a distinction between two kinds of risk: 1. individual risk, arising from factors specific to one bank's business and which can make it go bankrupt, and 2. systemic risk, arising from the propagation of financial distress through the system. As in Allen and Gale, they find that individual risk DOES decrease with increasing connectivity: banks become more resistant to shocks coming from their own business, but that systemic risk DOES NOT decrease. The latter risk increases with higher connectivity, and can win out in determining the overall chance a bank might go bankrupt. In effect, the effort on the part of many banks to manage their own risks can end up creating a new systemic risk that is worse than the risk they have reduced through risk sharing.

There are two principle elements in the credit network model they study. First is the obvious fact that resilience of an institution in such a network depends on the resilience of those with whom it shares risks. Buying CDS against the potential default of your Greek bonds is all well and good as long as the bank from whom you purchased the CDS remains solvent. In the 2008 crisis, Goldman Sachs and other banks had purchased CDS from A.I.G. to cover their exposure to securitized mortgages, but those CDS would have been more or less without value had the US government not stepped in to bail out A.I.G.

The second factor model is very important, and it's something I didn't have space to mention in the Bloomberg essay. This is the notion that financial distress tends to have an inherently nonlinear aspect to it -- some trouble or distress tends to bring more in its wake. Battiston and colleagues call this "trend reinforcement, " and describe it as follows:
... trend reinforcement is also quite a general mechanism in credit networks. It can occur in at least two situations. In the first one (see e.g. in (Morris and Shin, 2008)), consider an agent A that is hit by a shock due a loss in value of some securities among her assets. If such shock is large enough, so that some of A’s creditors claim their funds back, A is forced to fire-sell some of the securities in order to pay the debt. If the securities are sold below the market price, the asset side of the balance sheet is decreasing more than the liability side and the leverage of A is unintentionally increased. This situation can lead to a spiral of losses and decreasing robustness (Brunnermeier, 2008; Brunnermeier and Pederson, 2009). A second situation is the one in which when the agent A is hit by a shock, her creditor B makes condition to credit harder in the next period. Indeed it is well documented that lenders ask a higher external finance premium when the borrowers’ financial conditions worsen (Bernanke et al., 1999). This can be seen as a cost from the point of view of A and thus as an additional shock hitting A in the next period. In both situations, a decrease in robustness at period t increases the chance of a decrease in robustness at period t + 1.
It is the interplay of such positive feedback with the propagation of distress in a dense network which causes the overall increase in systemic risk at high connectivity.

I'm not going to wade into the detailed mathematics. Roughly speaking, the authors develop some stochastic equations to follow the evolution of a bank's "robustness" R -- considered to be a number between 0 and 1, with 1 being fully robust. A bankruptcy event is marked by R passing through 0. This is a standard approach in the finance literature on modeling corporate bankruptcies. The equations they derive incorporate their assumptions about the positive influences of risk sharing and the negative influences of distress propagation and trend reinforcement.

The key result shows up clearly in the figure (below), which shows the overall probability of a bank in the network to go bankrupt (a probability per unit of time) versus the amount of risk-sharing connectivity in the network (here given by k, the number of partners with which each bank shares risks). It may not be easy to see, but the figure shows a dashed line (labeled 'baseline') which reflects the classical result on risk sharing in the absence of trend reinforcement. More connectivity is always good. But the red curve shows the more realistic result with trend reinforcement or the positive feedback associated with financial distress taken into account. Now adding connectivity is only good for a while, and eventually becomes positively harmful. There's a middle range of optimal connectivity beyond which more connections only serve to put bank in greater danger.

Finally, the authors of this paper make very interesting observations about the potential relevance of this model to globalization, which has been an experiment in risk sharing on a global scale, with an outcome -- at the moment -- which appears not entirely positive:
In a broader perspective, this conceptual framework may have far reaching implications also for the assessment of the costs and benefits of globalization. Since some credit relations involve agents located in different countries, national credit networks are connected in a world wide web of credit relationships. The increasing interlinkage of credit networks – one of the main features of globalization – allows for international risk sharing but it also makes room for the propagation of financial distress across borders. The recent, and still ongoing, financial crisis is a case in point.

International risk sharing may prevail in the early stage of globalization, i.e. when connectivity is relatively ”low”. An increase in connectivity at this stage therefore may be beneficial. On the other hand, if connectivity is already high, i.e. in the mature stage of globalization, an increase in connectivity may bring to the fore the internationalization of financial distress. An increase in connectivity, in other words, may increase the likelihood of financial crises worldwide.
Which is, in part, why we're not yet out of the European debt crisis woods.

How my taxes are raised matters

I need to pay higher taxes.  To get to fiscal balance, I need to pay higher taxes.  To fund the things I support, such as national health insurance, more Section 8 housing, and a robust military, I need to pay higher taxes.  But I am not paying them alone--to pay more without others paying more is a gesture, and would not solve anything.

The federal government can get at me one of two ways: it can scale back or eliminate my deductions, or it can raise my rates.  If my mortgage interest deduction goes away, for example, my federal tax liability would increase by around 10 percent; alternatively, the federal government could just charge me a ten percent surtax on income.

If my income is taxed, the impact on my desire to work is ambiguous.  On the one hand, because the cost of leisure would fall, I would have an incentive to work less.  On the other hand, if I want to restore my previous after tax standard of living, I would have an incentive to work more.

If you take away my mortgage interest deduction, however, the impact is not ambiguous--I will have an incentive to work more.  Leisure is no less expensive (there is no substitution effect), but my desire to restore my previous income remains as before.  

Friday, October 28, 2011

The Brain Controls Insulin Action

Insulin regulates blood glucose primarily by two mechanisms:
  1. Suppressing glucose production by the liver
  2. Enhancing glucose uptake by other tissues, particularly muscle and liver
Since the cells contained in liver, muscle and other tissues respond directly to insulin stimulation, most people don't think about the role of the brain in this process.  An interesting paper just published in Diabetes reminds us of the central role of the brain in glucose metabolism as well as body fat regulation (1).  Investigators showed that by inhibiting insulin signaling in the brains of mice, they could diminish insulin's ability to suppress liver glucose production by 20%, and its ability to promote glucose uptake by muscle tissue by 59%.  In other words, the majority of insulin's ability to cause muscle to take up glucose is mediated by its effect on the brain. 

Read more »

Central corporate control revealed by mathematics

If you haven't already heard about this new study on the network of corporate control, do have a look. The idea behind it was to use network analysis of who owns whom in the corporate world (established through stock ownership) to tease out centrality of control. New Scientist magazine offers a nice account, which starts as follows:
AS PROTESTS against financial power sweep the world this week, science may have confirmed the protesters' worst fears. An analysis of the relationships between 43,000 transnational corporations has identified a relatively small group of companies, mainly banks, with disproportionate power over the global economy.

The study's assumptions have attracted some criticism, but complex systems analysts contacted by New Scientist say it is a unique effort to untangle control in the global economy. Pushing the analysis further, they say, could help to identify ways of making global capitalism more stable.

The idea that a few bankers control a large chunk of the global economy might not seem like news to New York's Occupy Wall Street movement and protesters elsewhere (see photo). But the study, by a trio of complex systems theorists at the Swiss Federal Institute of Technology in Zurich, is the first to go beyond ideology to empirically identify such a network of power. It combines the mathematics long used to model natural systems with comprehensive corporate data to map ownership among the world's transnational corporations (TNCs).
But also have a look at the web site of the project behind the study, the European project Forecasting Financial Crises, where the authors have tried to clear up several common misinterpretations of just what the study shows.

Indeed, I know the members of this group quite well. They're great scientists and this is a beautiful piece of work. If you know a little about natural complex networks, then the structures found here actually aren't terrifically surprising. However, they are interesting, and it's very important to have the structure documented in detail. Moreover, just because the structure observed here is very common in real world complex networks doesn't mean its something that is good for society.

Hating bankers and the "Unholy Alliance" -- the long history

An excellent if brief article at gives some useful historical context to the current animosity toward bankers -- it's nothing new. Several interesting quotes from key figures in the past:
“Behind the ostensible government sits enthroned an invisible government owing no allegiance and acknowledging no responsibility to the people. To destroy this invisible government, to befoul this unholy alliance between corrupt business and corrupt politics is the first task of statesmanship.”

Theodore Roosevelt, 1912

“We have in this country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve Banks. The Federal Reserve Board, a Government board, has cheated the Government of the United States and the people of the United States out of enough money to pay the national debt. The depredations and the iniquities of the Federal Reserve Board and the Federal Reserve banks acting together have cost this country enough money to pay the national debt several times over…

“Some people think the Federal Reserve Banks are United States Government institutions. They are not Government institutions. They are private credit monopolies, which prey upon the people of the United States for the benefit of themselves and their foreign customers, foreign and domestic speculator sand swindlers, and rich and predatory money lenders.”

Louis McFadden, chairman of the House Committee on Banking and Currency, 1932
I should have known this, but didn't -- the Federal Reserve Banks are not United States Government institutions. They are indeed owned by the private banks themselves, even though the Fed has control over taxpayer funds.This seems dubious in the extreme to me, although I'm sure there are many arguments to consider. Memory recalls reading arguments about the required independence of the central bank, but independence is of course not the same as "control by the private banks." Maybe we need to change the governance of the Fed and install some oversight with real power from a non-banking non-governmental element.

And my favourite:
“Banks are an almost irresistible attraction for that element of our society which seeks unearned money.”
FBI head J. Edgar Hoover, 1955.

In recent years, the attraction has been very strong indeed.

This is why knowing history is so important. Many battles have been fought before.

Thursday, October 27, 2011

Matt Taibbi on OWS

Don't miss this post by Matt Taibbi on the Occupy Wall St. movement and its roots as an anti-corruption movement:
People aren't jealous and they don’t want privileges. They just want a level playing field, and they want Wall Street to give up its cheat codes, things like:
FREE MONEY. Ordinary people have to borrow their money at market rates. Lloyd Blankfein and Jamie Dimon get billions of dollars for free, from the Federal Reserve. They borrow at zero and lend the same money back to the government at two or three percent, a valuable public service otherwise known as "standing in the middle and taking a gigantic cut when the government decides to lend money to itself."

Or the banks borrow billions at zero and lend mortgages to us at four percent, or credit cards at twenty or twenty-five percent. This is essentially an official government license to be rich, handed out at the expense of prudent ordinary citizens, who now no longer receive much interest on their CDs or other saved income. It is virtually impossible to not make money in banking when you have unlimited access to free money, especially when the government keeps buying its own cash back from you at market rates.

Your average chimpanzee couldn't fuck up that business plan, which makes it all the more incredible that most of the too-big-to-fail banks are nonetheless still functionally insolvent, and dependent upon bailouts and phony accounting to stay above water. Where do the protesters go to sign up for their interest-free billion-dollar loans?

CREDIT AMNESTY. If you or I miss a $7 payment on a Gap card or, heaven forbid, a mortgage payment, you can forget about the great computer in the sky ever overlooking your mistake. But serial financial fuckups like Citigroup and Bank of America overextended themselves by the hundreds of billions and pumped trillions of dollars of deadly leverage into the system -- and got rewarded with things like the Temporary Liquidity Guarantee Program, an FDIC plan that allowed irresponsible banks to borrow against the government's credit rating.

This is equivalent to a trust fund teenager who trashes six consecutive off-campus apartments and gets rewarded by having Daddy co-sign his next lease. The banks needed programs like TLGP because without them, the market rightly would have started charging more to lend to these idiots. Apparently, though, we can’t trust the free market when it comes to Bank of America, Goldman, Sachs, Citigroup, etc.

In a larger sense, the TBTF banks all have the implicit guarantee of the federal government, so investors know it's relatively safe to lend to them -- which means it's now cheaper for them to borrow money than it is for, say, a responsible regional bank that didn't jack its debt-to-equity levels above 35-1 before the crash and didn't dabble in toxic mortgages. In other words, the TBTF banks got better credit for being less responsible. Click on to see if you got the same deal.

STUPIDITY INSURANCE. Defenders of the banks like to talk a lot about how we shouldn't feel sorry for people who've been foreclosed upon, because it's they're own fault for borrowing more than they can pay back, buying more house than they can afford, etc. And critics of OWS have assailed protesters for complaining about things like foreclosure by claiming these folks want “something for nothing.”

This is ironic because, as one of the Rolling Stone editors put it last week, “something for nothing is Wall Street’s official policy." In fact, getting bailed out for bad investment decisions has been de rigeur on Wall Street not just since 2008, but for decades.

Time after time, when big banks screw up and make irresponsible bets that blow up in their faces, they've scored bailouts. It doesn't matter whether it was the Mexican currency bailout of 1994 (when the state bailed out speculators who gambled on the peso) or the IMF/World Bank bailout of Russia in 1998 (a bailout of speculators in the "emerging markets") or the Long-Term Capital Management Bailout of the same year (in which the rescue of investors in a harebrained hedge-fund trading scheme was deemed a matter of international urgency by the Federal Reserve), Wall Street has long grown accustomed to getting bailed out for its mistakes.

The 2008 crash, of course, birthed a whole generation of new bailout schemes. Banks placed billions in bets with AIG and should have lost their shirts when the firm went under -- AIG went under, after all, in large part because of all the huge mortgage bets the banks laid with the firm -- but instead got the state to pony up $180 billion or so to rescue the banks from their own bad decisions.

This sort of thing seems to happen every time the banks do something dumb with their money...
 More at the link.

Abolish banks? Maybe, maybe not...

I have little time to post this week as I have to meet several writing deadlines, but I wanted to briefly mention  this wonderful and extremely insightful speech by Adair Turner from last year (there's a link to the video of the speech here). Turner offers so many valuable perspectives that the speech is worth reading and re-reading; here are a few short highlights that caught my attention.

First, Turner mentions that the conventional wisdom about the wonderful self-regulating efficiency of markets is really a caricature of the real economic theory of markets, which notes many possible shortcomings (asymmetric information, incomplete markets, etc.). However, he also notes that this conventional wisdom is still what has been most influential in policy circles:
.. why, we might ask, do we need new economic thinking when old economic thinking has been so varied and fertile? ... Well, we need it because the fact remains that while academic economics included many strains, in the translation of ideas into ideology, and ideology into policy and business practice, it was one oversimplified strain which dominated in the pre-crisis years.
What was that "oversimplified strain"? Turner summarizes it as follows:
For over half a century the dominant strain of academic economics has been concerned with exploring, through complex mathematics, how economically rational human beings interact in markets. And the conclusions reached have appeared optimistic, indeed at times panglossian. Kenneth Arrow and Gerard Debreu illustrated that a competitive market economy with a fully complete set of markets was Pareto efficient. New classical macroeconomists such as Robert Lucas illustrated that if human beings are not only rational in their preferences and choices but also in their expectations, then the macro economy will have a strong tendency towards equilibrium, with sustained involuntary unemployment a non-problem. And tests of the efficient market hypothesis appeared to illustrate that liquid financial markets are not driven by the patterns of chartist fantasy, but by the efficient processing of all available information, making the actual price of a security a good estimate of its intrinsic value.

As a result, a set of policy prescriptions appeared to follow:

· Macroeconomic policy – fiscal and monetary – was best left to simple, constant and clearly communicated rules, with no role for discretionary stabilisation.

· Deregulation was in general beneficial because it completed more markets and created better incentives.

· Financial innovation was beneficial because it completed more markets, and speculative trading was beneficial because it ensured efficient price discovery, offsetting any temporary divergences from rational equilibrium values.

· And complex and active financial markets, and increased financial intensity, not only improved efficiency but also system stability, since rationally self-interested agents would disperse risk into the hands of those best placed to absorb and manage it.
In other words, all the nuances of the economic theories showing the many limitations of markets seem to have made little progress in getting into the minds of policy makers, thwarted by ideology and the very simple story espoused by the conventional wisdom. Insidiously, the vision of efficient markets so transfixed people that it was assumed that the correct policy prescriptions must be those which would take the system closer to the theoretical ideal (even if that ideal was quite possibly a theorist's fantasy having little to do with real markets), rather than further away from it:
What the dominant conventional wisdom of policymakers therefore reflected was not a belief that the market economy was actually at an Arrow-Debreu nirvana – but the belief that the only legitimate interventions were those which sought to identify and correct the very specific market imperfections preventing the attainment of that nirvana. Transparency to reduce the costs of information gathering was essential: but recognising that information imperfections might be so deep as to be unfixable, and that some forms of trading activity might be socially useless, however transparent, was beyond the ideology...
Turner goes on to argue that the more nuanced views of markets as very fallible systems didn't have much influence mostly because of ideology and, in short, power interests on the part of Wall St., corporations and others benefiting from deregulation and similar policies. I think it is also fair to say that economists as a whole haven't done a very good job of shouting loudly that markets cannot be trusted to know best or that they will only give good outcomes in a restricted set of circumstances.Why haven't there been 10 or so books by prominent economists with titles like "markets are often over-rated"?

But perhaps the most important point he makes is that we shouldn't expect a "theory of everything" to emerge from efforts to go beyond the old conventional wisdom of market efficiency: of the key messages we need to get across is that while good economics can help address specific problems and avoid specific risks, and can help us think through appropriate responses to continually changing problems, good economics is never going to provide the apparently certain, simple and complete answers which the pre-crisis conventional wisdom appeared to. But that message is itself valuable, because it will guard against the danger that in the future, as in the recent past, we sweep aside common sense worries about emerging risks with assurances that a theory proves that everything is OK.
That is indeed a very important message.

The speech goes on to touch on many other topics, all with a fresh and imaginative perspective. Abolish banks? That sounds fairly radical, but it's important to realise that things we take for granted aren't fixed in stone, and may well be the source of problems. And abolishing banks as we know them has been suggested before by prominent people:
Larry Kotlikoff indeed, echoing Irving Fisher, believes that a system of leveraged fractional reserve banks is so inherently unstable that we should abolish banks and instead extend credit to the economy via mutual loan funds, which are essentially banks with 100% equity capital requirements.8 For reasons I have set out elsewhere, I’m not convinced by that extremity of radicalism.9 ... But we do need to ensure that debates on capital and liquidity requirements address the fundamental issues rather than simply choices at the margin. And that requires
economic thinking which goes back to basics and which recognises the importance of specific evolved institutional structures (such as fractional reserve banking), rather than treating existing institutional structures either as neutral pass-throughs in economic models or as facts of life which cannot be changed.

Terrariums- Why Not?

I saw a couple of interesting terrariums at High Point Market that I just loved.  You might remember that although I love plants & flowers, I have a black thumb when it comes to indoor plants.  (Although there is 1 plant in my house that has been alive for a year now!)  I've always liked terrariums and have never given them a shot.  After seeing some "easy" (according to their owners) beauties at Market, I think I'll try them out. 

{Europe 2 You's terrarium filled with a gorgeous oregano that looks like flower blossoms- who knew??)

Here's a more modern version filled with succulents & tropical plants:

{At Bevara Design House}

I love this one:

{image via Design Sponge}

...And I can actually do moss.  Sort of.

This one is whoah:

{image via}

...And this little ferny fern I could maybe handle:

{image via}

My window boxes are half dead ( I have plans to add in some mums to replace the ferns I killed) and maybe when I've finished with that I'll get some terrariums in the plant hospice (my house).

Have a great one!! 

xoxo, Lauren

If you'd like help creating a home you absolutely love, contact me about our design services.

Tuesday, October 25, 2011

Home from Market

Whew!  We're home from a whirlwind few days down in High Point North Carolina for the Furniture Market.  Before I was in this business I had no idea something like it even existed.  High Point is literally a little city of showrooms.  In the 3 days we were there we didn't even see half of it.  But we did get to my favorite restaurant, Printworks Bistro, at the Proximity Hotel:

{Seriously the most gorgeous restaurant ever: light, airy, fresh & completely unexpected (see the Louis dining chairs in chartreuse toile??)  They have curtains separating the dining areas and hanging boxwood balls and textural drum shades add interest.  The colors are perfection (go green!! ;)  and the food is HEAVEN. 

We found some really amazing new-to-us companies & artists:

{Owen Mortenen creates works of art out of the natural things he finds on walks. }

I'm crazy about his Golden Raintree Studies made out of seed pods found from a tree that grows in Utah:

Natural & organic-feeling yet totally modern.  To read more, click here.

I loved this sconce by Luna Bella:

Some of the showrooms had the most amazing displays:

{Luna Bella}

{Spicher and Company}

The next few are of the Karen Robertson Showroom: 

I loved seeing so many of these detailed pieces jam-packed on the walls.  Totally jaw-dropping and they made me want to do a beach house STAT.

and switching up to...

{Halo Styles}

As far as showrooms/ booths at Market go, I really love going into the "more is more" type showrooms that are jam-packed because they feel like trasure troves.  Even if they're not at all my style, I appreciate them.  Check this one out:

{Genesee River Trading Co.}

And another view of the same showroom:

I loved some of their old games tables & kitchsy things.

The best part is, I was with my partner in crime pretty much the whole time sans-kiddos.  (Although we did really miss them!!)

And we got to see some of our favorite people!!

{Me & Michele of My Notting Hill.  Michele was one of a group of bloggers invited to Market to see all of the lastest & greatest.  She sweetly invited me along with her to an Architectural Digest party as her "plus 1" where we saw lot of big designers & industry people including one of my favorites Margaret Russell.   I also met Bunny Williams (more like stalked her as she was leaving the party and she seemed to be one of the kindest, most genuine designers I've met.  She asked what my name was & where I was from (go VA!  If you know about Bunny, you might know she's from Charlottesville, VA) and  } and was just very nice. 

{scaaaary red eyes on me with my friend Paloma of La Dolce Vita & Visual Comfort.  Paloma is also an old blog friend & I've loved watching her career evolve.  She's now the director of marketing for Visual Comfort, one of the best lighting companies in the industy.  }

{Roxanne Lumme, one of my good local design friends.  We ran into so many people from home!!! }

{Me with one of my first & closest design buds, Eddie Ross.  My camera ended up going out on me that night and I didn't get a group shot Dave & I with both Eddie & Jaithan.  We're always all pretty much laughing the entire time we hang out. }

I also got to see  bloggers (but didn't get pics with- arggg!) Erin of House of Turquoise, Stephan of Architect Design , Jen Sergent, and Traci of Traci Zeller Designs.  We got to hang with Traci for a while at a party one night & it was so good to catch up.  At a Hearst Magazine party we saw our good friend Matthew Talomie of Elle Decor & got to meet the team from Elle Decor Magazine, who were all really sweet & down to earth.  We also ran into a bunch of DC Designers & friends throughout the weekend: Patrick Sutton, Erin Paige Pitts, David Mitchell, Victoria Sanchez, Barbara Franceski and Sally Steponkus.  It was SO much fun.

We got a TON accomplished at this market.  I found so many new great sources for projects that I can't wait to use.  Even though I'm exhausted right now I'm feeling pretty charged design-wise.

xoxo, Lauren

If you'd like help creating a home you absolutely love, contact me about our design services.

The European debt crisis in a picture

From the New York Times (by way of Simon Johnson), a beautiful (and scary) picture of the various debt connections among European nations. (Best to right click and download and then open so you can easily zoom in and out as the picture is mighty big.)

My question is - what happens if the Euro does collapse? Do European nations have well-planned emergency measures to restore the Franc, Deutchmark, Lira and other European currencies quickly? Somehow I'm not feeling reassured.

Monday, October 24, 2011

Studies confirm: bankers are mostly non-human at the cellular level

This is no joke. Studies show that if you examine the genetic material of your typical banker, you'll find that only about 10% of it takes human form. The other 90% is much more slimy and has been proven to be of bacterial origin. That's 9 genes out of 10: bankers are mostly bacteria. Especially Lloyd Blankfein. This is all based on detailed state-of-the-art genetic science, as you can read in this new article in Nature.

OK, I am of course joking. The science shows that we're all like this, not only the bankers. Still, the title of this post is not false. It just leaves something out. Probably not unlike the sales documentation or presentations greasing the wheels of the infamous Goldman Sachs Abacus deals.

The new HARP might help...

From this morning's New York Times:

The Federal Housing Finance Agency, which oversees mortgage finance giants Fannie Mae and Freddie Mac, said it was easing the terms of the two-year-old Home Affordable Refinance Program, which helps borrowers who have been making mortgage payments on time but have not been able to refinance as home values have dropped...

...To encourage banks to participate in the program, FHFA is revamping it to protect lenders from having to buy back HARP loans if underwriting problems are later found. Banks will only have to verify that borrowers have made at least six of their last mortgage payments and the new rules eliminate the need for appraisals in most cases.FHFA said government-controlled Fannie Mae and Freddie Mac will waive certain fees for borrowers that refinance into loans with a shorter term, such as 15 years, aiming to spur homeowners to pay down the amount they owe at a faster rate.
The elimination of the requirement for an appraisal will make a big difference.  So will the waiver of fees for those who shorten terms.  Lower interest rates and shorter terms will help borrowers get right-side up faster.

Sunday, October 23, 2011

Harvard Food Law Society "Forum on Food Policy" TEDx Conference

Last Friday, it was my pleasure to attended and present at the Harvard Food Law Society's TEDx conference, Forum on Food Policy.  I had never been to Cambridge or Boston before, and I was struck by how European they feel compared to Seattle.  The conference was a great success, thanks to the dedicated efforts of the Food Law Society's presidents Nate Rosenberg, Krista DeBoer, and many other volunteers. 

Dr. Robert Lustig gave a keynote address on Thursday evening, which I unfortunately wasn't able to attend due to my flight schedule.  From what I heard, he focused on practical solutions for reducing national sugar consumption, such as instituting a sugar tax.  Dr. Lustig was a major presence at the conference, and perhaps partially due to his efforts, sugar was a central focus throughout the day.  Nearly everyone agrees that added sugar is harmful to the nation's health at current intakes, so the question kept coming up "how long is it going to take us to do something about it?"  As Dr. David Ludwig said, "...the obesity epidemic can be viewed as a disease of technology with a simple, but politically difficult solution".

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Saturday, October 22, 2011

Type I error, Type II error, and voting

No matter how our registration laws are set up, we will make errors: either people who are eligible to vote will be prevented from doing so, or people who are not eligible to vote will be allowed to do so.  Type I error falsely rejects a null hypothesis, while Type II error falsely fails to reject a null hypothesis.

If the null is that people who should be eligible to vote should be allowed to vote, then the new voter registration laws  being propagated around the country will produce more Type I error.  Two points here--I suspect that the new laws will create a lot more Type I error than precent Type II error.  Also, to me, Type I error is more serious than Type II error--preventing eligible voters from voting is a more egregious error than  allowing ineligible voters to vote.

Friday, October 21, 2011

Break up the big banks...

It's encouraging to see that the president of the Federal Reserve Bank of Kansas City has come out arguing that "too big too fail" banks are "fundamentally inconsistent with capitalism." See the speech of Thomas Hoenig. One excerpt:
“How can one firm of relatively small global significance merit a government bailout? How can a single investment bank on Wall Street bring the world to the brink of financial collapse? How can a single insurance company require billions of dollars of public funds to stay solvent and yet continue to operate as a private institution? How can a relatively small country such as Greece hold Europe financially hostage? These are the questions for which I have found no satisfactory answers. That’s because there are none. It is not acceptable to say that these events occurred because they involved systemically important financial institutions.

Because there are no satisfactory answers to these questions, I suggest that the problem with SIFIs is they are fundamentally inconsistent with capitalism. They are inherently destabilizing to global markets and detrimental to world growth. So long as the concept of a SIFI exists, and there are institutions so powerful and considered so important that they require special support and different rules, the future of capitalism is at risk and our market economy is in peril.”

News claims success with paywall

As of next Monday News Corp’s flagship newspaper in Oz, The Australian, will introduce a paywall to restrict access to its online content. Online content will be initially free for existing print subscribers and there will be some access to premium material via Google and Facebook but new users will be required to subscribe for $2.95 a week to read the content. Mr Murdoch is determined to continue on the journey initiated last year in the UK with The Times and The Sunday Times to get rid of freeloaders and to ensure continuous prosperity of his media empire.

Commentators are generally very restraint in their assessments of the effectiveness of paywalls so far, probably because of lack of hard figures to verify any claims. However, News Corp is proud to make it known that “The Times and The Sunday Times are generating more revenue from 100,000+ subscribers than they did from the 20 million browsers they had before…” (Hmm, something doesn’t add up here: ~£100 pa per subscriber gives only £10M pa in total revenue… Fairfax makes more in a month from its online assets with only 3.5 million unique browsers! Business must be really bad in the UK…)

The biggest print media pioneers of paywalls, such as Wall Street Journal and the New York Times, are stating officially that “it is too early to come to any definitive conclusions” but they are modestly optimistic. What struck me as a telltale sign of where the things are potentially going is that the companies are claiming they are able to “generate new revenues without adversely affecting their audiences”. It implies to me that what is actually happening is not that paywall model is working so well but rather that the same content is being able to be monetised in new, innovative ways (eg. with paid mobile apps, etc.). In other words, although rhetoric is about putting limits on unrestricted access to existing online content, it all boils down to offering a greater variety of access modes to that content, where some options require payment.

I suggested this could be the outcome in one of my blog posts titled Why iPad will not save newspapers, almost 18 months ago: “iPad can potentially become one more revenue stream for newspaper publishers but I doubt it will improve substantially fortunes of media companies.”  In my humble opinion, it is the content portability and repurposing opportunities that is the essence of media industry prosperity in the future. Newspaper circulation figures may be declining but print, although very profitable, is not the only way to monetise the content.

Related Posts: Media Market Commentary

Thursday, October 20, 2011

Another impediment to short sales?

This morning, I participated in a conference in Lakewood on housing sponsored by Rep. Linda Sanchez.   A HUD representative made me aware of an issue I hadn't known about before: how mortgage insurance is giving lenders an incentive to foreclose, rather than agree to short sales.

Apparently, a number of lenders bought mortgage insurance on particular mortgages from private mortgage insurance companies.  To clarify, the lenders did not require borrowers to purchase the mortgage insurance, but rather bought mortgage insurance (and paid the cost) on their own.

Under the terms of the policies, the lenders get a pay-off from the PMI companies is they foreclose on a property, but not if they modify a loan or allow for a short sale.  Consequently, lenders are better off foreclosing than modifying, even if the foreclosure produces lower proceeds than a modification.

This is yet another perverse incentive that is contrary to the policy aim of stabilizing the housing market.  I have no idea how widespread this is, but if it is common, it is yet another problem.  

Federal Reserve Corruption

Take a look at this on the transparency of the Federal Reserve (from Financeaddict) compared to other large nations' central banks. Then watch this, where Timothy Geithner tries very hard to slip sleazily away from any mention of the $13 Billion that went directly from AIG to politically well-connected Goldman Sachs. "Did you have conversations with the AIG counterparties?" Response -- waffle, evade, waffle, stare, mumble. After that, try to tell me that the US is not neck deep in serious political corruption.

And they wonder what Occupy Wall Street is all about!

Private information and jumps in the market

Following my second recent post on what moves the markets, two readers posted interesting and noteworthy comments and I'd like to explore them a little. I had presented evidence in the post that many large market movements do not appear to be linked to the sudden arrival of public information in the form of news. Both comments noted that this may leave out of the picture another source of information -- private information brought into the market through the action of traders taking actions:
Anonymous said...
I don't see any mention of what might be called "trading" news, e.g. a large institutional investor or hedge fund reducing significantly its position in a given stock for reasons unrelated to the stock itself - or at least not synchronized with actual news on the underlying. The move can be linked to internal policy, or just a long-term call on the company which timing has little to do with market news, or lags them quite a bit (like an accumulation of bad news leading to a lagged reaction, for instance). These shocks are frequent even on fairly large cap stocks. They also tend to have lingering effect because the exact size of the move is never disclosed by the investor and can spread over long periods of time (i.e. days), which would explain the smaller beta. Yet this would be a case of "quantum correction", both in terms of timing and agent size, rather than a breakdown of the information hypothesis.
DR said...
Seconding the previous comment, asset price information comes in a lot more forms than simply "news stories about company X." All market actions contains information. Every time a trade occurs there's some finite probability that it's the action of an informed trader. Every time the S&P moves its a piece of information on single stock with non-zero beta. Every time the price of related companies changes it contains new information.
Both of these comments note the possibility that every single trade taking place in the market (or at least many of them) may be revealing some fragment of private information on the part of whoever makes the trade. In principle, it might be such private information hitting the market which causes large movements (the s-jumps described in the work of Joulin and colleagues).  

I think there are several things to note in this regard. The first is that, while this is a sensible and plausible idea, it shouldn't be stretched too far. Obviously, if you simply assume that all trades carry information about fundamentals, then the EMH -- interpreted in the sense that "prices move in response to new information about fundamentals" -- essentially becomes true by definition. After all, everyone agrees that trading drives markets. If all trading is assumed to reveal information, then we've simple assumed the truth of the EMH. It's a tautology.

More useful is to treat the idea as a hypothesis requiring further examination. Certainly some trades do reveal private information, as when a hedge fund suddenly buys X and sells Y, reflecting a belief based on research that Y is temporarily overvalued relative to X. Equally, some trades (as mentioned in the first comment) may reveal no information, simply being carried out for reasons having nothing to do with the value of the underlying stock. As there's no independent way -- that I know of -- to determine if a trade reveals new information or not, we're stuck with a hypothesis we cannot test.

But some research has tried to examine the matter from another angle. Again, consider large price movements -- those in the fat-tailed end of the return distribution. One proposed idea looking to private information as a cause proposes that large price movements are caused primarily by large-volume trades by big players such as hedge funds, mutual funds and the like. Some such trades might reveal new information, and some might not, but let's assume for now that most do. In a paper in Nature in 2003, Xavier Gabaix and colleagues argued that you can explain the precise form of the power law tail for the distribution of market returns -- it has an exponent very close to 3 -- from data showing that the size distribution of mutual funds follows a similar power law with an exponent of 1.05. A key assumption in their analysis is that the price impact Δp generated by a trade of volume V is roughly equal to Δp = kV1/2.

This point of view seems to support the idea that the arrival of new private information, expressed in large trades, might account for the no-news s jumps noted in the Jouvin study. (It seems less plausible that such revealed information might account for anything as violent as the 1987 crash, or the general meltdown of 2008). But taken at face value, these arguments at least seem to be consistent with the EMH view that even many large market movements reflect changes in fundamentals. But again, this assumes that all or at least most large volume trades are driven by private information on fundamentals, which may not be the case. The authors of this study themselves don't make any claim about whether large volume trades really reflect fundamental information. Rather, they note that...
Such a theory where large individual participants move the market is consistent with the evidence that stock market movements are difficult to explain with changes in fundamental values... 
But more recent research (here and here, for example) suggest that this explanation doesn't quite hang together because the assumed relationship between large returns and large volume trades isn't correct. This analysis is fairly technical, but is based on the study of minute-by-minute NASDAQ trading and shows that, if you consider only extreme returns or extreme volumes, there is no general correlation between returns and volumes. The correlation assumed in the earlier study may be roughly correct on average, but it not true for extreme events. "Large jumps," the authors conclude, "are not induced by large trading volumes."

Indeed, as the authors of these latter studies point out, people who have valuable private information don't want it to be revealed immediately in one large lump because of the adverse market impact this entails (forcing prices to move against them). A well-known paper by Albert Kyle from 1985 showed how an informed trader with valuable private information, trading optimally, can hide his or her trading in the background of noisy, uninformed trading, supposing it exists. That may be rather too much to believe in practice, but large trades do routinely get broken up and executed as many small trades precisely to minimize impact. 

All in all, then, it seems we're left with the conclusion that public or private news does account for some large price movements, but cannot plausibly account for all of them. There are other factors. The important thing, again, is to consider what this means for the most meaningful sense of the EMH, which I take to be the view that market prices reflect fundamental values fairly accurately (because they have absorbed all relevant information and processed it correctly). The evidence suggests that prices often move quite dramatically on the basis of no new information, and that prices may be driven as a result quite far from fundamental values.

The latter papers do propose another mechanism as the driver of routine large market movements. This is a more mechanical process centering on the natural dynamics of orders in the order book. I'll explore this in detail some other time. For now, just a taster from this paper, which describes the key idea:
So what is left to explain the seemingly spontaneous large price jumps? We believe that the explanation comes from the fact that markets, even when they are ‘liquid’, operate in a regime of vanishing liquidity, and therefore are in a self-organized critical state [31]. On electronic markets, the total volume available in the order book is, at any instant of time, a tiny fraction of the stock capitalisation, say 10−5 −10−4 (see e.g. [15]). Liquidity providers take the risk of being “picked off”, i.e. selling just before a big upwards move or vice versa, and therefore place limit orders quite cautiously, and tend to cancel these orders as soon as uncertainty signals appear. Such signals may simply be due to natural fluctuations in the order flow, which may lead, in some cases, to a catastrophic decay in liquidity, and therefore price jumps. There is indeed evidence that large price jumps are due to local liquidity dry outs.

Wednesday, October 19, 2011

10 Things to Do to Cozy up your House for Fall

When the seasons change, I get a little excited (ok, sometimes a lot excited) & have the urge to bring that feeling into my home.  I think most of us who really love our homes do.   And if you think about it, when we're little kids, we pretty much start doing this right away in preschool.  Every year I remember doing crafts with leaves in the fall and making cheesy things out of pinecones at Christmastime & so on. 

 This year has been particularly crazy for our family with work & time (& the lack of it) and I haven't gotten the chance to really do much around the house, so I thought a little refresher list of 10 easy things to do might get me in gear to make some small changes around the house for Fall.  

{a tree in our neighborhood, last year}

So here they are:
1.  Switch out throw pillows to ones with warmer tones & cozier-feeling materials

{Image via pinterest & I couldn't find the original cource}

2. Add more throw blankets around the house or switch out existing summer throws to thicker, cozier ones.  I really love my faux fur throws, especially for napping and bringing outside onto the back patio at night. 

{image from}

3. Even if you don't have time to bake, you can fake that Heavenly smell with candles and/or diffusers.  I have pumpkin pie-scented candles & diffusers all over the house (and vanilla cake too!) and I want to eat them!!!

{image from Country Living}

4.  Have healthy seasonal food around for the munching.  (so you don't eat your candles}  Bowls of walnuts or apples in the family room and/ or kitchen invite everyone to enjoy seasonal goodies.  I'm always more likely to eat something when it's within reaching distance.

{my vintage peanut stocked with almonds}

{little bowl of walnuts}

5.  Art & Accessories:  There are certain places in my house where I'll switch paintings around or swap out accessories.  The mantle is one of the easiest places to do this because you can just prop artwork & don't have to put holes in the walls. 

{our mantle for Fall}

Bookshelves are another good place for this.  Before I had two kids, I used to really rearrange our books by color seasonally. 

{Some of my old "fall"-colored books...  My English teacher husband doesn't approve of my seasonal genres.}

(I know it sounds like I must have been on crack, but I really kind of miss the book rearranging. ) In the Fall, I'd make the orange & browns & golden books stand out more by placing them most prominently and in the Spring & Summer, I'd pull out the blues & aquas.  Now I'm lucky if the books are even on the shelves. 

{our super-crammed living room bookshelf...  not much rearranging happening here these days...  I've now realized that by the time I have the time to do that again, I'll probably be missing my kids.}

6.  Bring in leaves & branches from your yard.  (or your neighbors' yards! ;) ;) hee hee.  I found these cool orange-needled branches last Fall:  (I told you I hadn't gotten much done this year ;)  I love going on walks with the family & collecting things from outside.

7.  Pumkins & gourds:  They usually last a really long time & I pretty much always have pumpkins & gourds leftover from Halloween on the Thanksgiving table.  Piling them on your porch and around the house makes it really feel like Fall.  Kids love them too.

{Last year's Thanksgiving Table}

8.  Have fires when you can.  With a toddler in our house, our fires are a little few & far between but when we do have them, I'm in Heaven.  It just seems to lead to good family hang-out time.  On Fall nights, we love doing fires outside & roasting marshmallows.

{mmm mmm I loooooove s'mores!!}

9. Bedding:  In the Fall we add extra blankets to our bed including a down comforter & a throw blanket for napping at the foot of the bed.  It's been a fairly warm Fall so I do end up kicking them off a lot of the time at night.. maybe I made the switch too early this year?? 

{I love the faux fur blanket on Tia Zoldan's bed in this pic}

10. And finally... (you know I'd have to include some real eating in here)- Soup!  We try to make weekly batches of soup or pasta sauce in the Fall & Winter.  It feels so good on a cool day to be warm & toasty inside eating soup.  My mom makes an amazing pumpkin curry soup in the Fall:

{I'll have to get the actual recipe from my mom but the amazing-looking pumpkin soup pictured above is from Sweet Peas Kitchen and you can view the recipe here: }

Anyway, would love to hear about the changes you've been making in your house for Fall.  I'll keep you posted on my progress!!

xoxo, Lauren

If you'd like help creating a home you absolutely love, contact me about our design services.

Tuesday, October 18, 2011

Markets are rational even if they're irrational

I promise very soon to stop beating on the dead carcass of the efficient markets hypothesis (EMH). It's a generally discredited and ill-defined idea which has done a great deal, in my opinion, to prevent clear thinking in finance. But I happened recently on a defense of the EMH by a prominent finance theorist that is simply a wonder to behold -- its logic a true empirical testament to the powers of human rationalization. It also illustrates the borderline Orwellian techniques to which diehard EMH-ers will resort to cling to their favourite idea.

The paper was written in 2000 by Mark Rubinstein, a finance professor at University of California, Berkeley, and is entitled "Rational Markets: Yes or No. The Affirmative Case." It is Rubinstein's attempt to explain away all the evidence against the EMH, from excess volatility to anomalous predictable patterns in price movements and the existence of massive crashes such as the crash of 1987. I'm not going to get into too much detail, but will limit myself to three rather remarkable arguments put forth in the paper. They reveal, it seems to me, the mind of the true believer at work:

1. Rubinstein asserts that his thinking follows from what he calls The Prime Directive. This commitment is itself interesting:
When I went to financial economist training school, I was taught The Prime Directive. That is, as a trained financial economist, with the special knowledge about financial markets and statistics that I had learned, enhanced with the new high-tech computers, databases and software, I would have to be careful how I used this power. Whatever else I would do, I should follow The Prime Directive:

Explain asset prices by rational models. Only if all attempts fail, resort to irrational investor behavior.

One has the feeling from the burgeoning behavioralist literature that it has lost all the constraints of this directive – that whatever anomalies are discovered, illusory or not, behavioralists will come up with an explanation grounded in systematic irrational investor behavior.
Rubinstein here is at least being very honest. He's going to jump through intellectual hoops to preserve his prior belief that people are rational, even though (as he readily admits elsewhere in the text) we know that people are not rational. Hence, he's going to approach reality by assuming something that is definitely not true and seeing what its consequences are. Only if all his effort and imagination fails to come up with a suitable scheme will he actually consider paying attention to the messy details of real human behaviour.

What's amazing is that, having made this admission, he then goes on to criticize behavioural economists for having found out that human behaviour is indeed messy and complicated:
The behavioral cure may be worse than the disease. Here is a litany of cures drawn from the burgeoning and clearly undisciplined and unparsimonious behavioral literature:

Reference points and loss aversion (not necessarily inconsistent with rationality):
Endowment effect: what you start with matters
Status quo bias: more to lose than to gain by departing from current situation
House money effect: nouveau riche are not very risk averse

Overconfidence about the precision of private information
Biased self-attribution (perhaps leading to overconfidence)
Illusion of knowledge: overconfidence arising from being given partial information
Disposition effect: want to hold losers but sell winners
Illusion of control: unfounded belief of being able to influence events

Statistical errors:
Gambler’s fallacy: need to see patterns when in fact there are none
Very rare events assigned probabilities much too high or too low
Ellsberg Paradox: perceiving differences between risk and uncertainty
Extrapolation bias: failure to correct for regression to the mean and sample size
Excessive weight given to personal or antidotal experiences over large sample statistics
Overreaction: excessive weight placed on recent over historical evidence
Failure to adjust probabilities for hindsight and selection bias

Miscellaneous errors in reasoning:Violations of basic Savage axioms: sure-thing principle, dominance, transitivity
Sunk costs influence decisions
Preferences not independent of elicitation methods
Compartmentalization and mental accounting
“Magical” thinking: believing you can influence the outcome when you can’t
Dynamic inconsistency: negative discount rates, “debt aversion”
Tendency to gamble and take on unnecessary risks
Overpricing long-shots
Selective attention and herding (as evidenced by fads and fashions)
Poor self-control
Selective recall
Anchoring and framing biases
Cognitive dissonance and minimizing regret (“confirmation trap”)
Disjunction effect: wait for information even if not important to decision
Tendency of experts to overweight the results of models and theories
Conjunction fallacy: probability of two co-occurring more probable than a single one

Many of these errors in human reasoning are no doubt systematic across individuals and time, just as behavioralists argue. But, for many reasons, as I shall argue, they are unlikely to aggregate up to affect market prices. It is too soon to fall back to what should be the last line of defense, market irrationality, to explain asset prices. With patience, the anomalies that appear puzzling today will either be shown to be empirical illusions or explained by further model generalization in the context of rationality.
Now, there's sense in the idea that, for various reasons, individual behavioural patterns might not be reflected at the aggregate level. Rubinstein's further arguments on this point aren't very convincing, but at least it's a fair argument. What I find more remarkable is the a priori decision that an explanation based on rational behaviour is taken to be inherently superior to any other kind of explanation, even though we know that people are not empirically rational. Surely an explanation based on a realistic view of human behaviour is more convincing and more likely to be correct than one based on unrealistic assumptions (Milton Friedman's fantasies notwithstanding). Even if you could somehow show that market outcomes are what you would expect if people acted as if they were rational (a dubious proposition), I fail to see why that would be superior to an explanation which assumes that people act as if they were real human beings with realistic behavioural quirks, which they are.

But that's not how Rubinstein sees it. Explanations based on a commitment to taking real human behaviour into account, in his view, have "too much of a flavor of being concocted to explain ex-post observations – much like the medievalists used to suppose there were a different angel providing the motive power for each planet." The people making a commitment to realism in their theories, in other words, are like the medievalists adding epicycles to epicycles. The comparison would seem more plausibly applied to Rubinstein's own rational approach.

2. Rubinstein also relies on the wisdom of crowds idea, but doesn't at all consider the many paths by which a crowd's average assessment of something can go very much awry because individuals are often strongly influenced in their decisions and views by what they see others doing. We've known this going all the way back to the famous 1950s experiments of Solomon Asch on group conformity. Rubinstein pays no attention to that, and simply asserts that we can trust that the market will aggregate information effectively and get at the truth, because this is what group behaviour does in lots of cases:
The securities market is not the only example for which the aggregation of information across different individuals leads to the truth. At 3:15 p.m. on May 27, 1968, the submarine USS Scorpion was officially declared missing with all 99 men aboard. She was somewhere within a 20-mile-wide circle in the Atlantic, far below implosion depth. Five months later, after extensive search efforts, her location within that circle was still undetermined. John Craven, the Navy’s top deep-water scientist, had all but given up. As a last gasp, he asked a group of submarine and salvage experts to bet on the probabilities of different scenarios that could have occurred. Averaging their responses, he pinpointed the exact location (within 220 yards) where the missing sub was found. 

Now I don't doubt the veracity of this account or that crowds, when people make decisions independently and have no biases in their decisions, can be a source of wisdom. But it's hardly fair to cite one example where the wisdom of the crowd worked out, without acknowledging the at least equally numerous examples where crowd behaviour leads to very poor outcomes. It's highly ironic that Rubinstein wrote this paper just as the bubble was collapsing. How could the rational markets have made such mistaken valuations of Internet companies? It's clear that many people judge values at least in part by looking to see how others were valuing them, and when that happens you can forget the wisdom of the crowds.

Obviously I can't fault Rubinstein for not citing these experiments  from earlier this year which illustrate just how fragile the conditions are under which crowds make collectively wise decisions, but such experiments only document more carefully what has been obvious for decades. You can't appeal to the wisdom of crowds to proclaim the wisdom of markets without also acknowledging the frequent stupidity of crowds and hence the associated stupidity of markets.

3. Just one further point. I've pointed out before that defenders of the EMH in their arguments often switch between two meanings of the idea. One is that the markets are unpredictable and hard to beat, the other is that markets do a good job of valuing assets and therefore lead to efficient resource allocations. The trick often employed is to present evidence for the first meaning -- markets are hard to predict -- and then take this in support of the second meaning, that markets do a great job valuing assets. Rubinstein follows this pattern as well, although in a slightly modified way. At the outset, he begins making various definitions of the "rational market":
I will say markets are maximally rational if all investors are rational.
This, he readily admits, isn't true:
Although most academic models in finance are based on this assumption, I don’t think financial economists really take it seriously. Indeed, they need only talk to their spouses or to their brokers.
But he then offers a weaker version:
... what is in contention is whether or not markets are simply rational, that is, asset prices are set as if all investors are rational.
In such a market, investors may not be rational, they may trade too much or fail to diversify properly, but still the market overall may reflect fairly rational behaviour:
In these cases, I would like to say that although markets are not perfectly rational, they are at least minimally rational: although prices are not set as if all investors are rational, there are still no abnormal profit opportunities for the investors that are rational.
This is the version of "rational markets" he then tries to defend throughout the paper. Note what has happened: the definition of the rational market has now been weakened to only say that markets move unpredictably and give no easy way to make a profit. This really has nothing whatsoever to do with the market being rational, and the definition would be improved if the word "rational" were removed entirely. But I suppose readers would wonder why he was bothering if he said "I'm going to defend the hypothesis that markets are very hard to predict and hard to beat" -- does anyone not believe that? Indeed, this idea of a "minimally rational"  market is equally consistent with a "maximally irrational" market. If investors simply flipped coins to make their decisions, then there would also be no easy profit opportunities, as you'd have a truly random market.

Why not just say "the markets are hard to predict" hypothesis? The reason, I suspect, is that this idea isn't very surprising and, more importantly, doesn't imply anything about markets being good or accurate or efficient. And that's really what EMH people want to conclude -- leave the markets alone because they are wonderful information processors and allocate resources efficiently. Trouble is, you can't conclude that just from the fact that markets are hard to beat. Trying to do so with various redefinitions of the hypothesis is like trying to prove that 2 = 1. Watching the effort, to quote physicist John Bell in another context, " like watching a snake trying to eat itself from the tail. It becomes embarrassing for the spectator long before it becomes painful for the snake."