Broken Symmetry

Paul Samuelson the Investor

From Economic Principals:

It turns out that the great MIT economist was influential in the creation of one of the earliest and most influential hedge funds. Launched in 1970, Commodities Corp. blazed a trail of extremely high returns throughout the 1970s and early ’80s, before disappearing in various pieces into Bermuda mailboxes and Goldman Sachs. Many of its star traders – Bruce Kovner of Caxton and Paul Tudor Jones, chief among them—formed successful hedge funds of their own. Samuelson thus had a ringside seat at the birth of an influential industry that is still only poorly understood.

About the same time, he invested a substantial amount in shares of Warren Buffet’s Berkshire Hathaway Inc. It was in 1970, too, that he won the Nobel prize in economics, the second to be awarded. Long famous for the fortune that his pioneering textbook earned him after 1948, it turns out that Samuelson may have made more money as an investor than as an author. He was both smarter and richer than is generally understood: as an investor, a bigger winner, perhaps, than the more volatile John Maynard Keynes.

Via Tyler Cowen at MR. More evidence for the Paul-Samuelson-as-Isaac-Newton theory?

Remember MLK Jr.

Evidence of strategic periodicities in collective conflict dynamics

From Simon DeDeo, David C. Krakauer, and Jessica C. Flack:

We analyze the timescales of conflict decision-making in a primate society. We present evidence for multiple, periodic timescales associated with social decision-making and behavioral patterns. We demonstrate the existence of periodicities that are not directly coupled to environmental cycles or known ultraridian mechanisms. Among specific biological and socially-defined demographic classes, periodicities span timescales between hours and days, and many are not driven by exogenous or internal regularities. Our results indicate that they are instead driven by strategic responses to social interaction patterns. Analyses also reveal that a class of individuals, playing a critical functional role, policing, have a signature timescale on the order of one hour. We propose a classification of behavioral timescales analogous to those of the nervous system, with high-frequency, or alpha-scale, behavior occurring on hour-long scales, through to multi-hour, or beta-scale, behavior, and, finally gamma periodicities observed on a timescale of days.

Via Physics arXiv blog.

Tyler Cowen on Methodological Individualism

Over at MR, Tyler offers some thoughts and a wealth of interesting links on the subject.

Foucault understood how actual historical explanation relies on the use of broad categories, classes, and exemplars, and in a manner which is not logically reducible to statements about individual beliefs and desires. The writer (theorist) has nothing close to a complete mental model of how the interacting categories reduce to component individual parts, and so some or most of the moving parts of the explanation retain their autonomy at a partially macro level. The Austrians will kick and scream on this one, but if you combine imperfect information and the sense/reference distinction, methodological individualism ends up as more of a slogan than anything else. There is a reflective equilibrium to the explanatory process, and micro relies on some macro foundations, not just vice versa, and individuals rely on the social for some of their cues. Atomistic reduction to the level of the individual in general will not succeed.

For earlier posts on the horribles that result from methodological individualist theory in antitrust law, see here. Also note that Kenneth Arrow has expressed at least strong skepticism about methodological individualism. The picture that develops is of a feedback loop between individuals, groups, and the set of formal rules and procedures for encoding and transmitting them. We can't understand the behavior of the system with a myopic focus on any single part.

Facebook and Ennui

Rick Bookstaber gives an interesting take on the alternative trajectories of society and Facebook over the next few decades:

I am not going to enter the discussion of how secure Facebook's position is, or how much advertising it can generate. Insread, I am going to discuss the implications of Facebook for our individuality as we increasingly embrace Facebook and similar systems that replace real interaction with the virtual, and the implications of this world for the success of Facebook.

The basic point is that either the world changes and Facebook become marginalized, or Facebook continues [to] thrive and we live in a world of existential alienation. ...

Interestingly, Facebook wins relatively few friends in Japan. I wonder how Bookstaber would interpret this in view of his thesis.

Move Bankrupty-Remote Entities Back on the Balance Sheet?

Fascinating interview of Gary Gorton re: the gory details of the credit crisis in late 2008, which continues to present:

Securitization basically allows the traditional banks to finance their loans by selling them rather than holding them on balance sheet, and the source of value here is avoidance of bankruptcy costs. A firm that originates loans does so by lending money to any number of borrowers—both corporate and consumer—and it then selects a large portfolio of its loans to sell, in a very specific legal sense, to a “special purpose vehicle,” an entity it creates for that very precise reason. The main advantage of doing so—of establishing the SPV and legally selling the loans to it—is that this arrangement circumvents the costs associated with bankruptcy.

Via Alex Tabarrok at MR.

I understand why Gorton is in favor of innovation in revenue generation, and I even understand why he considers shadow banking an inevitable next step given the amount of institutional money moving around now. I even understand why there need to be bankruptcy remote entities -- there should be a spread of higher and lower-risk vehicles.

What I don't understand is how or why these special purpose vehicles get to stay off the balance sheet.