I managed to live over 40 years without ever consciously hearing the word “pianism“.  And perhaps that explains why there is no appropriate Wikipedia entry. Then again, maybe this is a genuine example of social media failure.  How can it be that a word that describes the technique of playing one of the most transformative musical inventions of all time has not been covered yet by one of us wisdomofcrowdshivemindtypewritermonkeys?

If I follow the logic of Clay Shirky’s Here Comes Everybody: How Change Happens When People Come Together, it is actually my fault there is no entry for pianism; being the first person to have discovered the chasm in the wikicrust, I should have done my social media duty and filled it in with what passes for the aggregate of my knowledge so that others following would not stumble into the same psychotic abyss.  Instead, selfishly, I thought I’d share this glaring absence with you my few friends for a bit of a snigger.  But you are probably not sniggering, except perhaps at my archness, which, after all this time, I’m a little disappointed that you’re not accustomed to yet.

In mitigation, social media delivered me a gem just the other day: one of those recycled gems that litter the digital steppe.  Via some path I can’t now recall, I ended up on Amazon reading a DVD review that immediately and uncharacteristically prompted me, Pavlov-canine-like, to click “Add to Shopping Basket“, surreptitiously bypassing the obligatory cooling off period in “Wish List“:

My title [One of the Most Extraordinary Piano Films Ever Made] applies primarily to the 1965 black and white film of Alexis Weissenberg playing Stravinsky’s Three Movements from Petrushka, amazingly creatively filmed in Stockholm by Åke Falck. I remember seeing this film on TV almost forty years ago and the memory of it has stayed with me ever since. I am so pleased finally to have a copy of that marvellous film. Weissenberg was in his early thirties at the time and at the very height of his considerable form. The views provided by Falck are highly unusual but each has a clear intention of adding to our enjoyment of the music by showing us in closeup both the hands of Weissenberg and the movements of the mechanism of the piano; the camera actually almost climbs inside the piano. The whole thing is filmed with high-key contrast. This is one of the great piano films ever made.

Having confessed to an ignorance of pianism, I am not, however, going to reveal here that I had not heard of Alexis Weissenberg either, nor ever knowingly listened to Petrushka (orchestral or piano version). So don’t ask.

About 18 months ago, I did finally come across this word “pianism”, and on Saturday mornings now I sometimes get to observe it (albeit at my own not inconsiderable expense) being painstakingly transferred from one generation to another.  But I would not dare create a wiki based on these fly-on-the-wall insights.

The other day too, I overheard someone say that, in contrast to the guitar, the piano always sounds like the piano.  Reining in my passion for contradiction I said nothing, even though I was sure that couldn’t be right.  Pianism is about making the instrument sound like all sorts of things that it is not.  A little way in to the Petrushka, the piano does stop sounding like a piano (around 1 minute 35 seconds). In the DVD “extras” Weissenberg too makes an argument that the sounds a piano can make defy the physics of hammer hitting strings. (Ironically, you will find out if you buy it that to film the Petrushka they had to use playback and build a piano without strings).

By other miracles, the copyright owners appear to have provided this enticement for your limbic system. Neurologically speaking, and pace Clay Shirky, the definitive book on pianism might be subtitled How Change Happens When People Spend A lot of Time On Their Own.

Related Posts

1. something to read when the sport is on
2. ancestral fitness
3. gym fees require heavy lifting

Related posts brought to you by Yet Another Related Posts Plugin.

There should be a rule that if Professor Robert Shiller is speaking in public within a hundred miles of you, you must make tracks to hear him. A statistical analysis of my own movements over the past 12 months might show that I’m already following this rule. However, with just the two data points, you should not bet the farm on it…though many have done worse (I know: I’m related to some of them). When they reform Parliament, they should sneak that rule in there for our politicians, and then apply it more broadly to the population at large. Once you’ve read Shiller’s new book, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism (US edition), with Nobel Laureate George Akerlof, you’ll know why.

I’ve more or less finished Animal Spirits, and the purpose of my Monday trip to Policy Exchange was to hear Shiller discuss the book and his new pamphlet for the hosts: a proposal that the UK adopt an inflation-indexed unit of account, like Chile’s Unidad de Fomento, as a means to cure the population of money illusion. I felt blessed to be invited.

Animal Spirits is surely essential reading for any student of our broken times. And The Case for a Basket, which you can download for free, has a good chance of becoming government policy; when I last saw Shiller in London in the autumn, he’d been in to see Gordon Brown, Alastair Darling and Lord Mandelson, if I recall correctly. Meanwhile, as the leading centre-right think-tank, I understand that Policy Exchange will be the leading source of ideas for any future Tory administration, assuming they can keep their moats clean, as it were.

But I could not help wondering if Shiller’s audience was taking all this behavioural economics stuff in, or whether he was just another speaker on the Westminster agenda to be consumed: knowledge of his ideas being a necessary source of signalling to others in polite conversation. Shiller’s argument that our animal spirits have been dangerously discounted by economic thinking surely makes him a heretic in this milieu; the reformation he foretells has barely started. There are a lot of PPE graduates out there, and a greater concentration within 100 yards of Parliament.  Would they not need to go back to school, or be reprogrammed?

But I digress.

To imagine how the “basket” would work, you have to understand it is a unit of account, a measurement of value that would not alter with inflation. Or deflation, for that matter. If you had your house to sell, and wanted to make sure you got what you paid for it a year later, you would offer it at the same basket level. You would avoid having to perform a complex accounting calculation that, on a day-to-day basis, is beyond most of us, including our elected representatives. We prefer to think in nominal prices rather than real terms. So we get easily persuaded that houses are a sure winner when we should all know there ain’t no thing as sure winners. Shiller shows US house prices actually closely track inflation over the longest time. A basket system would be especially useful for fixing ongoing contracts, like legal fees or alimony payments; the “basket” ensures that a figure agreed today will buy the same amount of goods and services in the future for the recipient.

Shiller maintains that the Chilean system — introduced in Chile in 1967, but only really taking off in the 1980s — has worked successfully, despite local complaints about its long-term viability, and could prove just as useful in low-inflation economies like the UK and US.

What I find attractive about it is that it is a simple solution to a complex set of pernicious social behaviours. According to Shiller, all that the government needs to do is supply its institutional credibility to a calculation and then create a website. Electronic payments systems would enable any number of assets and commodities to be listed in baskets and payment settled via a real-time currency calculation. In effect it stops you being defrauded by history.

The idea of Animal Spirits, meanwhile, is not new. Shiller points out that the phrase was used by John Maynard Keynes. But in their book, Shiller and Akerlof seek to increase the emphasis on non-rational factors which modern economics has tended to ignore. Money Illusion plays a key role. But they also emphasise issues like trust, bad faith, and corruption. And there is a wonderful qualification of the power of capitalism, with perhaps more than a gentle poke at our more optimistic libertarian friends:

…the bounty of capitalism has at least one downside. It does not automatically produce what people really need; it produces what they think they need, and are willing to pay for. If they are willing to pay for real medicine, it will produce real medicine. But if they are willing to pay for snake oil, it will produce snake oil.

Shiller is a curious student indeed. He reads old newspapers in his quest to understand mood and capture the narratives that transmit bad economic ideas. In Monday’s talk he regaled us with a newspaper column from the 1880s deploring the a collapsed property boom in Los Angeles. The columnist boldly asserted that never again would people be so stupid. To be fair, for nearly a century that was correct. So how do these animal spirits get going? This is what he and Akerlof say:-

Why do new kinds of corrupt or bad-faith behavior arise from time to time? Part of the answer is that there are variations through time in the perceived penalties for such behavior. Memories of major government crackdowns against corruption fade over time. In a time of widespread corrupt activity, many people may get the impression that it is easy to get away with it. Everyone else is doing it, it seems to them, and no one seems to be getting punished. To some extent, lowering one’s adherence to principles at such times is a perfectly rational thing to do. Lower principles at certain times may also reflect a social osmosis, as information about the probability of punishment for certain kinds of crimes spreads through a net of personal acquaintances, as Raaj Sah has documented. Such a process may be part of the confidence multiplier, as corruption feeds back into more corruption.

The variation through time in the extent of corruption of bad faith is also to some extent a reflection of the fresh opportunities that arise as new financial inventions of one sort or another appear, or as financial regulations allow innovations to be implemented. These innovations may not be understood initially by the public. This variation occurs because of cultural changes unrelated to fear of punishment or to changes in technology. These changes are clearly within the realm of pure animal spirits. Culture changes over time to facilitate or hinder aggressively competitive or predatory activities. Because these cultural changes are difficult to quantify, and fall outside the field of economics, they are rarely connected by economists to economic fluctuations. They should be.

Shiller and Akerlof continue with examples of how widespread flouting of 1920s US prohibition led to a more generalized disrespect for the rule of law. Then in the depression years things shifted again. By 1941,  bridge was the most popular card game in America, encouraging, as it does, cooperation, while also not being played for money. By contrast, the early years of this century have been characterised by the rise of Texas hold’em, bluffing, and the poker face, both literally and metaphorically.

You don’t have to look far for these animal spirits. If Shiller is now more likely to be the first voice the Tories turn to on matters to do with housing markets, this will be an improvement on a previous foray which enlisted the Honorable Kirstie Allsopp, presenter of property porn TV programme Location, Location, Location. I’ve often wondered why the kindling of animal spirits by one of our public service broadcasters had not long ago been scrutinized by a House of Commons select committee or two. But recent evidence shows the same spirits had taken hold there also.

Now if it were real animal spirits we needed to calm, Louis Armstrong would be our man. In the 1938 film Going Places, Armstrong plays Gabe whose music is the only thing that will settle the unrideable horse Jeepers Creepers.  Yes, you know where this is heading. Tell me I’m wrong, but it sounds like he too is asking “where did you get those PPEers?” How they hypnotize!

And did you Twitterers note how Duke upbraids Maxie? “Why don’t you stop thinkin’ up snappy sayings and start concentrating on business…”

Related Posts

1. another fine mess
2. the 11th chapter of napoleonic hubris
3. something to read when the sport is on

Related posts brought to you by Yet Another Related Posts Plugin.

A Scottish doctor today is arguing for a tax on chocolate to tackle obesity and the concomitant rise in type II diabetes. Of course some, including myself, have been labouring under the impression that chocolate might just be good for you, and that this might explain certain cravings, assuming you are eating the very high cocoa solid variety. But an empirical test this morning confirmed that it is not the chocolate I crave but the sugar. I read somewhere on the internet that if you think you crave chocolate because of a nutritional deficiency you should try eating some pure cocoa. So I did just that. It took about a quarter of a teaspoon of Green & Black’s Cocoa powder to convince me that it’s the sugar in chocolate that I’ve been craving. I’m pretty good at acquiring tastes but cocoa is nothing on its own: it needs sugar. And all that sugar does, it seems, is boost your insulin levels and leave you wanting more when your blood sugar crashes again later. Chronically, this will kill you.

A few weeks ago, I finished reading The Diet Delusion by Gary Taubes. If he is correct, the book pictured (above) by John Yudkin is from the graveyard of nutritional science. Published in the US in 1973 for a cover price of $1.95, this copy of Sweet and Dangerous appears to have left a thrift store some time later — somehow riding a wave of inflation to sell for $2.75 — before hopping the Atlantic where it would have been acquired by my late mother-in-law from a UK charity shop for 40p. By this time its bubble had finally burst, and Yudkin’s work is now well out of print. Were it not for the normal prevarication over getting rid of any books in the Knackered household, this battered edition might already have returned to second-hand bookstore oblivion; instead, it has been sitting on my desk for nearly nine months asking to be blogged about, reprieved by Taubes’ mention.

According to Taubes, the hypothesis that sugar consumption could be a primary cause of heart disease and other chronic illnesses was being taken seriously in the research community in the early 1970s. But it was in competition with Ancel Keys‘ prevailing hypothesis that dietary fat was what mattered. This is what Taubes says:-

By the early 1970s, Keys’s dietary-fat hypothesis of heart disease, despite the ambiguity of the evidence, was already being taught in textbooks and in medical schools as most likely true. After Yudkin retired in 1971, his hypothesis effectively retired with him. His university replaced him (at Queen Elizabeth College London) with Stewart Truswell, a South African Nutritionist who was among the earliest to insist publicly that Keys’s fat theory of heart disease was assuredly correct and that it was time to move on  to modifying the diets of the public at large accordingly.

Yudkin became a figure of ridicule, and further research into the sugar and refined carbohydrate hypothesis was avoided by those who knew what was good for them professionally, so says Taubes.

Taubes draws out just how dramatic has been the increase in our refined sugar consumption over the past two centuries, suggesting that Yudkin was right to be more concerned about sugar metabolism:-

But the greatest single change in the American diet was in fact the spectacular increase in sugar consumption from the mid-nineteenth century onward, from less than 15 pounds a person yearly in the 1830s to 100 pounds by the 1920s and 150 pounds (including high fructose corn syrup) by the end of the century.

A fuller review and more mentions of Taubes’s book will arrive in due course. Just to say that I’ve been wondering whether it might be the most important book I’ve ever read. The paperback edition is now out in the UK.

Related Posts

1. the diet delusion
2. uncle bryan’s story of the stone-age people
3. sugar baddy

Related posts brought to you by Yet Another Related Posts Plugin.

Gregory Berns, a professor of neuroeconomics at Emory University and author of Iconoclast: A Neuroscientist Reveals How to Think Differently(UK)/(US), was interviewed this morning on Radio 4’s Today programme exploring the role of neuroeconomics in understanding the current crisis.  He’s in Davos for the World Economic Forum, with all the large fromages.

Back in the day, the Knackered Hack used to dispatch a team of reporters to Davos. Press places were then scarce.  Now I’m watching it all on Twitter, my very own self-organizing newswire, and tossing in the occasional iconoclastic observation of my own.  Who-da thunk it?  Everyone and his dog seems to be there; some shuddering, and not from the cold.

Berns message was about as negative as you can get when considering the current crisis.  He deftly applied the old-dog-new-tricks teaching heuristic to an entire generation:-

One thing that we know is when people make decisions that they are uncertain about is that they look to other people… We have seen along the way how other people’s opinions essentially pollute those judgments. Now,  modern markets are great. Now, economists like to talk about efficient markets and all of that, but the problem is that they are only efficient when people behave as individuals and render independent judgments.  Now I would probably go as far as saying the current crop of adults is a lost cause in that I think we should be focussing our efforts on the next generation and how to teach them to make judgment that are independent of each other and stop this crazy herd behaviour.

So there you have it.  All current adults are sheep.  Better cancel the Twitter account .  You can listen to the whole thing here.  I think it was edited, so there may be some context missing and the above quotation therefore not adequately representative. That’s mainstream media for you.

All that said, like a dog barking in the wind, I myself did tweet the following just a few weeks ago:-

Haunted slightly by counterfactual sense the boom promoted an entire generation of the wrong type of manager”

I’ll come back to that idea soon, I hope.  But in the meantime, given Berns’ imperative that we focus on the cognitive capacities of the next generation, it was a neat little coincidence that a review copy of a new textbook by David Hardman, entitled Judgment and Decision Making, arrived in the post yesterday from Wiley. US version available here.  Just take a look at the contents:-

1. Introduction and Overview: Judgments, Decisions Rationality
2. The Nature and Analysis of Judgment
3. Judging Probability and Frequency
4. Judgmental Distortions: The Anchoring-and-Adjustment Heuristic
5. Assessing Evidence and Evaluation Arguments
6. Covariation Causation, and Counterfactual Thinking
7. Decision Making under Risk and Uncertainty
8. Preference and Choice
9. Confidence and Optimism
10. Judgment and Choice over Time
11. Dynamic Decisions and High Stakes: Where Real Life Meets the Laboratory
12. Risk
13. Decision Making in Groups and Teams
14. Cooperation and Coordination
15. Intuition, Reflective Thinking, and the Brain

Back of the net, as they say in soccer.

David, with others, runs the London Judgment and Decision Making Group, whose seminars I’ve been lucky enough to attend when I’m in town.  If Berns is right, David should be needing a larger venue.  David assures me he will be blogging on the book before too long, so I’ll let you know when that happens.  We can definitely benefit from a regular dose of wisdom from this discipline.  Of course, it’s a little known fact that the Knackered Hack is already one of the leading decision science blogs on the web.  It says so here. And if you are wondering how that happened, the answer remains … well … uncertain.

Photo credit: stephenphampshire

Related Posts

1. toxic waste
2. the maverick’s story
3. the 11th chapter of napoleonic hubris

Related posts brought to you by Yet Another Related Posts Plugin.

I wonder if Malcolm Gladwell’s Outliers: The Story of Success is going to inadvertently create a popular misunderstanding about success similar in form to my previously stated fear about what a superficial reading of Gut Feelings and The Wisdom of Crowds would do for effective decision-making.

In a few Twitter exchanges yesterday, the notion that 10,000 hours of work invariably leads to success seems to have been the takeaway of one or two people who have read the book, although that might be an erroneous gut feeling on my part, constrained by the 140-character limit of such “conversations”. That is how misunderstanding cascades through new media . To compound that problem, I have not yet read Outliers myself. However, it was David Shenk at The Genius in All of Us (a blog and the title of his forthcoming book) who highlighted the various longitudinal studies into talent that I believe Gladwell is using too.

My understanding from Shenk, whose blog has sat quietly on my blogroll more or less since I started here, is that 10,000 hours of hard work do not necessarily lead to success, but are the minimum needed for mastery of a complex cognitive task or subject. If that mastery or genius represents success, then there is no debate. But there are plenty of back stories (I am collecting them, of course) that reveal how other factors play a part after the mastery and may yet prevent even hard-won talent from being recognized. For example, Sibelius, who I’m learning seems to have had a rough ride from 20th century musical fashion in general, flunked his audition as violinist for the Vienna Philharmonic through a disastrous bout of nerves. In Gladwell’s defence, I’m sure that he states clearly in his book that there are a lot of environmental factors (some of them entirely random) that are usually necessary to support an individual over the ten years or so required to sustain that disciplined effort.

But I will not be surprised now if successful people, who have not read the book, start explaining their success having backwardly calculated that they must have spent 10,000 hours of hard work to earn it. Let me know any examples, won’t you.

You’ll have noticed in the last post [sic] that I surreptitiously tried to sneak myself into the musical outlier group that is prize-winning horn players. Here is the outlier among those outliers, Dennis Brain, providing an introduction to the horn. Killed tragically in an accident in 1957, aged just 36, he remains to be surpassed:-

The works of Dennis Brain can be purchased from Amazon here.

Related Posts

1. horns of a dilemma
2. undulating route to higher performance
3. everything is jumpin’

Related posts brought to you by Yet Another Related Posts Plugin.

What has the French Horn to do with the science of uncertainty? The Economist review of journalist Jasper Rees’s book I Found My Horn may have nailed it.  The book chronicles Rees’s mid-life crisis in which he picked up his childhood instrument rather than running a marathon .  It’s now being published in the US as A Devil to Play: One Man’s Year-Long Quest to Master the Orchestra’s Most Difficult Instrument.  More pertinently, a play starring co-writer Jonathan Guy Lewis opens this very night on the London stage.

What makes the horn quite so hard to play is the length of tubing necessary to produce its tonal range; despite three valves, it is very easy to hit the wrong note, or fall off the right one. There’s a level of doubt about each outcome that does not trouble other musicians to quite the same degree.  Even professional orchestral players are more exposed than most to public musical catastrophe, because of the horn’s expressive value to composers.  For this, among other reasons, horn players are considered a breed apart.  This is how Simon Rattle puts it:-

You never eyeball a horn player. You just don’t. They’re stuntmen. You don’t eyeball stuntmen when they’re about to dice with death.”

Given the Knackered Hack’s quest for antidotes to hubris, perhaps mastery of the horn (if that is not a contradiction in terms) should be considered an essential qualification for public or corporate office?  I’ve noticed that this website seems to attract a disproportionate number of horn players (at least two).  Perhaps there’s a connection? You can purchase a CD by one of those readers below.

[By way of full disclosure, the Knackered Hack was placed first in the under 12s brass section of the Harrogate Festival in 1976, performing the second movement of Mozart's Fourth Horn Concerto K495, cough... ]

Photo credit: vtengr4047

Related Posts

1. something to read when the sport is on
2. which connection i should cut
3. overgrown paths

Related posts brought to you by Yet Another Related Posts Plugin.

The bad economic news goes on. But so does life. Consequently, I’m contractually obliged to indulge in yet more comic relief.

There’s been a new Friday ritual in the Knackered household since May. A vibrant red-and-yellow A4 envelope, emblazoned with the letters “DFC“, drops through the letter slot to sizzle like a stick of cartoon dynamite on the doormat until the kids (8 and 13 years old) get home from school. They can’t wait to rip it open and devour the 36-page comic inside.

The DFC, whose initials remain shrouded in mystery (alternative hypotheses are supplied inside the front cover each week, e.g. “Dracula’s Favourite Cardigan”, “Disco For Crustaceans”) is no ordinary comic: not that there are many of those left these days. This comic combines the talents of a rich mixture of graphic novelists, artists and storytellers, along with the literary demi-god of children’s fiction, Philip Pullman.

Mezolith, Stories from the Stone Age, illustration by Adam Brockbank

The weekend before last, the younger Chip off the Old Hack got to meet his heroes: a handful of the illustrators and storytellers were down at the Bath Festival of Children’s Literature, entertaining the kids and signing copies. I’ve never seen him shake with excitement, but that is how it was as he clutched his pride-and-joy, the very first edition, waiting for it to be initialed. Gratifyingly, the sight of the very first copy had the young illustrators cooing like parents over a newborn.

Well, if you haven’t heard of The DFC, publisher David Fickling wanted to recreate the great storytelling tradition of the heyday of British comics: names from the 1950s and 1960s like The Eagle and Bunty. I was lucky enough to be introduced to Fickling, someone who was, until that moment, an invisible hand in shaping the education and destiny of the two Chips off the Old Hack; he published Pullman and Jacqueline Wilson; he also initiated the Horrible Histories series. If you have kids, grandchildren, nephews or nieces of a certain age, these titles will probably be very familiar to you. The Knackered favourite in that imprint is the Murderous Maths series, and some eagle-eyed readers tell me that MM author Kjartan Poskitt provides the The DFC’s puzzles.

Fickling seems to have an eye for the creative outlier. In conversation, it was clear that his passion is good stories and that when he finds them he’s prepared to take risks. Writer/illustrator partnership The Etherington Brothers put in several proposals, but threw in one completely off-the-wall suggestion with no expectation of it being accepted; this was Monkey Nuts, the tale of Sid (a tap-dancing monkey) and Rivet (a robot drinks-machine). Happily, it made the cut. Perhaps that typifies the joyously exuberant, anything-goes creativity that the publication is managing to foster. And young people (even slightly reluctant readers, in our experience) are equally motivated and enthusiastic to read it.

So, it’s a fair guess that something very special is happening over at The DFC. Already, some of the illustrators are generating interest from Hollywood; it’s said we should expect some of these storylines to find their way into future Dreamworks productions. And us paleo types can get excited, because Mezolith (above), written by Ben Hegarty, is the story of stone-age, hunter-gatherer Britons.

It is early days still. The publication carries no advertising, and (as I understand it) the forty-odd contributing creatives are part-shareholders in the venture. So, as a pioneering enterprise, it deserves your support. If you want the kids in your life to think kindly of you on a weekly basis, (and don’t we all?) I’d scurry over to The DFC website, and get them an annual subscription. Better than money in the bank!

Of course, if you are planning to go to the Cheltenham Literature Festival this coming weekend to see Nassim Taleb, the Etherington Brothers will be there for a The DFC comic workshop* too. Now what are the chances of that happening?

* The DFC would like to hear from any schools willing and able to host a comic workshop. You can contact them via the website or via their terrestrial address: The DFC, Oxford, England, Europe, Earth, Solar System, Milky Way, The Universe 31 Beaumont Street, Oxford, OX1 2NP.

Related Posts

1. dfc at tesco Nov 26-Dec 2
2. apple crunch
3. writing into the darkness

Related posts brought to you by Yet Another Related Posts Plugin.

Having effectively called the top of the dotcom bubble with his first book, Irrational Exuberance, and documented the emerging US housing bubble in his second edition of the same, you’d think that Yale economist Robert Shiller would have been treated with significant reverence by our economic and financial institutions (both public and private) over the past few years. And you’d think that he would already have been asked to make a material contribution to resolving the crisis. In fact, you’d think that writing Irrational Exuberance would alone have been enough to forestall the second crisis. But then, if you thought that, you’d be me. And you’d be wrong. Again.

If you’re unfamiliar with Robert Shiller then understand that he is perhaps the most eminent and considered examiner of modern investment bubbles. It was two days after Shiller and a colleague testified before the Federal Reserve Board in December 1996 that then Fed Chairman Alan Greenspan sent stock markets into a mini-crash by coining the now legendary phrase “irrational exuberance” in the context of stock market behaviour. Influential indeed. Shiller’s book Irrational Exuberance came out in March 2000, after which the dotcom boom finally collapsed.

As Shiller tells it, the world of political and economic authority just does not work the way you might have hoped when it comes to emergent investment bubbles. And yesterday I took a look at one or two of the more popular economics websites to remind myself of how well they responded to the notion of a US housing bubble, and their level of reference to Shiller’s work. Even at the peak, these sites were looking for reasons why we were not in a bubble. It made me think that if you desperately want to sell your house these days you should do no more than find an economist or central banker and just name your price: they’ll tend to believe excessively in market efficiency and won’t even haggle with you. In fact, they really don’t seem to be very savvy at all; in the way Shiller observes Greenspan’s ideological devotion to Ayn Rand (pp 43), they would seem to be honour-bound to reward your heroic selfishness.

Shiller’s new book, The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do About It (publication date: September 1), is a concise attempt to elaborate in just seven short chapters the genesis of the housing bubble (a psychological carry-over from the dotcom bubble), explode its myths (“prices always go up”), explore its scale and the dangers of its deepening impact (it’s bad), assert the need to maintain confidence in our economic and financial institutions by aggressive action (comparing the US and European responses to the Great Depression), and then explore longer-term, more fundamental reforms and innovations that will create a population much more attuned to economic risk.

How the US housing bubble looked at the peak. (Source: Irrational Exuberance website)

If you were among those who’d imbibed his dotcom analysis, or just lived the visceral torment of trying to swim against the tide of this particular mania, Shiller’s narrative of the social psychology of the housing bubble is all too familiar. By the way, if you think you already paid a high enough price for being prudent and that you may now cash in, Shiller has more bad news: you’re gonna have to pay for the inevitable bailouts too.

We have to be ready for the possibility that many more tax rebates will be necessary, perhaps for years to come. These rebates may eventually have a significant negative impact on the national debt. That possibility can be accepted only if we truly recognize the seriousness of the problem.

The book describes the process of the contagion of ideas, likening the spread of bubble mentality to a disease epidemic. Like a disease, the epidemic grows as the infection rate exceeds the removal rate; in other words, positive beliefs about the market outnumber more negative perspectives. For instance, there was the irrational belief that housing always appreciates, born of the inflation-ignoring money illusion; the increasing salience of particular “new era” narratives; regional or city patriotism that implied a particular area was somehow intrinsically different — where “everyone” wanted to live — justifying the inexorable local market rise. These ideas also inform the stock of media coverage, and are woven into reports of market gains in an attempt to explain what has little or no real fundamental basis:-

Most persons can be forgiven for not seeing that the sense of economic prosperity that usually attends a major speculative bubble is actually caused by the bubble itself.

But what is particularly telling is how this infects not just the private institutions, who stand accused of complicity in creating the subprime mess, but also our public institutions: political, monetary and regulatory. For example, describing conversations with the officials from the US Office of the Comptroller of the Currency and The Federal Deposit Insurance Corporation when he was urging prompt action to curb the then excessive lending:

I had the feeling that many of them viewed me, with my argument that the bubble would burst, as an extremist who deserved a skeptical response.

The problem Shiller complains of now, though, is that he is too readily characterised as a Cassandra. Mirroring the positive feedback loop that attends market rises, Shiller describes how journalists now invite him to describe how deep and how long a recession might be, while seeming much less interested in the solutions and frameworks that he proposes as a response to the economic and market disaster that is unfolding. He argues that this negative feedback loop — the increasing salience of bad news stories — serves to undermine confidence, and deflects attention from the scale and detail of the remedies needed. And I can attest to that; I may no longer eat breakfast cereal but am obliged to consume an oversized portion of Credit Crunch every morning c/o BBC Radio 4’s The Today Programme.

More than just an academic observer, Shiller is a practitioner. He has designed institutional and market frameworks to help avoid the economic catastrophes which tend to follow bursting bubbles. For instance, discovering that there was no long-run continuous data series to analyse the activity of this most important of asset markets, he set about researching and building the now widely used (one could say “benchmark”) S&P/Case-Shiller house price index, which charts the housing market in the US back to 1890. It’s on the basis of this data, Shiller shows, that US house prices rise with inflation over the long-run and are not the one-way bet of popular imagination. With colleagues, he also devised a domestic property futures market on the Chicago Mercantile Exchange.

So, Shiller is not really in the business of I-told-you-so, nor here to knock markets. He’s passionate about understanding the individual and group psychology of investment, and designing market mechanisms that better serve us as citizens — that will enable us to take more informed risks, and so perhaps lead us toward more creative lives.

And it is worth reminding ourselves why Shiller thinks it’s important that markets send us the right signals. In this, from Irrational Exuberance, one need only substitute “dotcoms” with “new granite worktops”:-

If we exaggerate the present and future value of the stock market, then as a society we may invest too much in business start-ups and expansions, and too little in infrastructure, education and other forms of human capital.

But in The Subprime Solution, Shiller argues against those who call for a retreat to a simpler financial age. He suggests a range of options that can trickle down to the ordinary person to democratize finance, provide them with the security of home-ownership (where appropriate), and insulate them from some of the risks to their longer-term earnings profile. One interesting point he makes is that some people, lacking the means to offset their socio-economic risks, may become far too cautious in their choice of employment, thus depriving society of their more creative endeavour.

I especially liked his defence of mathematical finance as an important new technology. When we think of technology we too often think of gadgets and software rather than applied knowledge and know-how. It’s clear that some mathematical models have been erroneously applied, and I take Paul Wilmott’s blog as my guide for insights on how that has happened. But, in simple terms, I’d venture that this is not greatly different from the misapplication of GPS: use it with common sense, and know how to navigate without it when it doesn’t work. Shiller reminds us not to throw the baby out with the bath water.

At less than 200 pages of wide-margined type, lightly annotated and with no bibliography, there is something of the emergency pamphlet about this book. And Shiller is advocating a much speedier and more deep-rooted response to the crisis, which, as of a few weeks ago, he felt was still not being taken seriously enough. I suspect the effective collapse of Fannie Mae and Freddie Mac into government support since then has helped change that, but the policy response still seems some way from the kind of discussion Shiller is trying to lead here.

Shiller notes as his inspiration John Maynard Keynes‘ 1919 best-selling critique of The Treaty of Versailles The Economic Consequences of the Peace. And there is a strong moral imperative running through Shiller’s advocacy, no doubt reflecting the increasing severity of the social consequences that can compound very quickly if the policy response is half-baked. Of Keynes’ book, Shiller says in an accompanying release:-

This says something important about human emotions and drives, and a weakness that can cause people to careen blindly into huge catastrophes. In an important sense, we see the same human weaknesses again with the subprime crisis. The resolution to this problem calls for the kind of integrated thinking involving economic, political and moral dimensions that Keynes brought to the crisis of his time. In this sense, Keynes’ great book is an inspiration to me.

There are many examples in the book of how our financial understanding can be re-framed over the long-term. One that definitely seems worthy of further examination is the unidad de fomento used in Chile and copied elsewhere in Latin America where prices are quoted in a standard inflation-indexed basket measure rather than hard currency to reveal to the individual the intrinsic value of a commodity or asset over time rather than its nominal, currency-based value. For it is the rise in nominal values over time to which Shiller attributes the recent sense that you can’t go wrong with housing. Shiller describes Chile as the most inflation-sensitive population in the world.

There are many more recommendations, but if this book has the ambition of Keynes’ earlier work, and the scale of the problem is as suggested, I’d argue that the book is as accessible as you are going to get from such a modern behavioural economics guru. It’s a book that everyone who lives in a house (and who is of reading age) should own; just don’t buy ten and try to rent them out to friends.

Shiller links

1. The Atlantic Monthly has an exclusive feature article by Shiller, drawn from the book.
2. You can read Shiller’s occasional New York Times pieces here.
3. A publisher’s video interview of him is here.
4. His Yale lectures are being made available to the public later in the year at Open Yale.
5. the Irrational Exuberance homepage is here.

The book should also be available on Amazon’s Kindle from August 18, two weeks prior to print publication:-

Related Posts

1. magoo finance iv
2. magoo finance
3. Sornette pronounces that US housing now in bubble

Related posts brought to you by Yet Another Related Posts Plugin.

I thought I should point you in the direction of a new anthology of blog posts, written by some of the leading online proponents of ancestral fitness. It’ll soon be available at www.ancestralfitness.com and will make the ideal gift for the Neanderthal in your life in need of a little self-improvement.

For those unfamiliar with the concept of ancestral fitness, it describes a lifestyle philosophy which attempts to incorporate diet and exercise regimes consistent with our evolutionary biology. That translates as a diet avoiding “easy” carbs, and exercise revolving around high-intensity workouts. There’s more to it than that, naturally.

Of course, top of the list of contributors is Professor Art De Vany. But why they roped in the last guy is anybody’s guess. I bet he’s pleased to be in such illustrious company.

Related Posts

1. uncle bryan’s story of the stone-age people
2. hottest thinker in the world
3. Caveman lunch with taleb

Related posts brought to you by Yet Another Related Posts Plugin.

So, I was fretting about underdogs in the last post. This past weekend, the Sunday Times Magazine ran a long interview with Nassim Taleb in which he was described as “now the hottest thinker in the world”, charging up to $60,000 per speaking engagement, with the great and good beating a path to his door — from the world’s leading banks to NASA.

Interestingly, the interview by Bryan Appleyard included lunch and, naturally, had Nassim following Art De Vany’s dietary prescriptions of evolutionary fitness. Well, some of my most loyal readers will have heard it here first.

For other reasons (and by accident) I found an old email pitch yesterday that I made in 2003 to a magazine on corporate governance; let’s say this was during my ugly duckling phase:-

Also, I have an interview idea which you might be interested in. Have you heard of a book Fooled By Randomness by Nassim Nicholas Taleb–a maths professor and hedge fund trader from the US? He is in town in a few weeks and I thought I might try and get a hold of him. Although his background is in quantitative trading, he has some interesting things to say about luck and probability in a business context, and it has struck me that this could provide some interesting reflections from a corporate governance point of view. The underlying theme would be that over-remunerating senior executives is even more hazardous than we think if both success and failure may owe more to luck than judgement, backed up by a good dose of sound mathematics of course.

Let me know if you think it a bit too outlandish. My owns sense is that Taleb and others are leading market thinkers and their ideas will permeate downwards in due course.

I didn’t get a commission.

Back in those days, even though Fooled By Randomness was a bestseller, you could still turn up at the now-disappeared Financial World Bookshop in Bishopsgate and hear Taleb talk for nothing to a small and select audience of besuited quants and the odd unshaven, head-scratching scribe. And you try and tell that to the young people of today — will they believe you? No.

Related Posts

1. uncle bryan’s story of the stone-age people
2. Caveman lunch with taleb
3. ancestral fitness

Related posts brought to you by Yet Another Related Posts Plugin.