Thursday, May 31, 2012

May Great Month for Low Vol Strategies

My beta indices showed the value of low volatility equity strategies, as the previously high-flying high beta stocks were crushed in May, and so now lag the S&P500 year-to-date.  Low beta strategies, meanwhile, crept up and overtook the basic S&P500 benchmark.   Above is a total return chart for daily data.

These beta portfolios consist of the the top/bottom beta 100 non-etf, non-ADR, non-REIT equities that were in the top 2000 market cap stocks in the US.  Beta was measured using daily data over the prior year as of December 31, 2011.

Wednesday, May 30, 2012

Experience is an Imperfect Teacher

It has been said that good judgement comes from experience, and experience comes from bad judgment.  Unfortunately, one doesn't always learn good judgment from experience.  From Russ Roberts' interview with Lawrence White over at EconTalk:
Lawrence White: I think the idea you referred to earlier of Friedman's, that people have to learn from experience that a certain program of control doesn't work, is true. And it was true in the Indian case. And so it's more about learning by doing. But I think somebody has to tell you what you need to learn from what you see. It's easy to learn the wrong lesson from experience.
While many learn only from experience, the implications of experience aren't obvious, especially on big issues.  This is also a theme of Jim Manzi's new book, and is discussed here in an exchange with Connor Friedersdorf:


Tuesday, May 29, 2012

Evolutionary Self Interest is Relative

David Sloan Wilson and Omar Eldakar have a neat discussion on group selection in evolutionary biology.   They point out that relative fitness is the key to assessing evolutionary success, absolute fitness be damned, which fits in nicely with my hypothesis that relative utility is more relevant than absolute utility functions.  They make this explicit around 21:45-24:15, which is snipped here:

Wilson points out a  great quote in there from AJ Kane: "Only the simplest minds can think that in any great controversy, one side was mere folly."  I think that's important to remember, and makes for more thoughtful debates, because if you habitually caricature the other side as indefensible you clearly are missing their essential if not most common arguments.

Monday, May 28, 2012

More Volatility-Return Evidence

Robeco's David Blitz addresses the low-vol anomaly by looking at an alternative to the Fama-French 3 factor model that basically assumes equity managers are all benchmarking (see Agency-Based Asset Pricing and the Beta Anomaly). If true, the relevant metric of risk is not total return volatility, but rather benchmark volatility, where the benchmark is the market. He calls this an 'agency based model' because the standard principal-agent problem here is the investor (principal) gives money to the portfolio manager (agent), who then invests with his perverse benchmark concerns. There is a lot of anecdotes and data to suggest that institutional portfolio managers are evaluated based on their benchmark volatility, regardless of what investors truly believe, so this isn't a very radical assumption.

 Using CRSP data, and the standard 25 size-book/market Fama-French portfolios that are traditionally used for testing theory modifications, he uses monthly data generates mean 'alphas' for these portfolios, which are intercepts that theoretically should be zero (because everything else is 'in' the models). Using t-stats and joint F-tests one can assess which approach fits the data better, and the agency based model works better (as usual, there are several other tests). 

This should come as no big shock because the F-F 3-factor model assumes beta 'works', when we know it does not. Adding it was rationalized by Fama-French in 1993 because it explained why equities had higher returns than bonds, and more importantly, if we admit beta is a sham most of the edifice of modern finance needs a major overhaul, not a tweak.

 Blitz's paper shines light on another angle. Clarke, de Silva and Thorley (2010) introduced a volatility factor (VMS--Volatile Minus Stable), that like the momentum factor, is just a long-short portfolio that reflects the 'risk premium' to the 'volatility factor', though here this risk premium is negative so this is like an insurance premium. Adding this VMS factor to the Fama-French 3-factor model does worse than Blitz's agency-based model. Its a good think if we can quit adding anomalies to our 'risk factors' as a way of explaining them, and this research supports that effort.

 My question always was that if the standard model is correct in than beta explains why equities are riskier than bonds but does not explain returns within equities, this implies everyone holding higher-than-average beta stocks is either deluded or not in an equilibrium. The solution seemed like a duct-tape patch to a major problem, but somehow leads to no consternation at the inconsistency. Common sense is having a feel for which inconsistencies are fatal and which are noise, and my Spider-sense has always told me this is a bad inconsistency.

 Meanwhile, there is a lot of research out there on this issue that makes me go hmm, because their numbers are so different than what I see looking at the same data. For example some researchers at the EDHEC Business school came out with a paper showing that returns fall if you look at a 1-month horizon, but rise pretty consistently when you looked over a 24-month holding period. I don't see how they got this, but suspect it has something to do with their inclusion requirements, such as including only stocks that existed over the subsequent 24 months. Further, they had no size exclusions, so they probably used every little penny stock that generates outsized returns but was non-tradable as a practical matter. I'm just guessing, because I don't see how they got such a large volatility premium (they used several to the same effect).

From Is there a risk/return trade-off across stocks? 
Table 1: Geometric mean returns for multi-portfolio analysis. July 1963 to December 2009.

On the other side, recently the self-proclaimed 'father of low vol investing' Bob Haugen and his loyal co-author Nardin Baker have quintuple-downed on standard estimates of the anomaly.  In Low Risk Stocks Outperform within All Observable Markets of the World, with a downloadable spreadsheet, they find a whopping 19% annualized return differential between the lowest and highest volatility deciles in the US from 1990-2011.

I think Haugen and Baker have the sign right, as opposed to the EDHEC group. Yet I also think they overclubbed it by a factor of 5.  

Friday, May 25, 2012

Mercenary Protestors

A friend of mine works here in Minneapolis, and lives in Chicago (6 hour drive, 1 hour flight).  Last Friday he noted his flight was filled with nurses.  He asked what was up, and found their union was paying for hotel, airfare and a per diem to join some Chicago protests the following day.

The nurses were rather visible at the NATO summit, officially calling for a tax on financial transactions, among other things.  The nurses my friend spoke to had little interest or understanding of what they were protesting, just noting it was part of being in a union, and going to be fun.

Nurses, presumably, have strong opinions on Tobin taxes. Who knew?

Thursday, May 24, 2012

Bartleby, the Welfare Queen

There's a neat story in the LA Times on a pathetic 27 year old woman with 4 kids, on government assistance struggling to break the cycle of intergenerational poverty. Here's a snippet:
After months searching for work and feeling increasingly discouraged, Natalie Cole caught a break — an offer of a part-time position at a Little Caesars Pizza shop in Compton. The manager scheduled her orientation and told her she had to pass a food safety test. She took the test — and failed. But rather than study and take it again, she shrugged it off. "I guess I am not working for a reason," she said.
People unwilling to work seems to be a real moral quandary, as reflected by the Fark comments on the story. Some don't have any sympathy, some think she needs more help.

 I'm certain that in 500 years this will no longer be such a puzzle because we simply will not have any room for those who want to have children but have neither ability nor willingness to provide for them.  There are some real long-term constraints that will bind at some point.  

Wednesday, May 23, 2012

Early Low Vol Literature Now Everywhere

It sure would have helped if sites like were up back in 2007. It's Bob Haugen and Nardin Baker's new website and has lots of neat references on low volatility. Then there's a wikipedia page on the Low_volatility_anomaly, where I get to discover first hand how misleading Wikipedia is when you are well versed in something. Nonetheless, the Wiki page is pretty good and hopefully will get better over time.

In my Kafkaesque litigation I scrambled to find simple evidence of common knowledge, which would be exempt from confidentiality agreement that my old boss was using to keep me from starting a new low-vol fund.  It was easy for me to deflect the 'mean variance optimization' allegation by pointing to Nobel Prize winning research even a judge could apprehend, but the low volatility angle was a lot harder to prove, at least by the time I would run out of money. Not only was I too soon pitching this strategy on Wall Street (back in the 1990s), but I was too soon involved in its litigation (circa 2007), as these webcites would have made my life easier.  Yet, I think it's misleading to say low volatility investing was 'out there' in 1975 (Haugen and Heins).  As someone who worked every day on the issue of precedence for over a year, I can tell you it was hardly common knowledge or obvious that these early works implied low vol investing was a good idea, and so instead I was emphasizing my prior use (eg, my dissertation and fund I had run with an explicit low vol focus).

 There were lots of papers that had found the CAPM didn't work, in that higher risk stocks didn't outperform lower risk stocks. In 1993, a year after the famous Fama-French CAPM-rejecting three factor model was introduced, Stephen Ross noted as if it was conventional wisdom that in practice “the long-run average return on the stock, however, will not be higher or lower simply because it has a higher or lower beta”[in “Is Beta Useful?” In The CAPM Controversy: Policy and Strategy Implications for Investment Management]. It was like in The Emporer's New Clothes, where once admitted by Fama--one of the CAPM's founding fathers--that the CAPM didn't work, every supposedly knew it didn't work all along (eg, Gibbons and Shanken rejected it at the 0.1% level in the 80's.  Then there's Bruce Lehman in 1990 who had noted the absence of any residual risk premium suggested this puzzle was nontrivial.).   With hindsight, these findings obviously implied the superiority of low volatility investing, because they imply you get the same return for less volatility/beta.

Yet to say everyone knew about low vol investing because of Haugen and Heins (1975), or Haugen and Baker (1991) forgets that this was just part of all those CAPM rejection pieces, which until 1992 everyone thought meant something quite different (swamped by value, size, or methodological issues).  Certainly not that low vol investing is attractive, which  to my knowledge was not mentioned until Ed Miller, who stated, in a 2001 Journal, that "An implication of [my winner's curse] theory] is that investors can improve their return relative to risk by exploiting the flatness of the security market line."

 Anyway, if we are merely to look for old references of the inverse risk/return relation in journals, I suppose we should start with Soldofsky and Miller's 1969 JoF paper, which clearly showed a perverse risk-return relation, and this observation was mentioned by later published articles that picked up on this finding, Richard McEnally (1974) and Ed Miller (1977). Everyone can go back because that's what academics do, cite prior work. I suppose there's something in Aristotle, and surely the Bard had a few quips ('Methinks thy risk premiumme ys not forsooth!').

What's really fun if you read these empirical pieces from prior to computers (ie,pre-1980), is how really shoddy they all are. The biases are too numerous to mention (survivorship bias, ignoring delisting returns, compounding daily returns, etc.). In presentation they tend to bury the lede, saying what they looked at and why, but not what they found. Lastly they are all sure to state  'further empirical study is needed' in the conclusion, the "Carthago delenda est" of the times.  No wonder macro models failed relative to simple vector autoregressions in the 1970s, econometricians were like medieval doctors back then.

Barry Ritholz is Funny

This made me chortle. Ritholz was doing an interview on the Facebook stock debacle, and I liked this:
To those shareholders who are now underwater and complaining that they accepted a last-minute increase in the allocation of what was expected to be a hot deal only to find out otherwise, Ritholtz says in jest, "What are you going to say, I thought it was a good deal at 100 times earnings. But this 150 times earnings? That's ridiculous."
It's funnier when he says it in the video. I know some people who were really screwed by Nasdaq's systems going down on Friday, and so I think Nasdaq deserves more blame than Morgan Stanley, the underwriter. As for this thing not popping on Friday as promised by the statistics of history (the standard 12% jump): when you are valuing stocks at 100x earnings, you can't say that 80 or 120 times earnings is crazy. It's all crazy.

Tuesday, May 22, 2012

Regulators Want More Money

From the HuffPost:
Two of the most important financial regulators in the country have a message for Congress: We need more money.
And my 4-year old daughter wants a pony. Given we created a brand new financial regulator, the Consumer Financial Protection Bureau, and they plan to spend $448 million next year, why don't we wait until one of these regulators actually creates some kind of thoughtful, new, regulation.

 What do they think they can do with more money? What rule-breaking is countenanced purely by a lack of resources? The many financial regulators need ideas and focus, not money. Clueless people always blame a lack of resources, which is why they are clueless.

Sunday, May 20, 2012

Why are Volatility and Bad News Positively Correlated?

If you look at implied volatility, or actual volatility, it goes up when markets decline, and falls when markets increase.  The reigning best explanation is that since most companies have some amount of debt, bad news increases leverage as the firm values fall, and higher leveraged firms have higher equity volatility, ceteris paribus.  While this 'Merton model' explanation explains a little of what's going one, it probably doesn't explain that much in practice.  I mean, it's not as if a Merton model helps predict equity volatility, even though KMV likes to convince its clients this is one of their valuable special tactics in predicting firm distress (don't believe them).

John Geanakoplos has been interested in leverage and business cycles (I noted his lecture below). Along the way he noted that there isn't really  good theory for the stylized fact that volatility tends to go up when markets go down.  Why should volatility be contemporaneously correlated with market declines rather than market climbs?

His theory is as follows: because people lever up more on assets that have higher bad news/high volatility correlations, because such assets don't fall much after the bad news, because so there is still a lot of uncertainty to resolve.  Investors prefer such assets with negative news/volatility correlations because they can lever them more.

Now, this argument is tenable only under the cover of a complex setup using real analysis, so that the simple argument being made seems like Godel's incompleteness theorem.  Yet, the answer is simply baked into his assumption of how various assets generate payoffs, and so has this faux-endogeneity that economists love.  You see, endogenous results come out of the math (supposedly), there's no assuming the result, whereas 'exogenous results' are simply assumptions.  Of course, these models have their exogeneity hidden in the rigged set up (note his asset payoff trees), which is as convoluted and artificial as any mathematical treatise on spherical horses moving through a vacuum.

Myself, I prefer the simpler theory.  When times are good you simply do more of what you did yesterday, because that was good and you want more of it.  There is little uncertainty in doing more.  When things are bad--eg, you are losing money, or can't borrow any more--then you need to do something different, you can't afford to do what you did yesterday.  As they say, things always end badly, otherwise they wouldn't end. There is a lot of uncertainty in doing things different, because there are now a bazillion things that you could do. Thus, bad news brings more uncertainty because it implies change, and good news bring lower uncertainty because it implies repetition.

Now, that won't make it to JET (the most rigorous of the esteemed economic journals) like Geanakoplos's paper, but it's truly a better theory.  

Saturday, May 19, 2012

The Power of Optimism

Here's a snippet from a Bloggingheads diavlog between Robert Wright an Matt Hudson, who wrote The 7 Laws of Magical Thinking:


This is why Danny Kahneman wrote in his latest book Thinking Fast and Slow, that optimism would be the one bias he would most want his children to have.

Friday, May 18, 2012

Group Selection Tactics

Recent work emphasizing the importance of group selection highlights the importance of coalitions, and of the conflict between individual and group incentives (eg, Wilson, Haidt).  I found Putin's recent top appointment a good example of how success is influenced by luck and mixed motives:
Mr. Putin’s first high-level appointment as president was Igor R. Kholmanskikh, 42, a tank-factory worker from the Urals who is famous for one thing: offering to travel to Moscow with a gang of assembly-line workers to chase antigovernment protesters off the streets.
Guys like this need to understand their success depends largely on understanding the importance of being restrained and deferential when being used, quietly acquiring trust from others until eventually going it on your own. Kind of like how Putin's grandfather, Stalin's chef, probably bit his tongue quite a bit and it paid off eventually. Patience is key. The process is well described in Caro's outline of President Johnson's rise to power. Johnson was a flattering sycophant during his rise to power, always eager to get face time with those above him, and acting like an adoring young pup, but when he became president he was an obnoxious, rude bully to those under him.

I know a lot of guys in business who became executives this way.  Invariably, they rarely spoke extemporaneously, had little understanding of the business and were quite defensive around people who liked to 'talk shop', but were masters at managing relations with others and forming bonds with the right people.  

Thursday, May 17, 2012

Ira Sohn Conference Results

I wasn't really aware of the Ira Sohn Conference, but some very big names were there. As Richard Posner pointed out, however, intellectual reputation invariably lags achievement, so the biggest names almost by definition are over the hill. A great example of this was Ronald Coase, who remarked upon winning the Nobel Prize in 1991, "it is a strange experience to be praised in my eighties for work I did in my twenties."

 In any case, last year's recommendations generated an average return of -8%, but the year prior was up 22%.  Thus, net over two years they returned a little less than the S&P500 over that period, adding yet another datapoint to the observation that advisers slightly lag the passive indices. On the bright side, Jim Chanos had two home-run picks--shorting VWS and FSLR--which will probably be sufficient to generate hope that while on average these recommendations are no good, if you pick the right ones, you can make a fortune. 

Such is the perennial problem with advice, in that on average it is unhelpful at best. Like education in general, trying to obtain wisdom given everything people have done and written is not straightforward. Surely reading such information is essential because no one could come up with all those insights by themselves, but unfiltered such data is no more informative than pop culture.  A lot of people with good intuition actually start ignoring such advice rather early because they see the diminishing marginal returns, why humans clearly become wiser from 0 to 30 then pretty much level off on average.  I suspect it's like Sturgeon's law (ie, 90% of everything is crap), in that those who like to take a lot of advice or read a lot includes some who are very wise and who have learned much from the past and others; but most highly educated people don't understand that they aren't necessarily becoming wiser because they choose the bad gurus, or build upon bad assumptions. 

Wednesday, May 16, 2012

Minimum Volatility Portfolio Tactics

MSCI is very good at creating indices, and their Global Minimum Volatility Index is intriguing (BB ticker M00IWO$P). If I plot its return again a simple average of my Minimum Variance portfolios drawn from the UKX, NKY, MSER and SPX indices (UK, Japan, Europe, USA). They line up pretty well.  Mean returns and standard deviations are basically identical over the period for which I have MSCI Global Minimum volatility data.

My index is created by taking all the constituents of these major indices each 6 months and applying an optimization algorithm that minimizes variance using the prior year's daily data.  The solution defines a fixed set of weights over the next 6 months.  MSCI weights things more globally, and has 8 different constraints.  It seems if you simply want a worldwide minimum variance, the little constraints about industries etc don't matter much in  risk/return effect.  This highlights that this problem has a 'flat maximum' in that solutions that are not so close to each other on one level are really close in terms of the ultimate answer.  See Robin Dawes' The Robust Beauty of Improper Linear Models for more on this phenomenon (strangely, the first page of Google search results for this title was a music CD released in 1995.  I guess these artists are being ironic).

The real value-add to any low vol strategy is not their low volatility algorithm, but rather, strategic decisions about how to view complementary factors like idiosyncratic volatility, size, momentum, and value.  Everything here is correlated, and so implicitly ignoring these factors is impossible. The details that will matter are really based on assumptions on how these factors interact: whether factor returns cancel each other  out or add up, and this answer varies whether you look at these factors like characteristics as opposed to a latent risk factors.

Monday, May 14, 2012

Risk and Return Confusion

If you listen to the first 20 seconds of this clip, you'll hear a simple proposition about risk and return from a top-rate finance professor, John Geanakoplos. The problem is, though it isn't really clear, he is talking about a risk akin to a default rate, and a return like a stated yield.  It's not really central to this particular lecture, but its the kind of throw-away assertion that highlights experts take the risk premium for granted, even though it's as common as a jackalope for your average investor.


Stephen Cecchetti’s textbook Money, Banking, and Financial Markets also presents the seemingly straightforward example of how bonds with higher default rates have higher yields: risk and expected return are positively correlated. Yet this is purely an anticipation of the default rates so is not risk in the sense of something priced. BBB bonds have, over time, the same total return as B-rated bonds, in spite of the fact that yields for B-rated bonds are always higher than for BBB-rated bonds. One must subtract the expected defaults and the resulting losses from a stated yield regardless of one’s risk tolerance. Confusing stated yield with return is a simple, obvious error. This is the kind of rationalization people make when they are certain their big picture is correct. The distinction between the amortized expected loss from defaults and priced risk is a fundamental distinction in modern risk-return theory. The usage of expected loss risk as opposed to 'risk premium' risk when it generates intuitive support at 30,000 feet suggests that financial professionals have a strong, active bias toward the big idea: risk begets average returns.

Geanakoplos's  theory, btw, is best highlighted by his takeaway: write down the principal on all problem mortgages by 50%.  This saves money because banks expect to get only 25% in the current morass.  The moral hazard of this solution is rather stark, as its unclear why anyone current on a mortgage should not immediate cease paying until he gets the 50% gift.  He has a hedge fund.  

Sunday, May 13, 2012

Hedges Don't Lose Money?

I was working out watching Jamie Dimon squirm like a worm, reminding me of Lawrence Summers pathetic recant of his rather innocuous speculation about gender talent distributions.  If a bank with $140B in market cap and over $2000B in assets loses $2B trading credit insurance, it sounds like no big deal, yet everyone, including Dimon, saw this as a a 'terrible, egregious, inexcusible mistake.'

 Dimon noted he had $8B in profits in their 'banking book' related to these trades that have not been marked to market, a point he could have expanded upon. Methinks he's rather eager to paint this as a rogue trader, a public execution of some inconvenient executives. I'm sure that some involved did it out of speculation and the potential for a large bonus, but some favored it as a hedge: any large position involves the support of groups with their differing motives--good faith idealists and cynical opportunists--but Jamie Dimon speaks as if this were indefensible, which I am sure is not true for all the participants. The trades do appear to be dumb but I'm sure there's a case where they don't appear that dumb (having been involved in a nasty legal dispute for 18 months, I can assure you that if an argument can not be presented as a reasonable good faith argument, it must involve torturing innocent children).

The game for a large bank seems to no longer include using mark-to-market hedges (they are even talking about criminal charges).  This probably isn't a horrible thing, in that large corporate hedges are used perniciously more often than not.  Sure, theoretically it need not be so, but as a practical matter, given agency problems it is.  For example, consider Metallgesellschaft tried to get very clever with their oil hedges and ended up having to eat a billion dollar loss. I know of a brokerage where in 2001 they discovered that their business was positively correlated to the stock market, so the CEO put on a big hedge shorting the market.  When the hedge made $20MM, he pocketed several million as a 'trader bonus', though surely it was a corporate hedge if it went the other way.  Then there's the history of gold companies, who discovered in the 1990s that shareholders don't want their companies hedging their core business with futures, they buy them in part for this exposure and don't like the idea that buying gold companies means their beta with gold prices is ambiguous.  Most gold companies now are long gold, which suits everyone just fine.  One could go on and on about how hedging core business risks has screwed up companies.

The notion that by definition hedges have zero expected profit and so lose money quite often seems totally alien to most legislators, journalists, and commentators, which is fine, but for Dimon to not mount a defense at all suggests either a really lame attempt to appear humble or suggests he has no idea what hedging means either.  Sandy Weill's hand-picked apprentice doesn't know much about  underwriting or portfolio management, but he does know a lot about the kind of thing Weill confused with banking, which is mainly acquisitions, PR and regulatory glad-handling.

These hedges are being abandoned for the wrong reason, because hedges sometimes lose money, as opposed to the good reason that these kind of big hedges are too often merely a label applied to bad corporate decisions.  

Thursday, May 10, 2012

Asness and Frazzini Make Simple Point on Value

Cliff Asness has been thinking, writing, and investing on value and momentum ideas since the late 1990's, and as the head of a successful hedge fund, it's fair to say he's one of the world's foremost experts on these equity factors. He and Andrea Frazzini recently put up a The Devil in HML's Details on the SSRN, so this is all new to me even though this paper has been around for a year elsewhere (strangely, there are more downloads than abstract views).

 Here's the finding. Value, as reflected by stocks have low book value/price ratios, outperforms its opposite, growth. These studies, however, generally use data from December 31, to create portfolios on July 1. This is because in the bad old days it was hard to get actual fiscal year ends, and some end in March, June, etc. Using the prior year's book value to the next July seemed like a conservative assumption, and matching that with market data from the same time also diminished some measurement issues. These value/growth portfolios would be held for 12 months, implying such information was 12-18 months old. Well, if you use the most recent data available, you can increase the value alpha by about 3% annually, which is quite significant.

This shouldn't be a surprise, but I did always notice that Dimensional's Large-Cap value portfolio has outperformed Ken French's Big/High portfolio returns since 1993 by a good 1.3% annually, which given transaction costs that should handicap Dimensional, I always found a little odd.  Mystery solved.  It's good to know that stale data is not better than the most recent data (except when creating momentum factors, which you want to lag just a little bit to account for some really short run mean reversion).  

Wednesday, May 09, 2012

Convincing Arguments

I remember learning Chomskian arguments for universal grammar and finding them baffling, other than the big idea that there's something hard-wired about acquiring language in humans versus any other species.  Who knew that EO Wilson had the same interpretation at that time.  Further, it is interesting that Wilson thinks this complexity helped Chomsky intimidate critics, something most people don't think happens among objective, truth-seeking scientists .   This is Chomsky's summary of his argument on universal grammar is from Wilson's Social Conquest of Earth:
[Chomsky] To summarize, we have been led to the following conclusions, on the assumption that the trace of a zero-level category must be properly governed.
  1. VP is α-marked by I. 
  2. Only lexical categories are L-markers, so that VP is not L-marked by I. 
  3. α-government is restricted to sisterhood without the qualification (35).
  4. Only the terminus of an X0-chain can α-mark or Case-mark. 
  5. Head-to-head movement forms an A-chain. 
  6. SPEC-head agreement and chains involve the same indexing.
  7. Chain coindexing holds of the links of an extended chain. 
  8. There is no accidental coindexing of I. 
  9. I-V coindexing is a form of head-head agreement; if it is restricted to aspectual verbs, then base-generated structures of the form (174) count as adjuunction structures. 
  10. Possibly, a verb does not properly govern its α-marketd complement. 

 [Wilson] Scholars struggled to understand what appeared to be a profound new insight into the workings of the brain (I was one of them, in the 1970s).  Deep grammar or universal grammar, as it was variously called, was a favorite topic of befudddled salonistes and college seminars. For a long time, Chomsky succeeded because, if for no other reason, he seldom suffered the indignity of being understood.

Tuesday, May 08, 2012

Group Selection Makes a Comeback

E.O. Wilson's latest book The Social Conquest of Earth is a relatively short, profound read on group selection. Wilson is the famed myrmecologist whose book Sociobiology really got the evolutionary biology field going in the seventies. This is a rather major intellectual revolution, as there used to be conensus that group selection was empirically irrelevant (Dawkin's Selfish Gene) and also immoral (The Frankfurt School, see Ursula Goodenough here call ethnocentrism a 'bullshit' instinct). Now its seen as relatively important, and has good and bad sides we simply will have to deal with.  Jon Haidt argues we are more groupish than selfish, and I think that's a pretty empirically important fact if true.

 I think it's important for everyone to realize they have important, idiosyncratic connections: family, neighbors, colleagues, and for some religion and race. My parents taught me these things didn't matter, we were all humans and we worked for each other indiscriminantly when good, selfishly when petty, and for our tribe if we were primitive like Nazis (of course, these were the same people who taught me Jews were just like African Americans as both were discriminated-against minorities, and growing up on the west side of Cleveland I had no reason to doubt it; in college my AEΠ frat brothers--a Jewish oriented fraternity--found this observation amusing). In any case, understanding how to navigate groups seems a fundamental life skill for most of humanity, so its good to know how it works, and they are not all alike, nor pure victims or belligerents.

 As a typical hetero WASP male, currently a Deist, my tribal connection are pretty unhelpful. I kind of wish I were born in one of those closer-knit American subgroups like Armenians, Jews, or Mormons that have annoying mothers-in-law but helpful uncles that can help one's career, but on the other hand my tribe is running the Freemasons and I'm told good things are coming on December 21 of this year.

 An interesting point in this literature is that groups seem to be endogenous, in that there's always an advantage to form coalitions, and cement them with loyalty instincts--they aren't going away. When people talk about the instincts for loyalty and giving, these are not based towards humanity, but rather, one's tribe. All that altruistic talk is rightly Godwined, which has rather gloomy prospects.

 Here are some snippets from the book:
Group selection shapes instincts that tend to make individuals altruistic toward one another (but not members of other groups).  Individual selection is responsible for much of what we call sin, while group selection is responsible for the greater part of virtue.  Together they have created the conflict between the poorer and the better angels of our nature.
Nevertheless, an iron rule exists in genetic social evolution.  it is that selfish individuals beat altruistic individuals, while groups of altruists beat groups of selfish individuals.  The victory can never be complete; the balance of selection pressures cannot move to either extreme.  In individual selection where to dominate, societies would dissolve.  If group selection were to dominate, human groups would come to resemble ant colonies.
In each of group groups we find competition for status, but also trust and virtue, the signature products of group selection.
A basic element of human nature is that people feel compelled to belong to groups and, having joined, consider them superior to competing groups.  

Monday, May 07, 2012

The Low Volatility Effect in Emerging Markets

The Robeco low volatility team published their study of the low volatility effect in developing markets. David Blitz (right), Juan Pang and Pim van Vliet (2012) document the following:
In this paper we examine the empirical relation between risk and return in emerging equity markets and find that this relation is flat, or even negative. This is inconsistent with theoretical models such as the CAPM, which predict a positive relation, but consistent with the results of studies which have previously examined the empirical relation between risk and return in the U.S. and other developed equity markets.
This is important because while this effect has been well-documented in the developed countries, these are the first results for the BRICs and their ilk. The basic metric they used was to rank stocks by volatility, and create long-short portfolios based on the extremum quintiles. The result is a percent return number that is independent of any currency fluctuations. Total volatility as a sorting criteria works better than better than beta, but they have similar results. The effects are not concentrated in the smaller cap stocks, though clearly excluding these firms lessens the effect (ie, if only because the extremums within 200 stocks are less than extremums within 400 stocks). If there was ever a strong rejection of a theory, this is it, as 17 out of 19 countries showing low volatility stocks outperforming high volatility stocks.  So, it exists in the US back to 1926, and in 95+% of other markets in their various time samples (in this paper, generally 1989-2010).  That's a pretty clear pattern. Perhaps now we can move on to the more interesting question of why this happens, and what this means for standard asset pricing theory.

From The Volatility Effect in Emerging Markets
Table 2

Long High Vol/
Short Low Vol Return
South Africa

Sunday, May 06, 2012

Real Men

From an reviewer discussing her love of manly men:
My husband once told me a saying from the Marine Corps: “Be polite, be professional and have a plan to kill everyone you meet.”
Currently, I have no such plan.

Friday, May 04, 2012

Hitler vs. Stalin

A review of a Lillian Hellman biography, a popular author who like most mid century intellectuals was enchanted by communism:
Ms. Kessler-Harris's defense of Hellman and others who refused to abjure Stalinism will sound familiar. While some party apparatchiks were "vaguely aware in the 1930s of Stalin's increasingly ruthless methods"—a rather limp way of describing a roiling genocide—one must remember that "this was, after all, a period when rumors flew." Soviet enthusiasts like Hellman, Ms. Kessler-Harris writes, were merely showing a commitment to "social justice" and not Stalinism per se. The Communist Party plumped for the noble goals of racial equality and a vaguely defined "peace," leading Ms. Kessler-Harris to ask: "How could [Hellman] not have joined?"
People confabulate all the time, myself included, but many people consciously confabulate and excuse lies, and this is quite different. Usually this happens when they see a greater good, as illustrated not merely by Hellman's life, but by her sympathetic biographer. Note that Ezra Pound and Martin Heidegger are generally consider morally bankrupt for embracing fascism, which to me isn't worse than whatever you want to call what Stalin and Mao were doing. White lies have their place, but not for big intellectual debates like the viability of socialism.

Thursday, May 03, 2012

The Great Stagnation Rebuffed

Given that toilet technology, the average speed on freeways, and productivity in general, has been stagnant for about 40 years, it's good to appreciate real innovations when you see it. Take the new New Zealand drinking game:
Called possum, the game has quite simple rules: you sit in a tree and drink until you fall out of it.
Part of being young is embracing one's freedom to be stupid, and this takes it to another level.

Wednesday, May 02, 2012

Inspirational Politicians

I'm always a bit bemused by people who find politicians interesting people, as invariably their remarks are simply a party line, and even the stories and metaphors aren't even their own.  Consider this confession by Charles Wheelen:
My first job out of college was writing speeches for the governor of Maine. Every spring [for graduations], I would offer extraordinary tidbits of wisdom to 22-year-olds—which was quite a feat given that I was 23 at the time.
I just don't see the point in listening to such people.

Tuesday, May 01, 2012

Do Subsidies Increase or Decrease Costs?

I guess this is debatable (who knew?). Federal college aid has risen 165% over the past decade, and college costs have risen about 74% over that same period. Yet some think that increased costs are from our stingy federal government.  For example, Jesse Jackson over at Huffpost notes:
College tuition is soaring because the state contribution to budgets is being slashed
Obama has a plan to increase aid in response. The Obama administration has already taken a series of steps to expand the availability of grants and loans and to make loans easier to pay back, proposed extending the tuition tax break and keep loan interest rates artificially low. Even Ron Paul is for specialized tax credits for college. It's hard to blame politicians for doing what sells. Paul Krugman tendentiously presents data for the idea that cost are rising because of of government cutbacks, ignoring the increasing irrelevancy of the full-tuition price and other issues, so it's possible to hold such beliefs by referencing properly credential authorities (as are most opinions).

When you subsidize something, you shift out demand which causes quantity and price to increase. It simply isn't true that prices rise due to smaller government subsidies.