Economy Recovery Plan

Wednesday, January 7th, 2009

Phil Greenspun shares his Economy Recovery Plan — but what caught my eye was this warning:

We know what America’s future looks like if we continue along our present path. It looks like Michigan.

(Hat tip to Todd.)

How the newspaper industry tried to invent the Web but failed

Wednesday, January 7th, 2009

Jack Shafer of Slate explains how the newspaper industry tried to invent the Web but failed:

[N]ewspapers have really, really tried to wrap their hands around the future and preserve their franchise, an insight I owe to Pablo J. Boczkowski’s 2004 book, Digitizing the News: Innovation in Online Newspapers. The industry has understood from the advent of AM radio in the 1920s that technology would eventually be its undoing and has always behaved accordingly.

For instance, publishers aggressively pursued radio licenses in the early days of broadcasting and, later, sought and acquired TV licenses when they were dispensed. As early as 1947, Walter Annenberg’s Philadelphia Inquirer and John S. Knight’s Miami Herald experimented with fax editions of their papers. Seems visionary enough to me.

Newspapers and other media entities started experimenting with videotext technology in the 1970s, according to David Carlson’s Online Timeline. Newspapers considered themselves vulnerable to new entrants and worried aloud to anybody who would listen about falling readership. In 1979, the Knight Ridder newspaper chain established a videotext subsidiary to develop its Viewtron service, Boczkowski writes. Clunky and toylike by today’s standards (see the silly, pre-Donkey Kong-quality graphics), the early system required an expensive, dedicated terminal. Yet after conducting trials in 1980, the system held sufficient promise that Knight Ridder succeeded in selling Viewtron franchises to other newspapers. More than a dozen other dailies played with videotext during the decade, including newspapers in the Times-Mirror chain, Cowles Media, and McClatchy Newspapers, as well as at the Chicago Sun-Times and the Washington Post.

Howard Finberg of the Poynter Institute remembers that Viewtron could fetch from the “Miami Herald or the New York Times the night before the paper hit your doorstep,” access the Associated Press, look up airline schedules, access bank account info, and order a meal online. Not bad for the dark ages, eh?

Broadcasters joined the text fray, too. In Los Angeles during the early 1980s, CBS was testing the Extravision teletext service, and NBC was experimenting with its own offering, Tempo L.A., according to the New York Times.

So intense was the industry’s devotion to videotext and so rampant its paranoia that some other medium would usurp its place in the media constellation that the American Newspaper Publishers Association lobbied Congress in 1980 to prevent AT&T from launching its own “electronic yellow pages.” Washington Post Co. CEO Katharine Graham, then chair of the ANPA, and other publishers met with Sen. Robert Packwood, R-Ore., to discuss the legislation that would free AT&T to start its service.

As the Wall Street Journal would later report, Packwood said to the publishers, “What you’re really worried about is an electronic Yellow Pages that will destroy your advertising base, isn’t it?”

Graham’s response: “You’re damn right it is.”

Videotext failed to catch on commercially, with Knight Ridder burning through $50 million before closing Viewtron in 1986. The industry’s next favorite newsprint alternative was audiotext, and while Boczkowski writes that the format generated modest profits, it never enjoyed the wild enthusiasm that videotext did. As the decade progressed, the Chicago Tribune, Minneapolis Star Tribune, Hartford Courant, and the New York Times revisited the idea of fax newspapers. Some of the fax editions found a niche but not much more.

According to Boczkowski, newspapers didn’t rush into videotext because they were visionaries in a hurry to invent the future but because they were “reactive, defensive, and pragmatic” about their mature, lucrative business. Having observed the videotext experiments in England and elsewhere, they feared that if they didn’t adopt the technology or at least test it, somebody else would and displace them. Once they determined that nobody could make money from videotext and the technology posed no threat to the newsprint model, they were happy to shutter their ventures.

By the mid-1980s, the industry’s biggest worry was that the PC, which had eased its way into homes and the workplace like an algae bloom, would somehow supplant them. Boczkowski acknowledges that newspapers’ early online strategies were as much about blocking new competitors as beating a path to the future. That said, by the early to mid-1990s, the New York Times, the San Jose Mercury News, the Chicago Tribune, the Washington Post, the Los Angeles Times, and many others were producing electronic-edition business, striking deals with the burgeoning proprietary online systems, such as CompuServe, America Online, Prodigy, and Interchange, or throwing content up on bulletin board systems.

Publishers adored the proprietary online services because they locked down the user experience to the newspaper’s benefit. A Washington Post spokesman quoted in Boczkowski’s book applauds the way Interchange “preserves the company’s direct business relationship with Post readers.”

The newspapers moved onto the web surprisingly early, but they made a fatal mistake:

From the beginning, newspapers sought to invent the Web in their own image by repurposing the copy, values, and temperament found in their ink-and-paper editions. Despite being early arrivals, despite having spent millions on manpower and hardware, despite all the animations, links, videos, databases, and other software tricks found on their sites, every newspaper Web site is instantly identifiable as a newspaper Web site. By succeeding, they failed to invent the Web.

How the city hurts your brain

Wednesday, January 7th, 2009

Jonah Lehrer (Proust Was a Neuroscientist) explains how the city hurts your brain:

Consider everything your brain has to keep track of as you walk down a busy thoroughfare like Newbury Street. There are the crowded sidewalks full of distracted pedestrians who have to be avoided; the hazardous crosswalks that require the brain to monitor the flow of traffic. (The brain is a wary machine, always looking out for potential threats.) There’s the confusing urban grid, which forces people to think continually about where they’re going and how to get there.

The reason such seemingly trivial mental tasks leave us depleted is that they exploit one of the crucial weak spots of the brain. A city is so overstuffed with stimuli that we need to constantly redirect our attention so that we aren’t distracted by irrelevant things, like a flashing neon sign or the cellphone conversation of a nearby passenger on the bus. This sort of controlled perception — we are telling the mind what to pay attention to — takes energy and effort. The mind is like a powerful supercomputer, but the act of paying attention consumes much of its processing power.

Natural settings, in contrast, don’t require the same amount of cognitive effort. This idea is known as attention restoration theory, or ART, and it was first developed by Stephen Kaplan, a psychologist at the University of Michigan. While it’s long been known that human attention is a scarce resource — focusing in the morning makes it harder to focus in the afternoon — Kaplan hypothesized that immersion in nature might have a restorative effect.

Imagine a walk around Walden Pond, in Concord. The woods surrounding the pond are filled with pitch pine and hickory trees. Chickadees and red-tailed hawks nest in the branches; squirrels and rabbits skirmish in the berry bushes. Natural settings are full of objects that automatically capture our attention, yet without triggering a negative emotional response — unlike, say, a backfiring car. The mental machinery that directs attention can relax deeply, replenishing itself.

“It’s not an accident that Central Park is in the middle of Manhattan,” says Berman. “They needed to put a park there.”

In a study published last month, Berman outfitted undergraduates at the University of Michigan with GPS receivers. Some of the students took a stroll in an arboretum, while others walked around the busy streets of downtown Ann Arbor.

The subjects were then run through a battery of psychological tests. People who had walked through the city were in a worse mood and scored significantly lower on a test of attention and working memory, which involved repeating a series of numbers backwards. In fact, just glancing at a photograph of urban scenes led to measurable impairments, at least when compared with pictures of nature.

Lehrer’s new book is How We Decide.

How to Repair a Broken Financial World

Wednesday, January 7th, 2009

Michael Lewis (Liar’s Poker, Panic) and David Einhorn explain How to Repair a Broken Financial World:

There are other things [besides an enormous bailout] the Treasury might do when a major financial firm assumed to be “too big to fail” comes knocking, asking for free money. Here’s one: Let it fail.

Not as chaotically as Lehman Brothers was allowed to fail. If a failing firm is deemed “too big” for that honor, then it should be explicitly nationalized, both to limit its effect on other firms and to protect the guts of the system. Its shareholders should be wiped out, and its management replaced. Its valuable parts should be sold off as functioning businesses to the highest bidders — perhaps to some bank that was not swept up in the credit bubble. The rest should be liquidated, in calm markets. Do this and, for everyone except the firms that invented the mess, the pain will likely subside.

This is more plausible than it may sound. Sweden, of all places, did it successfully in 1992. And remember, the Federal Reserve and the Treasury have already accepted, on behalf of the taxpayer, just about all of the downside risk of owning the bigger financial firms. The Treasury and the Federal Reserve would both no doubt argue that if you don’t prop up these banks you risk an enormous credit contraction — if they aren’t in business who will be left to lend money? But something like the reverse seems more true: propping up failed banks and extending them huge amounts of credit has made business more difficult for the people and companies that had nothing to do with creating the mess. Perfectly solvent companies are being squeezed out of business by their creditors precisely because they are not in the Treasury’s fold. With so much lending effectively federally guaranteed, lenders are fleeing anything that is not.

Countering Groupthink

Wednesday, January 7th, 2009

Kevin Lewis of the Boston Globe shares some surprising insights from the social sciences, including this not-so-surprising insight on countering groupthink:

One of the most famous phenomena in social psychology is groupthink, the tendency of a group to converge on a consensus without much critical evaluation, even if the consensus is wrong. Various remedies have been proposed over the years, but some management researchers are presenting an interesting new angle on it. They invited a couple hundred members of fraternities and sororities to participate in a problem-solving experiment. The students were given 20 minutes to read a murder mystery and deduce the most likely perpetrator out of three suspects. Individually, only 44 percent of the students got it right, which is slightly better than chance. The students were then sorted into groups of three, all from the same fraternity or sorority, and were given 20 minutes to come to agreement on the most likely suspect. After a few minutes, a fourth member was added to the group — sometimes from the same fraternity or sorority, sometimes from a different one. If the new member came from a different fraternity or sorority, the group performed objectively better then the totally homogeneous groups (75 percent vs. 54 percent correct), and members with incorrect guesses were much more likely to change their minds. Nevertheless, the homogeneous groups perceived themselves as having more confidence, consensus, and effective interaction.

The original research comes from Phillips, K. et al., “Is the Pain Worth the Gain? The Advantages and Liabilities of Agreeing With Socially Distinct Newcomers,” Personality and Social Psychology Bulletin (forthcoming).

One of the great social benefits of the Madoff scandal

Wednesday, January 7th, 2009

Michael Lewis (Liar’s Poker, Panic) and David Einhorn explain that one of the great social benefits of the Madoff scandal may be revealing the S.E.C. for what it has become:

Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors. (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse.)

The instinct to avoid short-term political heat is part of the problem; anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda.

It’s not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.

The commission’s most recent director of enforcement is the general counsel at JPMorgan Chase; the enforcement chief before him became general counsel at Deutsche Bank; and one of his predecessors became a managing director for Credit Suisse before moving on to Morgan Stanley. A casual observer could be forgiven for thinking that the whole point of landing the job as the S.E.C.’s director of enforcement is to position oneself for the better paying one on Wall Street.

Some Protect the Ego by Working on Their Excuses Early

Tuesday, January 6th, 2009

Benedict Carey of the New York Times notes that some people protect their fragile egos by working on their excuses early — really early:

[G]enuine excuse artisans — and there are millions of them — don’t wait until after choking to practice their craft. They hobble themselves, in earnest, before pursuing a goal or delivering a performance. Their excuses come preattached: I never went to class. I was hung over at the interview. I had no idea what the college application required.

“This is real self-sabotage, like drinking heavily before a test, skipping practice or using really poor equipment,” said Edward R. Hirt, a psychologist at Indiana University. “Some people do this a lot, and often it’s not clear whether they’re entirely conscious of doing it — or of its costs.”

Psychologists have studied this sort of behavior since at least 1978, when Steven Berglas and Edward E. Jones used the phrase “self-handicapping” to describe students in a study who chose to take a drug that they were told would inhibit their performance on an exam (the drug was actually inert).
[...]
In another experiment, participants who had a good excuse for their poor scores — distracting noises, pumped through headphones they wore during the test — were less motivated to prepare for a subsequent test than those who had no excuse. “The handicap allowed them to say, ‘All things considered, I actually did pretty well,’ ” Dr. McCrea said in a phone interview. “And there’s no drive to get better.”

The burn of embarrassment is, in some sense, the pilot light of motivation.

As a short-term strategy, self-handicapping is often no more than an exercise in self-delusion. Studies of college students have found that habitual handicappers — who skip a lot of classes; who miss deadlines; who don’t buy the textbook — tend to rate themselves in the top 10 percent of the class, though their grades slouch between C and D.

Those who succeed despite their flirtations with disorder typically grow increasingly fond of the handicap itself, whether drink or drugs or defying rules. “With success, expectations go up, and the behavior gets more extreme,” said Dr. Berglas, author of Reclaiming the Fire: How Successful People Overcome Burnout (Random House, 2001).

But the tactic doesn’t fool many people. In a recent study, James C. McElroy of Iowa State University and J. Michael Crant of Notre Dame had 246 adults evaluate the behavior of characters in several workplace anecdotes. The participants’ impressions of a character began to sour after the second time the person cited a handicap.

“What happens here is that if you do it often, observers attribute your performance to you, but begin to view it as part of your disposition, i.e., you’re a whiner,” Dr. McElroy wrote in an e-mail message. “But you can avoid this happening if someone else does the handicapping for you, and surprisingly enough, even if they do it often.”

That, too, is well known among the very best of excuse makers: for best results, recruit an apologist.

The important thing for some is, no matter the method, to avoid considering the alternative explanation.

The Power of Hypocrisy

Tuesday, January 6th, 2009

Years ago, UC Santa Cruz psychology professor Elliot Aronson discovered the power of hypocrisy:

A quarter-century ago, the University of California at Santa Cruz found itself dealing with a public health crisis. An exotic and fearful disease called AIDS was spreading, and students were at risk. What was frustrating to officials was that the means to stop AIDS was simple and obvious: Students needed to either abstain from sex or, if they did have sex, use condoms.

Aronson, then a faculty member and now a professor emeritus at the university, decided to help out. Educating students was the obvious first step: Aronson and university officials put up advertisements on campus about the horrors of AIDS. They handed out pamphlets. They held conferences about the risks of unsafe sex.

“We tried to scare . . . them about why AIDS was such a terrible disease,” Aronson said. “In the early ’80s, it was a death sentence.”

Unlike many educators, Aronson wanted more than a good feeling about what he was doing; he wanted evidence that the education was working. He conducted surveys before and after the outreach efforts. Before the messages went out, about 17 percent of sexually active students were using condoms regularly. After all the scary messages, that number went up — to 19 percent.

The psychologist tried another tack. Some of the most effective persuaders in the world are not doctors, but marketers. If seductive marketing can get people to plunk down good money for baubles, surely it could get people to do something to save their own necks.

Aronson resolved to try to make condom use sexy. Students reported they were not using condoms because they saw it as an interruption to love-making: It was bathroom talk in the bedroom. Men declared that condoms interfered with their satisfaction. Aronson started looking for movies that depicted condom use in another light: prophylaxis as wild fun.

The psychologist scoured the adult movies available in Santa Cruz. Knowing glances followed the professor doing “research” in the backrooms of video stores.

Aronson wanted a five-to-six-minute clip of a normal-looking couple having sex with condoms, and enjoying it. But few pornographic movies fit the bill. They invariably veered into exotic scenarios: the guy wearing a Royal Canadian Mounted Police uniform, the midget and the obese woman.

“I spent the better part of a week watching the movies,” he said. “They were boring as hell. One porno film is a turn-on. Fifty porno films is hell.”

In frustration, Aronson decided to make his own sex movie. The Santa Cruz Shakespeare festival was featuring “Romeo and Juliet” that year, and the lead roles were being played by two gorgeous actors. Aronson told them about his project, and they agreed to help.

Aronson directed the movie in a single day. A young man and a woman are talking, and one thing leads to another. Most of the action takes place under a silk sheet; it’s what Aronson called R-rated rather than X-rated.

“She would say, ‘Do you have the stuff?’ and he would bring out a beautiful box with condoms,” Aronson recalled. “She opened a condom with her teeth — ripped it off — looking very sexy.”

“The main thing was to make the use of condoms seem sexy and attractive rather than something you interrupt the sex with. It was now part of foreplay.”

The results delighted the psychologist. After the movie was shown around campus, condom use soared to 60 percent. It was great news, except that the next survey, taken after two months, showed condom use back down at 20 percent.

Aronson recognized the problem: Marketers usually want you to make just a single purchase (a camera or a hot tub), whereas fighting AIDS required a long-term behavior change.

“Condoms are not fun to use, and we were trying to sell them something under false pretenses,” he said. “Most of the students gave it a shot and then stopped. I was stupid to think they would never catch on. You cannot make something fun that isn’t fun.”

Aronson put aside his camera and went back to what he knew best: psychology. He had studied under Leon Festinger, who had discovered a now well-known phenomenon, cognitive dissonance. The theory suggests that when people do things against their better judgment, they experience internal discomfort, much like hunger or thirst.

A smoker who reads about how smoking causes cancer experiences cognitive dissonance if she continues to smoke: She is knowingly doing something that will harm her. There are two ways to relieve herself of the discomfort. The first is to quit smoking. But that is difficult, so most smokers convince themselves that the links between smoking and lung cancer are not quite as strong as doctors assert.

“I convince myself the scientific data is not really all that good or my uncle Hymie smoked for 87 years and he is 95 now [or] the filter tip does trap all the cancer-producing agents,” Aronson said. “I find a way to sleep at night even though I am doing something incredibly stupid.”

The students at Santa Cruz were doing the same thing by engaging in unsafe sex: They were rationalizing away the risks. But what if there were a way to keep them from doing so? What if the students placed themselves in a position where they vociferously and publicly advocated to others the utility of condoms? If Aronson could make them spokespeople for AIDS prevention, he theorized, it would be very difficult for them to then act as if condoms didn’t really do much to stop AIDS or they were not really at risk. They would feel like hypocrites.

Aronson realized he had gotten things backward: Instead of his selling condom use to students, what he really needed was for them to sell AIDS prevention to him.

Aronson found a bunch of students at the health center. He said he needed them to make a video aimed at high school seniors about the risks of AIDS and the importance of using condoms. If they did a good job, they could save lives. After the students made up their own speeches and shot the videos, Aronson paid them $5 and asked them about their own condom use.

“We increased their awareness that they were not practicing what they were preaching,” he said. “Their nose is being rubbed in the fact that they are a hypocrite.”

At the same time, Aronson paid $5 to some students who had been given educational messages about safe sex.

As both groups of students headed out the door after being paid, Aronson arranged for them to pass a woman in a nurse’s uniform who was selling heavily subsidized condoms. He measured how much of their newfound $5 the volunteers spent buying condoms. He found that the video-making but hypocritical volunteers spent far more on condoms than those who had merely been given educational messages. Some of the students made to feel like hypocrites spent their entire $5 on condoms.

But did the effect last? Months later, Aronson arranged for the students in his experiment to be cold-called by a person taking a survey. The survey made no mention of the health center incident. Both three and six months after his intervention, Aronson found, 65 to 70 percent of students who had made videos about condom use and then had their faces gently rubbed in their own hypocrisy were using condoms every time they had sex.

“You can get better results from using hypocrisy than any other technique I know,” Aronson said. “You are never going to get 100 percent change, but the condom stuff is so powerful because we went from 17 percent to 70 percent for at least six months. It is not a magic bullet, but it is more magical than any other bullets we have in our arsenal.”

Charter schools outperform traditional schools

Tuesday, January 6th, 2009

Boston charter schools outperform traditional schools — and pseudo-charter “pilot” school runs by the School Department:

The study, being released today at a Boston Foundation forum, examined state standardized test scores for students of similar backgrounds at the three kinds of schools over a four-year period. In the most stark example, charters — independent public schools dedicated to innovative teaching — excelled significantly in middle school math. However, pilots, which have similar goals but are run by the School Department, performed at slightly lower rates than traditional schools, according to the study.

The findings could present a setback for Governor Deval Patrick’s education overhaul, which seeks to emulate pilot schools around the state while resisting calls for more charter schools.

The divergent performance among charter and pilot school students surprised state and local education leaders because the schools share a similar history and philosophy.

Charter schools were created as part of the 1993 Education Reform Act, as a way to develop new teaching strategies that could eventually be transferred to public schools. The approximately 60 schools operate under looser state regulations than traditional schools, have mostly nonunion teachers, and are run by independent boards that report directly to the state. They have been particularly popular in urban school districts among parents and students frustrated with traditional schools.

Let’s go down that list again:

  • New teaching strategies
  • Looser regulations
  • Non-union teachers
  • Independent boards

Apparently, transferring the new teaching strategies isn’t enough. Hmm…

The more competitors, the less competition

Tuesday, January 6th, 2009

Kevin Lewis of the Boston Globe shares some surprising insights from the social sciences, like the more competitors, the less competition:

If you’ve ever had to take a test in a room with a lot of people, you may be able to relate to this study: The more people you’re competing against, it turns out, the less motivated and competitive you are. Psychologists observed this pattern across several different situations. Students taking standardized tests in more crowded venues got lower scores. Students asked to complete a short general-knowledge test as fast as possible to win a prize if they were in the fastest 20 percent completed it faster if they were told that they were competing against 10 people rather than 100. Students asked how fast they would run in a race for a $1,000 prize if they finished in the top 10 percent said they would run faster in a race against 50 people rather than 500. Similarly, students contemplating a job interview or Facebook-friending contest said they would be less competitive if they expected more competitors — even if “winning” only required finishing in the top 20 percent. The authors conclude that competitiveness was curtailed because the larger the group, the more difficult it is to compare oneself directly to others.

This seems to point to statistical innumeracy, really.

(Hat tip to Tyler Cowen, who also links to the original paper, Garcia, S. & Tor, A., “The N-Effect: More Competitors, Less Competition,” Psychological Science (forthcoming).)

Diamonds suggest comets caused killer cold spell

Tuesday, January 6th, 2009

Diamonds suggest comets caused killer cold spell just 13,000 years ago:

Doug Kennett of the University of Oregon and colleagues found the little diamonds at sites from Arizona to South Carolina and into Alberta and Manitoba in Canada.

They are buried at a level that corresponds to the beginning 12,900 years ago of the Younger Dryas, a 1,300-year-long cold spell during which North American mammoths, saber-toothed cats, camels and giant sloths became extinct.

The Clovis culture of American Indians also appears to have fallen apart during this time.

Bones of these animals, and Clovis artifacts, are abundant before this time. Excavations show a dark “mat” of carbon-rich material separates the bones and artifacts from emptier and younger layers.

Writing in the journal Science, Kennett and colleagues report they have evidence of the nanodiamonds from six sites across North America, fitting in with the hypothesis that a giant explosion, or multiple explosions, above the Earth’s surface cause widespread fire and pressure.

There is evidence these minerals can be found in other sediments, too, they said, and help explain the “black mat”.

“These data support the hypothesis that a swarm of comets or carbonaceous chondrites (a type of meteorite) produced multiple air shocks and possible surface impacts at 12,900 (years ago)” they wrote.

The heat and pressure could have melted part of the Greenland ice sheet, causing currents to change and affecting climate. Any impacts would have kicked up dust that would have shrouded the sun and lowered temperatures, endangering plants and animals.

It’s not quite Lucifer’s Hammer, but it’s close. You never know when we might have to reboot society.

Mr. Peabody and His Boy Sherman

Monday, January 5th, 2009

I was just watching the first episode of Rocky and Bullwinkle, Jet Fuel Formula And Bullwinkle's Ride Or Goodbye, Dollink, which I found… uneven — but I loved Mr. Peabody and his boy Sherman:

Consider the strange story of Harry Markopolos

Monday, January 5th, 2009

Michael Lewis (Liar’s Poker, Panic) and David Einhorn ask us to consider the strange story of Harry Markopolos:

Mr. Markopolos is the former investment officer with Rampart Investment Management in Boston who, for nine years, tried to explain to the Securities and Exchange Commission that Bernard L. Madoff couldn’t be anything other than a fraud. Mr. Madoff’s investment performance, given his stated strategy, was not merely improbable but mathematically impossible. And so, Mr. Markopolos reasoned, Bernard Madoff must be doing something other than what he said he was doing.

In his devastatingly persuasive 17-page letter to the S.E.C., Mr. Markopolos saw two possible scenarios. In the “Unlikely” scenario: Mr. Madoff, who acted as a broker as well as an investor, was “front-running” his brokerage customers. A customer might submit an order to Madoff Securities to buy shares in I.B.M. at a certain price, for example, and Madoff Securities instantly would buy I.B.M. shares for its own portfolio ahead of the customer order. If I.B.M.’s shares rose, Mr. Madoff kept them; if they fell he fobbed them off onto the poor customer.

In the “Highly Likely” scenario, wrote Mr. Markopolos, “Madoff Securities is the world’s largest Ponzi Scheme.” Which, as we now know, it was.

Harry Markopolos sent his report to the S.E.C. on Nov. 7, 2005 — more than three years before Mr. Madoff was finally exposed — but he had been trying to explain the fraud to them since 1999. He had no direct financial interest in exposing Mr. Madoff — he wasn’t an unhappy investor or a disgruntled employee. There was no way to short shares in Madoff Securities, and so Mr. Markopolos could not have made money directly from Mr. Madoff’s failure. To judge from his letter, Harry Markopolos anticipated mainly downsides for himself: he declined to put his name on it for fear of what might happen to him and his family if anyone found out he had written it. And yet the S.E.C.’s cursory investigation of Mr. Madoff pronounced him free of fraud.

What’s interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it. It wasn’t just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter, Goldman Sachs was refusing to do business with Mr. Madoff; many others doubted Mr. Madoff’s profits or assumed he was front-running his customers and steered clear of him. Between the lines, Mr. Markopolos hinted that even some of Mr. Madoff’s investors may have suspected that they were the beneficiaries of a scam. After all, it wasn’t all that hard to see that the profits were too good to be true. Some of Mr. Madoff’s investors may have reasoned that the worst that could happen to them, if the authorities put a stop to the front-running, was that a good thing would come to an end.

The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many.

The Optimal Way to Board Plane Passengers

Monday, January 5th, 2009

John Allen Paulos shares The Optimal Way to Board Plane Passengers — according to Jason Steffen, an astrophysicist at Fermi Lab near Chicago, who has run a few simulations:

For simplicity, his model assumes a plane with 120 passengers seated in 40 rows, each with a central aisle having three seats to the left and three seats to the right of it. It also assumes that each of the 120 passengers has an assigned seat number and carry-on baggage and that they move forward if and only if no one is directly in front of them.

So, given these reasonable assumptions, what’s the best way to board? It seems intuitive that the worst way is to load those passengers seated in the front of the plane first and then those a bit further back and so on. And this is, in fact, the worst way to board passengers.

So, it might seem almost as intuitive that the standard way — loading the back rows first and then gradually rows nearer the front — should be among the best ways to board, but Steffen’s simulations indicate that this is the second-slowest way. Even random boarding is faster.

After many simulations allowing for different sets of passenger quirks and luggage-stowing times, it turns out that the best method (one of several more or less equivalent methods) calls for passengers in even-numbered window seats near the back of the plane to board first.

Passengers hefting their carry-ons into the overhead compartments are less likely to get in each other’s way if there’s an empty row between them. Moreover, they can step into the empty row if someone seated further back needs to pass.

After these passengers have boarded, passengers in even-numbered window seats in the middle of the plane board, and they are followed by those in even-numbered window seats near the front of the plane. Next, the same procedure is followed for those in the even-numbered middle seats and then for those in the even-numbered aisle seats.

Finally, after the even-numbered passengers have boarded, the same procedure (window, middle, aisle from back to front) is followed for passengers in the odd-numbered seats. These passengers may not always have an empty row to step into, but they will still be separated from entering passengers by a row of already seated even-numbered passengers.

It appears that the reason the protocol is faster is that it allows multiple passengers to simultaneously stow their baggage, the most time-consuming component of the boarding process.

This and other similar schemes Steffen discusses may seem too complicated for passengers to master, but passengers needn’t remember the seating order algorithm. They can each be assigned a zone consistent with it and enter by zones, as they presently do.

The outcome is fairly robust in the sense that it’s relatively insensitive to deviations from it, say, because of couples or families being seated together.

Airlines should, of course, supplement these theoretical conclusions with empirical investigations.

I’m glad he included that last line.

Denmark’s resilient mortgage market

Sunday, January 4th, 2009

After Copenhagen’s great fire of 1795, the Danes developed a resilient mortgage-lending model:

When a Danish mortgage bank grants a mortgage it is obliged to sell an equivalent bond with a maturity and cashflow that matches those of the underlying loan almost perfectly. This may not seem very different from the “originate-to-distribute” securitisation models that flourished in America and parts of Europe in recent years. But the Danish system has two characteristics that change it almost completely. The first is that the issuers of mortgage bonds remain responsible for making payments on them. This avoids a flaw that was so painfully exposed in America’s mortgage market: lax lending is encouraged when the link is broken between those who sell mortgages and those who bear the risk of default.

The second feature of the Danish system is that mortgage-holders can also buy the bonds in the market and use them to redeem their mortgages. This is useful if a rise in interest rates (or a fall in house prices) causes mortgage-backed bonds to trade at a discount. Redeeming their bonds allows homeowners to reduce the amount they owe. In America, for instance, mortgage-backed securities have fallen far below their fundamental value in thinly traded markets, partly because the people who would benefit most from buying them have no mechanism to do so. “Everybody can buy that bond at a discount except that one guy who is most involved with the loan, the homeowner,” says Alan Boyce, a mortgage expert who has worked with George Soros, an investor and philanthropist, on promoting the Danish model in emerging markets. In Denmark, by contrast, a fall in the value of mortgage bonds usually encourages homeowners to snap them up to redeem their own mortgages, as is happening now.

Although this might seem to make such bonds less attractive to investors, in practice it seems to have done the opposite. Ted Lord of Barclays Capital, an investment bank, says that Danish investors see their country’s mortgage bonds as no more risky than their government’s debt. Regulations limit the amount that can be loaned to homeowners to no more than 80% of the value of the home. Denmark’s legal system also makes it easy for banks to seize the homes of defaulters.