Why Economic Models Are Always Wrong

Carter had initially used arbitrary parameters in his perfect model to generate perfect data, but now, in order to assess his model in a realistic way, he threw those parameters out and used standard calibration techniques to match his perfect model to his perfect data. It was supposed to be a formality–he assumed, reasonably, that the process would simply produce the same parameters that had been used to produce the data in the first place. But it didn’t. It turned out that there were many different sets of parameters that seemed to fit the historical data. And that made sense, he realized–given a mathematical expression with many terms and parameters in it, and thus many different ways to add up to the same single result, you’d expect there to be different ways to tweak the parameters so that they can produce similar sets of data over some limited time period.

The problem, of course, is that while these different versions of the model might all match the historical data, they would in general generate different predictions going forward–and sure enough, his calibrated model produced terrible predictions compared to the "reality" originally generated by the perfect model. Calibration–a standard procedure used by all modelers in all fields, including finance–had rendered a perfect model seriously flawed. Though taken aback, he continued his study, and found that having even tiny flaws in the model or the historical data made the situation far worse. "As far as I can tell, you’d have exactly the same situation with any model that has to be calibrated," says Carter.

That financial models are plagued by calibration problems is no surprise to Wilmott–he notes that it has become routine for modelers in finance to simply keep recalibrating their models over and over again as the models continue to turn out bad predictions. "When you have to keep recalibrating a model, something is wrong with it," he says. "If you had to readjust the constant in Newton’s law of gravity every time you got out of bed in the morning in order for it to agree with your scale, it wouldn’t be much of a law   But in finance they just keep on recalibrating and pretending that the models work."

File under “the map is not the territory.” This probably applies to other areas as well. Via Why Economic Models Are Always Wrong: Scientific American.

Nearing The End Of Photographs As “Proof”

We all know about photoshopping and the way it has made photographic "evidence" the least rather than the most believable indicator of underlying reality.

 For the next step down this road, consider this project from Kevin Karsch, a PhD student at the University of Illinois / Urbana-Champaign. Its official title is "Rendering Synthetic Objects into Legacy Photographs." Once you realize that "legacy photographs" means "real photographs of something that actually existed," and "synthetic objects" covers just about anything you can imagine, you have an idea of the potential. But check it out (and be sure to listen to the narration):

via Today’s ‘What Hath God Wrought?’ Tech Moment – James Fallows – Technology – The Atlantic.

Occupy Wall Street vs. The Tea Party

Best thing I’ve seen yet regarding #Occupy* and the Tea Party.

Occupy Wall Street, at its core, is a reaction to the increasing power and influence of large corporations. The Tea Party, at its core, is a reaction to the government’s constant interference with private enterprise. But wait a minute—aren’t those things connected?

Bailouts, subsidies, tax breaks, special rights and privileges, regulations designed to restrict competition—to name a few of the many ways the government protects and stimulates corporate interests, and those things are every bit as anti-free market as, not to mention directly related to, the high taxes and excessive bureaucracy that gets Tea Partiers riled up.[3] In other words, aren’t these two groups—Occupy Wall Street and the Tea Party—raging against different halves of the same machine? Do I have to draw a Venn diagram here?

… [venn diagram here] …

Yeah, I’m oversimplifying, but only a little. The greatest threat to our economy is neither corporations nor the government. The greatest threat to our economy is both of them working together. There are currently two sizable coalitions of angry citizens that are almost on the same page about that, and they’re too busy insulting each other to notice.

My take? If the government doesn’t have the power to grant favors, corporations can’t use government for favors. Via How Conservatives Drove Me Away: Occupy Wall Street vs. The Tea Party.

Obama Deploys Troops to Uganda

President Obama authorized the deployment to Uganda of approximately 100 combat-equipped U.S. forces to help regional forces “remove from the battlefield” – meaning capture or kill – Lord’s Resistance Army leader Joseph Kony and senior leaders of the LRA.

The forces will ultimately go to Uganda, South Sudan, the Central African Republic, and the Democratic Republic of the Congo, with the permission of those countries.

World War 4, folks. If Bush did this, would we be happy? Via JammieWearingFool: Great News: Obama Deploys Troops to Uganda.

Why We Need More Capitalism, Not Less

The [Occupy Wall Street] protesters are right about one thing: Washington has been coddling Wall Street. But they have missed the most important way that Wall Street lives off the rest of us. …

There is a much more important, albeit quieter, favor Washington has been performing for Wall Street over the last 25 years: When large financial institutions get into trouble, policymakers make sure that their creditors receive 100 cents on the dollar [6].

The economist Milton Friedman liked to point out that capitalism is a profit-and-loss system. Profits encourage risk-taking. Losses encourage prudence, which is just as important. Over the last 25 years, however, government policy has been laissez-faire when it comes to profits, and socialist when it comes to creditor losses.

If the protesters want to fix the symbiosis between Wall Street and Washington, the first thing they need to do is recognize the disease. The disease is not too much capitalism but too little. If firms that fund bad investments by other firms lost all their money, they would either disappear or learn to be more prudent. Washington needs to be less involved with Wall Street, not more. We need less crony capitalism and more of the real thing. We need to demand of our politicians that they stop bailing out losers 100 cents on the dollar. If we keep subsidizing recklessness, we will keep getting more of it, and the rest of us will pay the price.

Emphasis mine. Read the whole thing. Via Occupy Wall Street and Washington’s History of Financial Bailouts.

Khadaffy Duck Is Dead

The Great Loon wrecked his country in the service of his twisted ambitions and an incoherent philosophy; he believed the flatterers and toadies who told him that he was wise.  His relations and his allies pillaged the country. He persecuted the innocent, oppressed the poor, slandered the just.

Sadly, he deserved the death he received — just as Saddam Hussein deserved the humiliation and mockery of his last moments on earth.  Forty years of comfortable prison in the Hague would not have been just recompense for his crimes; for a man whose vanity and ambition turned a country into a concentration camp, death is a just sentence, however served.

I am glad he is gone, and I am glad that the United States shares in the honor of his fall.

World War 4, folks. Via Farewell To The Great Loon | Via Meadia.

Solyndra and the Transcontinental Railroad

President Obama says government will have to build the nation out of the economic trough.

"We’re the country that built the intercontinental railroad," Obama says. "So how can we now sit back and let China build the best railroads?"

Ironic that he mentions the Chinese. Progressives used to complain that to build the railroad, bosses abused Chinese workers — called them "coolies" and treated them badly. Now this is big success?

I guess Obama doesn’t know that the Transcontinental Railroad was a Solyndra-like Big Government scandal. The railroad didn’t make economic sense at the time, so the government subsidized construction and gave the companies huge quantities of the best land on the continent.

As we should expect, without market discipline — profit and loss — contractors ripped off the taxpayers. After all, if you get paid by the amount of track you lay, you’ll lay more track than necessary.

Credit Mobilier, the first rail construction company, made enormous profits by overcharging for its work. To keep the subsidies flowing, it made big contributions to congressmen.

Where have we heard that recently?

The transcontinental railroad lost tons of money. The government never covered its costs, and most rail lines that used the tracks went bankrupt or continued to be subsidized by taxpayers.

The Union Pacific and Northern Pacific — all those rail lines we learned about in history class — milked the taxpayer and then went broke.

One line worked. The Great Northern never went bankrupt. It was the railroad that got no subsidies.

via Government is the biggest job killer | John Stossel | Columnists | Washington Examiner.

Iranian Plot to Assassinate Saudi Ambassador in Washington DC

Did I mention that it’s World War 4?

The United States accused Iran on Tuesday of backing a plot to kill the Saudi ambassador to Washington, escalating tensions with Tehran and stirring up a hornet’s nest in the Gulf, where Saudi Arabia and Iran have long jostled for power.

The assassination plot began to unfold in May 2011 when Arbabsiar approached an individual in Mexico to help, but that individual turned out to be an informant for the U.S. Drug Enforcement Administration.

The confidential source, who was a paid informant but not identified, immediately tipped law enforcement agents, according to the criminal complaint. Arbabsiar paid $100,000 to the informant in July and August for the plot, a down payment on the $1.5 million requested.

LIKE A "HOLLYWOOD MOVIE"

Shakuri approved the plan to kill the ambassador during telephone conversations with Arbabsiar, the complaint said.

As part of the plot, the informant talked to Arbabsiar about trying to kill the ambassador at a Washington, D.C. restaurant he frequented, but warned him that could lead to dozens of others being killed, including U.S. lawmakers.

The criminal complaint said that Arbabsiar responded "no problem" and "no big deal".

After Arbabsiar was arrested in New York, he allegedly confessed and provided U.S. authorities with more details about the Iranian government’s alleged involvement, Holder said.

Court papers say in a monitored phone call Shakuri allegedly confirmed to Arbabsiar the plot should move forward as quickly as possible, stating "just do it quickly, it’s late."

Mueller said in this case "individuals from one country sought to conspire with a drug trafficking cartel in another country to assassinate a foreign official on United States soil."

He added: "Though it reads like the pages of a Hollywood script, the impact would have been very real and many lives would have been lost," he said.

It defies excerpting; read the whole thing at Iranians charged in U.S. over assassination plot | Reuters.

Update: Is this a turning point for US “relations” with Iran?