Gill Eapen's Blog, page 76

The psychology of statistics

A recent study (1) appears to have found an interesting phenomenon – the financial performance of companies led by broad faced CEOs is higher than those run by long faced CEOs. To prove this they used 55 specimens (and discarded the other 10,000 companies in the US) and eliminated women CEOs because they do not have sufficient testosterone levels. This is a fantastic study – finally we are at the threshold of combining irrelevant psychological experiments with dumb statistics. What can be better?

However, they found some issues in their fancy conclusions based on 55 people. For example, the effect appears to be less when managers in the firm do not think "black and white," and are more flexible. I wondered if they controlled for such factors as how many times meat is served in the cafeteria or what percentage of the managers drive the Lexus. It is conceivable that such factors have a significant impact on the same observation.

Although it is unclear what is meant in the study by the term "financial performance," of the companies led by broad faced and testosterone filled CEOs, presumably, it is the same metrics used by the accountants – factors that have no correlation with the long term success of the firm. It is important to assure that public money is not wasted by academics looking for ways to publish papers, at any cost.

(1) What Determines A Company's Performance? The Shape Of The CEO's Face http://www.psychologicalscience.org/index.php/news/releases/what-determines-a-companys-performance-the-shape-of-the-ceos-face.html

Faith & Flexibility

As polarization spreads like wild fire across countries, cultures and cults – between democrats and republicans, labor and conservative, tea and latte drinkers, scientists and the religious, North and South, East and West, aged and the young, social networkers on the computers and the clubs, engineers and economists, country club dwellers and the homeless, academics and practitioners, kings and slaves, drivers of BMW and lesser cars, those who think they know and those who think they do not – most move to defined corners and bank on faith to prove their position and lose flexibility.

Faith – the disease of all in one form or the other – is a way to prove why no proof is needed for what they believe in. For the scientists, it is about the process – collection of data, testing and the acceptance or the rejection of the null hypothesis. For the religious, it is about content, that requires no process. For the democrats, it is about compassion for show and for the other, it is about freedom for themselves. For the engineers it is about precision and for the economists, statistics. For the accountants and empiricists, it is about history and for the rest, just feelings. For the young, it is about faces on the book and for not so young, email.

Faith is not a fact nor a strategy. Having faith is not superior to anything. In a world, mired in faith – it is flexibility that we need – the ability to assimilate new information and adapt.

Ref: Flexibility: Flexible Companies for the Uncertain World. http://is.gd/flexbook

Nano step for the scientists, giant leap for the economy

As politicians and accountants, toil with debt and deficits, they forget that the future is about innovation that substantially changes status-quo. Economic value is generated by a step change in technology – automobiles, airplanes, computers and the internet are examples. The world is due for another giant leap and this can only happen by investing into the technology themes that hold promise for fundamental shifts.

One such area is nanotechnology – a broad platform that has ground breaking applications in many fields including medicine, computing, energy, transportation and engineering. In this context, discovery and development of nanomaterials is akin to the development of computers, in that the applications are extremely broad – it is a true platform that can substantially change the productivity and economics of many different industries. The investments needed to further accelerate this fast growing area is miniscule compared to the overall budgets and constraints. Such investments have very high leverage as these materials can not only transform existing applications but also spawn a series of hitherto unknown industries. This network effect in production economics provides an extremely attractive investment proposition. If the industry reaches a threshold of applications, it will be self sustaining. The ball is already rolling – forward looking governments around the world can give it a bit of a bump, with miraculous effects on jobs, people and growth.

From better diagnostics and delivery mechanisms in medicine, driving down healthcare costs with early detection, better targeting and continuous measurement, higher efficiency in energy production (fuel cells, solar cells) & storage (battery, capacitor), better food processing and packaging, allowing more healthy alternatives, more efficient and green industrial materials in commodity chemicals, magnets, coatings and lubricants, newer applications in electronics including faster chips, bigger storage, thinner displays and lower power consumption to lighter and safer automobiles and space crafts, nanotechnology will touch on every product and industry in the future. The faster we get there, the better the world will be.

Fooled by the body

A recent study (1) shows that Metformin (a popular treatment for Type 2 Diabetes) and exercise (a popular prescription to lower glucose levels) in combination can have unexpected effects – i.e. less effective in lowering blood sugar levels. This points to a general issue with improving health through a variety of agents and activities, specifically applied to different parts of the body. Each agent is focused on some aspect of the system – such as cholesterol control, hypertension, blood-glucose reduction and other aspects. Treating a highly non-linear system such as the human body with focused and prescriptive regimens has been somewhat ineffective for improving overall health.

A more holistic approach to medicine is needed if the goal is improving health and not treating disease. Just as many other complex systems that show non-linear interactions, where precise analysis, prediction and intervention have failed to extract the expected outcomes, the human body has been obstinate against attempts to influence it, part by part. The only reasonable conclusion that can be reached is that the human body cannot be aggregated upward, component by component, system by system and organ by organ. These approaches have worked well in Engineering where a complex system can be modeled from its parts – each driven by a predictable effect to local stimuli. Contemporary scientists, steeped in such determinism, are taking similar approaches to biological systems, with less interesting results.

The human body, an electromagnetic and chemical system, with complex interactions, may require a different approach than what is currently practiced. The rush to incrementally improve and focus existing therapies to less understood disease states, is not a good path to improving health. A better definition of the human body and disease states that encompass the whole system are necessary, even before attempting any solutions.

(1) Metformin and Exercise in Type 2 Diabetes: Examining treatment modality interactions

 Normand G. Boulé, PHD1⇓, Cheri Robert, MSC1, Gordon J. Bell, PHD1, Steven T. Johnson, PHD2, Rhonda C. Bell, PHD3, Richard Z. Lewanczuk, MD, PHD4, Raniah Q. Gabr, MSC5 and Dion R. Brocks, PHD5

Investment policy

Two attributes with the highest return to society are health and education. Preventative intervention in healthcare early substantially reduces the cost to society as the individual grows and ages. However, such interventions require a stringent regimen – including exercise and control on calorie intake. Thus, societal utility from such interventions can only be realized if the individual cooperates. Free rider problems exist for the young individual, who may not comply on the hope that the society will bail them out at a later time. Similarly, societal returns to education is extremely high – so high that there is a strong case to completely subsidize all education. Here again, free rider problems exist as the individual may take advantage of the subsidy but may not learn in the process.

Investment policy making, thus, is fundamentally about figuring out how to provide societal goods of high return (health and education) to broader public, while avoiding the free rider problems. Health and education are correlated, providing additional returns to policies that consider them holistically. Further, positive network effects exist in communities of individuals who are both healthy and educated. The optimization problem faced by the policy-maker, thus, is not necessarily global. The sequence of investments taken locally has a non-trivial effect on overall returns garnered.

Improving the health and education of individuals has high returns to society. This is the primary problem, most governments should be focused on.

Age incrimination

Most countries are suffering from aging politicians, who seem to have lost touch with the modern world. This is a serious problem. In the East, they accept corruption as a way of doing business. Leaders of the world's largest democracy seem to be shocked by the fact that the younger generation knows how corrupt they really are. Their handlers, run by the aging monarchs in a dozen large companies, are equally to blame. The same tactics used by the insightful in the past to rid the autocrats, appear to be effective against the senile leaders, nearly a century later.

In the West, the situation is not dissimilar. In the halls of high democracy, where some still believe the internet is a series of tubes, they have been piling on "experience," to save the country under God. They work many hours every day, to take care of the nation's business when most of the country gets little sleep, either working or looking for a job. For many, perpetually caught in the flashbacks from the 30s, the solution is building roads and bridges. For others, who picked up book-keeping in the 60s, it is all about cutting and cutting.

The leaders of contemporary democracies are simply too old to lead. They are completely out of touch – we do not live in the 30s or 60s, anymore. Your desire to serve the country is admirable – but there are many more, who could do the job better. It is time to start spending more time with your grand children and leave the governance to those who understand the present. Term limits are an essential policy change for every democracy across the world. For those, not democratic yet, it is better to realize that your time ran out couple of decades ago.

Talking heads

The cost due to "information" and "knowledge" provided by talking heads and financial intermediaries is likely the highest of any other evil afflicting society today – including cancer and taxes. They are everywhere – on TV, in the blogosphere, on radio and in print. They "forecast," the future and tell you why you are so stupid to buy stocks some time and sell in others. For some, God sends instructions to buy gold and for others, it is a comfortable thing to hug as the world melts around them. They explain why the "debt," is "too high" and why "silver shines." They explicate how the world is running out of oil and why the prices slowly and surely heading toward infinity for the last molecule of hydrocarbon that can be burned.

Talking heads is big business today. It does not require expertise, just access. It does not require competence, just arrogance. Most talking heads, however, do not publish any "performance metrics." They seem offended by the fact that somebody will question their wisdom. They typically do not deploy their "know-how," to make money for themselves – perhaps for the sheer concern for humanity. After all, it will be just like taking candy from a kid for most of the talking heads. If only they attempt to take advantage of their knowledge, all the existing money will flow to them in a few days if not minutes. They know exactly when to buy and sell – but generally, they provide such wisdom only after the fact.

Most talking heads that appear on TV and the media, explain how they sold everything just before the market crashed and how they bought everything back just before the market rose. The "predictable," transactions appeared to have happened a few days, before the event. As the world sits in complete astonishment and listen to the wisdom doled out free of charge, they hold their heads in shame. How could such knowledge exist in so small spaces – some fast and others mad.

If talking heads are held to any performance standards, the productivity of the overall economy could be improved. Farming is a much more appropriate profession for them – at least they will be making something for the first time in their lives rather than just "analyzing," irrelevant data.

Fitting models

The incompetence defense

A handful of idiots in companies, that have demonstrated incompetence for many decades, are likely to "change the rating," on US debt next week. They are masters of their game, accountants of supreme precision –the same idiots who held high ratings on investment banks, that went bankrupt, just couple of years ago – perhaps because they knew the bankers from their country clubs. This time around, they are adamant to correct their mistakes from last time – and the fact that they are not playing tennis or golf with most of the 7 billion people, help them make the "objective" decision.

The "raters," have to be careful, incompetence defense did not work last time when the chieftain of the energy company, the graduate of the golden business school and even more golden consulting firm tried it. Who are these guys?, asked the Nobel laureate from Princeton, and I have to say I have to repeat this question. Who are these guys, who decide the rating of the US debt has to go down next week or month? What do they know, the rest of the 7 billion people do not know? The answer – they know less. The ability to pay interest on your debt has nothing to do with the amount of debt you carry, in spite of the teachings of the illustrious accounting schools around the world. The ability to pay interest and the debt back have everything to do with your earning power.

Those who commit the crime, will be brought to justice. Spreadsheets with numbers and metrics will not be sufficient justification, as ratings have nothing to do with the past. They will be asked questions by the court and if they play dead, this time around it will not be just a reduction in next year's bonus.

The threshold of sanity

It is possible that any system has a maximum share of insanity that can be sustained before it breaks down. The smallest of systems, an individual's brain, is a good example. Most humans have some level of insanity – an inability to respond rationally to stimuli. As long as the percentage of the brain that houses insanity is below a threshold, it is able to function. When the threshold is breached, the person is diagnosed with a mental disease. Without proper treatment, the system breaks down catastrophically.

Conceivably, this is true for complex systems also – such as human societies, cultures, religions and countries. If insanity is kept below the threshold, the system functions and if it exceeds the threshold, the system breaks down. It is possible that this threshold percentage is universal and if so, it can be determined empirically. Then a continuous measurement of the insanity quotient of the system will provide early warnings to the onset of a collapse.

At the human brain level, this is a bit easier. Inconsistency in responses has been used as a proxy for insanity – in psychological tests used for nuclear engineers and military personnel. In a complex system, such as a country, instruments can be created to take cross-sectional measurements of insanity in the members, controlling for extraneous factors. Such measurements are also useful for smaller systems such as companies, legislators and religious leaders.

A continuous measurement of the insanity quotient has become not only useful but also necessary to avoid significant disruptions.