One year away…

Figure (click to enlarge) – Time dependence of FAO Food Price Index from January 2004 to May 2011. Red dashed vertical lines correspond to beginning dates of “food riots” and protests associated with the major recent unrest in North Africa and the Middle East. The overall death toll is reported in parentheses [26-55]. Blue vertical line indicates the date, December 13, 2010, on which we submitted a report to the U.S. government, warning of the link between food prices, social unrest and political instability [56]. Inset shows FAO Food Price Index from 1990 to 2011. [From arXiv:1108.2455, page 3]

“Poverty is the parent of revolution and crime.” ~ Aristotle.

By crossing data on food price, and food price peaks with an ongoing trend of increasing prices, as well as the date of riots around the world, 3 of my colleagues at NECSI – the New England Complex Systems Institute (link), Boston,  found out a specific food price threshold above which protests become likely. By doing so, unveiled a model that accurately explained why the waves of unrest that swept the world in 2008 and 2011 crashed when they did. That was the past. NECSI team however, expects a perilous trend in rising food prices to continue (link). Even before the extreme weather scrambled food prices this year, their 2011 report predicted that the next great breach would occur in August 2013, and that the risk of more worldwide rioting would follow. So, if trends hold, these complex systems model say we’re less than one year and counting from a fireball of global unrest riots.

The abstract and PDF link into their work follows:

[…] Social unrest may reflect a variety of factors such as poverty, unemployment, and social injustice. Despite the many possible contributing factors, the timing of violent protests in North Africa and the Middle East in 2011 as well as earlier riots in 2008 coincides with large peaks in global food prices. We identify a specific food price threshold above which protests become likely. These observations suggest that protests may reflect not only long-standing political failings of governments, but also the sudden desperate straits of vulnerable populations. If food prices remain high, there is likely to be persistent and increasing global social disruption. Underlying the food price peaks we also found an ongoing trend of increasing prices. We extrapolate these trends and identify a crossing point to the domain of high impacts, even without price peaks, in 2012-2013. This implies that avoiding global food crises and associated social unrest requires rapid and concerted action. […] in Marco Lagi, Karla Z. Bertrand and Yaneer Bar-Yam, “The Food Crises and Political Instability in North Africa and the Middle East“, arXiv:1108.2455, August 10, 2011. [PDF link]

The Aftermath Network

Photo – The Aftermath Network research group: Manuel Castells, Terhi Rantanen, Michel Wieviorka, Sarah Banet-Weiser, Rosalind Williams, John Thompson, Gustavo Cardoso, Pekka Himanen, You-Tien Hsing, Ernesto Ottone, João Caraça and Craig Calhoun.

Oh!… nostalgia. But can you read between the lines? Could you perceive the cynical TV ads. The underlying media mantra that you are not being productive enough. That is you, ultimately the reason for the global crisis. That ‘something‘ went broken. Are you having a feeling that all this mess could give rise to National Socialism, again? That, reversed nostalgia plays a role too?! Well, … shortly after the beginning of the financial crisis of 2008 sociologist Manuel Castells gathered a small group of international top intellectuals to ponder the crisis. While the crisis expanded, Castells named his group ‘The Aftermath Network‘, a direct reference to the new world which according to him will emerge from the ashes of the crisis.

Under the venue and patronage of Calouste Gulbenkian Foundation, Lisbon-Portugal, Castell‘s multidisciplinary research group meet every year with the aim of discussing in real time and from different angles the societal and cultural consequences of the worldwide economic collapse. Now, thanks to the Dutch VPRO Backlight, a new documentary has been produced (uploaded last week over YouTube), reflecting part of those meetings. Entitled ‘Aftermath of a Crisis‘ (above) is a 48 minute documentary reporting the world incertitude, facing a global fallacy, as well as the emergence of new social movements and protests in Spain, Greece, Portugal and London. Unfortunately, as I said the other day (link), there are increasing signs that: Keynesianism is now Bankism. Know what? Next time someone or some institution comes to you covered by a veil of nostalgia, even a thin one, do yourself a favor: put your brain in maximum alert.

Oh Europe, … Europe what are you doing?

Video – A 1964 film based on the novel Zorba the Greek by Nikos Kazantzakis. The film was directed by Michael Cacoyannis and the title character was played by Anthony Quinn. The supporting cast included Alan Bates as a visiting Englishman as well as Irene Papas. The theme, “Sirtaki” by Mikis Theodorakis, has become famous and popular as a song and as a dance. The movie was shot on location on the Greek island of Crete. Specific places featured include the town of Chania, the Apokoronas region and the Akrotiri peninsula. The famous scene, in which Quinn’s character dances the Sirtaki, was shot on the beach of the village of Stavros. (from YouTube)

Basil (Alan Bates), a young English writer, meets a free-spirited Greek peasant named Zorba (Anthony Quinn) while waiting to travel to the island of Crete. While Zorba pursues a relationship with aging French courtesan Madame Hortense, Basil attempts to court a young widow. Along the way, he learns valuable life lessons from the earthy Zorba, who has an unquenchable joie de vivre (link):

[…] Basil: I don’t want any trouble. Alexis Zorba: Life is trouble. Only death is not. To be alive is to undo your belt and look for trouble. […] Zorba: Damn it boss, I like you too much not to say it. You’ve got everthing except one thing: madness! A man needs a little madness, or else… Basil: Or else? Zorba: …he never dares cut the rope and be free. […] Basil: Teach me to dance, will you? Zorba: Dance? Did you say… dance?! … Come on my boy… together… Let’s go… hop … Again… hop … […] Zorba: Boss, I have so much to tell you, … I never had loved a man like you … […] Zorba: Hey boss, did you ever see a more splendiferous crash?! … Oh, … You can laugh too!… hmmm… Hey!… You laugh! […]

Bit by bit…

(pic. – click to enlarge) Summer time in here, you know?! So, this will be my next T-shirt: “First, the Economy took over Politics. Now, Finance took over Economy. Bit by bit, planet Earth bounds to be a giant speculation machine“. @ViRAms April 28 2011 (link).

Large Stakes, Big Mistakes…

Animated Video – Lively RSA Animate [April 2010], adapted from Dan Pink‘s talk at the RSA (below), illustrates the hidden truths behind what really motivates us at home and in the workplace. [Inspired from the work of Economics professor Dan Ariely at MIT along with his colleagues].

What drives us? Some quotes: […] Once the task called for even rudimentary COGNITIVE skills a larger reward led to poorer performance […] Once you get above rudimentary cognitive skills, rewards do not work that way [linear], this defies the laws of behavioural physics ! […] But when a task gets more complicated, it requires some conceptual, creative thinking, these kind of motivators do not work any more […] Higher incentives led to worse performance. […] Fact: Money is a motivator. In a strange way. If you don’t pay enough, people won’t be motivated. But now there is another paradox. The best use of money, and that is: pay people enough to take the issue of money off the table. […] …Socialism…??

[…] Most upper-management and sales force personnel, as well as workers in many other jobs, are paid based on performance, which is widely perceived as motivating effort and enhancing productivity relative to non-contingent pay schemes. However, psychological research suggests that excessive rewards can in some cases produce supra-optimal motivation, resulting in a decline in performance. To test whether very high monetary rewards can decrease performance, we conducted a set of experiments at MIT, the University of Chicago, and rural India. Subjects in our experiment worked on different tasks and received performance-contingent payments that varied in amount from small to large relative to their typical levels of pay. With some important exceptions, we observed that high reward levels can have detrimental effects on performance. […] abstract, Dan Ariely, Uri Gneezy, George Loewenstein, and Nina Mazar, “Large Stakes and Big Mistakes“, Federal Reserve Bank of Boston Working paper no. 05-11, Research Center for Behavioral Economics and Decision-Making, US, July 2005. [PDF available here] (improved 2009 version below)

Video lecture – On the surprising science of motivation: analyst Daniel Pink examines the puzzle of motivation [Jul. 2009], starting with a fact that social scientists know but most managers don’t: Traditional rewards aren’t always as effective as we think. So maybe, there is a different way forward. [Inspired from the work of Economics professor Dan Ariely at MIT along with his colleagues].

[…] Payment-based performance is commonplace across many jobs in the marketplace. Many, if not most upper-management, sales force personnel, and workers in a wide variety of other jobs are rewarded for their effort based on observed measures of performance. The intuitive logic for performance-based compensation is to motivate individuals to increase their effort, and hence their output, and indeed there is some evidence that payment for performance can increase performance (Lazear, 2000). The expectation that increasing performance-contingent incentives will improve performance rests on two subsidiary assumptions: (1) that increasing performance-contingent incentives will lead to greater motivation and effort and (2) that this increase in motivation and effort will result in improved performance. The first assumption that transitory performance-based increases in pay will produce increased motivation and effort is generally accepted, although there are some notable exceptions. Gneezy and Rustichini (2000a), for example, have documented situations, both in laboratory and field experiments, in which people who were not paid at all exerted greater effort than those who were paid a small amount (see also Gneezy and Rustichini, 2000b; Frey and Jegen, 2001; Heyman and Ariely, 2004). These results show that in some situations paying a small amount in comparison to paying nothing seems to change the perceived nature of the task, which, if the amount of pay is not substantial, may result in a decline of motivation and effort.

Another situation in which effort may not respond in the expected fashion to a change in transitory wages is when workers have an earnings target that they apply narrowly. For example, Camerer, Babcock, Loewenstein and Thaler (1997) found that New York City cab drivers quit early on days when their hourly earnings were high and worked longer hours when their earnings were low. The authors speculated that the cab drivers may have had a daily earnings target beyond which their motivation to continue working dropped off. Although there appear to be exceptions to the generality of the positive relationship between pay and effort, our focus in this paper is on the second assumption – that an increase in motivation and effort will result in improved performance. The experiments we report address the question of whether increased effort necessarily leads to improved performance. Providing subjects with different levels of incentives, including incentives that were very high relative to their normal income, we examine whether, across a variety of different tasks, an increase in contingent pay leads to an improvement or decline in performance. We find that in some cases, and in fact most of the cases we examined, very high incentives result in a decrease in performance. These results provide a counterexample to the assumption that an increase in motivation and effort will always result in improved performance. […] in Dan Ariely, Uri Gneezy, George Loewenstein, and Nina Mazar, “Large Stakes and Big Mistakes“, Review of Economic Studies (2009) 75, 1-19 0034-6527/09. [PDF available here]

Now, these are not stories, these are facts. These are one of the most robust findings in social science,… yet, one of the most ignored [sic]. And they keep coming in. Such as the fallacy of the supply and demand model (March 2008). Anyway, enough good material (a simple paper with profound implications)… for one day. But hey, …Oh, if you are still wondering what other paper inspired the specific drawings at minute 7′:40” and on, in the first video over this post, well, here it is: Kristina Shampan’er and Dan Ariely (2007), “How Small is Zero Price? The True Value of Free Products“, in Marketing Science. Vol. 26, No. 6, 742 – 757. [PDF available here]… Got it ?!

Financial crisis seen from the sky

[via Foreign Policy / Contrafactos Twitter] (…) Want to get a sense of just how bad things are? Take a spin on Google Earth. The above image, pulled yesterday  from Vesseltracker.com’s Google Earth file, shows container ships languishing off the Singapore coast. Welcome to the largest parking lot on Earth. International Economy explains (…):

“The world’s busiest port for container traffic, Singapore saw its year-over-year volume drop by 19.6 percent in January 2009, followed by a 19.8 percent drop in February. As of mid-March 2009, 11.3 percent of the world’s shipping capacity, sat idle, a record.”

Extremely bad news. Meanwhile, someone have made a huge mistake…

The Economy

Two “The Economist” covers. The first one was manually created and posted by Richard Dawkins himself, … – yes – the evolutionary Biologist. The second one is real as well recent (as of April 4th) – UNDER ATTACK, a 14-page special report on the rise and fall of the wealthy. Do note the Blackberry on top of the dead guy in the front and the skyline of London’s Canary Warf financial district in the background (via HS Dent blog). The Laissez-faire Economy lead to all this (more).

 

The end of the free-market ideology? (poll)

After reading at Yahoo! Finance (Oct. 24), “The Twilight of Free-Market Ideology” by Charles Wheelan (lecturer at Univ. of Chicago and author of Naked Economics) I decided to create a poll. Here are some passages from his article (as well as my very similar opinion over here):

[…] When I heard Alan Greenspan’s testimony before Congress last Thursday, I had one immediate thought: This is the beginning of the end for the free-market ideologues (…) According to press reports of the testimony, Greenspan told Congress that he “had put too much faith in the self-correcting power of free markets.” That’s no small statement. In fact, it struck me that if 1989 was the year when no reasonable person could still believe in communism (or any of its government-intensive relatives), then 2008 will go down in history as the year in which the free-market zealots saw their “wall” come crumbling down. […]

So, what’s your opinion?

October twenty-ninth, 1929 – Black Tuesday

October, 29. Just 3 days ahead of us, almost 80 years ago. Up till now, October 10, 2008 – Black Friday – was the worse. On that day the biggest DJIA point drop in history was found. A collection of these photos (below) are available at “A Photo Essay on the Great Depression“. Plus, to compare what happened in 1929 versus today I vividly recommend you this New York Times Journal graphic comparing severity versus time for several historical crashes.

Dorothea Lange‘s “Migrant Mother,” destitute in a pea picker’s camp, because of the failure of the early pea crop. These people had just sold their tent in order to buy food. Most of the 2,500 people in this camp were destitute. By the end of the decade there were still 4 million migrants on the road. (Source)

The trading floor of the New York Stock Exchange just after the crash of 1929. On Black Tuesday, October 29, the market collapsed. In a single day, sixteen million shares were traded -a record- and thirty billion dollars vanished into thin air. Westinghouse lost two thirds of its September value. DuPont dropped seventy points. The “Era of Get Rich Quick” was over. Jack Dempsey, America’s first millionaire athlete, lost $3 million. Cynical New York hotel clerks asked incoming guests, “You want a room for sleeping or jumping?” (Source). Finally (photo below): Bud Fields and his family. Alabama. 1935 or 1936. Photographer: Walker Evans. (Source)

“Epidemiology” of the Credit Crisis

August 1, 2007

August 10, 2007 (the beginning)

December 20, 2007

January 15, 2008

May 15, 2008

July 10, 2008

September 15, 2008 (post-Lehman)

October 10, 2008 (biggest DJIA point drop in history)

With a short empirical investigation, Reginald Smith (MIT – Sloan School of Management) have come to some interesting complex networks (nodes in here are financial stocks) over time, since the beginning of the financial crisis in August 10, 2007, till today. His rather simple econophysics study (draft PDF link) somehow demonstrates that the losses in certain markets, in this case the US equity markets, follow a cascade or “epidemic” flow like model along the correlations of various stocks. His networks shows the correlation (similar rise and fall movements) among the stocks in the S&P 500 and NASDAQ-100 using the latest stocks in the index (as of 10/10/2008). The abbreviations are the ticker symbols. Network edges here connect stocks (nodes) based on their correlations. More then 500 tickers were used. After correlations among any two stocks were calculated (J.C. Gower, Biometrika, 1966), a distance metric is computed. Finally these distances are used to create a minimal spanning tree. For the graphics and animations Reginald have used the python-graph module, pydot and Graphviz. Extra details and a F.A.Q. is here as well as some movies. If the stock share price return had a return (minus dividends) greater than or equal to -10% the nodes are green, less than -10% but greater than -25% yellow, and less than or equal to -25% red.

In what relates red nodes over time, I now wonder what would be the probability distribution of vertex connectivity change (is it scale-free?!), the characteristic path length L as well as the clustering coefficient C. It would be quite funny to know.

“I made a mistake…”

It’s not everyday we see a 40 year ideology collapsing through a dramatic act of contrition. It has happened just a few hours ago (check video above), yesterday in the “financial crisis” congressional hearing in Washington (23. Oct. 2008). Moreover, what seems remarkable, is that the recognition comes from one of his most universally respected founding fathers and defenders.

Alan Greenspan was the longest serving chairman in the Federal Reserve board history (1987-2006), and during this 18-year period of time he were perhaps the leading proponent of de-regulation along with libertarian capitalism, vividly expressed on his “The Age of Turbulence – Adventures in a New World” 2007 book, advocating above all issues, Adam Smith’s “Invisible Hand” that markets can regulate themselves. As it’s known, for his whole adult life, the former Fed chairman has been a devotee of the philosophy of Ayn Rand, who celebrated free-market capitalism as the world’s most moral economic order and advocated a strict laissez-faire approach to government regulation of the marketplace. Ironically, he was a regulator that did not believed in any regulation at all.

It is now quite a remarkable historic moment seeing former Federal Reserve chairman, a lifelong champion of free markets, publicly questioning the philosophy that guided him throughout his years as the world’s most powerful economic policymaker. A philosophy followed and strongly defended by him (along with many others like Margaret Thatcher and Ronald Reagan), at least in the last 40 years, as he himself acknowledged yesterday. Asked by the congressional committee chairman, whether his free-market convictions pushed him to make wrong decisions, especially his failure to rein in unsafe mortgage lending practices, Greenspan replied that indeed he had found a flaw in his ideology, one that left him very distressed. “In other words, you found that your view of the world, your ideology was not right?” he was asked:

“Absolutely, precisely“, replied Greenspan. “That’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence it was working exceptionally well“. Albeit he was surely one of the most influential voices for de-regulation: “There is nothing in Federal regulation that makes it superior to Market regulation”, said Greenspan back in 1994, in one among many of his past radical free-market statements.

I presume we now all wonder, where was Greenspan, when back in 2003 one of the most prestigiously recognized and legendary financial investors such as Warren Buffet, called credit default obligations and derivatives “weapons of financial mass destruction“? Or where was he when Princeton Professor of Economics, Paul Krugman – the recent Nobel laureate – said back in 2006 that “If anyone is to blame on the current situation (sub prime) is Mr Greenspan who poopooed warnings about an emerging bubble and did nothing to crack down on irresponsible lending“. Or what did he, Greenspan itself, said just a few days after ENRON collapsed?

People working in complex systems – and surely financial markets are one of them (yes, for the past 4-5 years including these present turbulent times I am working hard in this area as well) – for long know that any systemic structure could collapse if only positive-feedbacks are injected into them, creating an auto-catalytic snow-ball effect, leading among other things to a power-law like Black Swan. Indeed power-laws are a striking powerful signature. This is specially true when we address self-organization (read it in the present context as self-regulation). In order to be a truly self-regulated system, financial markets should also be embedded with negative-feedbacks as well, as I have addressed in a post about finance and complex systems one month ago. In fact, in order to emerge as a truly self-organized system, self-interest, should constitute just one among many of the ingredients over the entire financial system, and not the isolated unique ingredient. Self-interest promotes amplification and positive feedback, which is – as I recognize – necessary. However, left alone, promotes instead dramatic snowballing drifts over chaotic regimes, due to it’s intrinsic amplification. What’s amazing (at least for me), is that Alan Greenspan just recognized that in a tiny few seconds along his current discourse (check video above), pointing it to the precise key-word:

[…] I made a mistake in presuming that the self-interest of organizations, specifically banks and others, was such that they were best capable of protecting their own shareholders. […] So the problem, here is something which looked to be as a very solid edifice, and indeed a critical pillar to market competition and free-markets, did breakdown and I think that, as I said, shock me. I still do not fully understand why it happened, and obviously to the extend, that I figure out where it happened and why, … aaaaaa, … I will change my views. If the facts change I will change. […]

As a result, “the whole intellectual edifice” of risk management collapsed, Greenspan said. In what regards his unexpected words yesterday at the congressional hearing, at least, I frankly praise him for his huge intellectual courage and present honesty. In the end, it seems that during the past 18 years, former FED chair was nothing else then a simple-man driven by his own blind faith on markets, from which he apparently comes out now. Unfortunately, only now at a very high price. Meanwhile as we know, severe consequences are here to stay, as was already evident when Greenspan addressed the House Financial Services Committee on 2003 (video below). Let’s hope that all these will not be forgotten in 3 decades from now (though, I doubt it – after all, nothing really serious came out from the entitled 3-man dream-team Bush-Sarkozy-Barroso “new global finance order” summit at Camp David last weekend, as expected):

“You have told the American people that you support a trade policy which is selling them out.” – Rep. Bernard Sanders to Federal Reserve Chairman Alan Greenspan on 7/16/03. Rep. Bernard Sanders (Independent-Vermont), now a US Senator, dresses down Federal Reserve Chairman Alan Greenspan in front of the House Financial Services Committee on 7/16/03.

Economics 101

Subprime Banking Mess (via YouTube) – John Bird and John Fortune (the Long Johns) brilliantly, and accurately, describing the mindset of the investment banking community in this satirical interview.

Now, above in the video, do you remember the words: Structured Investment Vehicle (S.I.V. or Conduits)? No? Okay, let’s now pass to a very brief and relatively more technical approach to it (as you will see it, reality transcends fiction) – CNBC via Youtube:

Care for more?

Some spammers are bigger than others

[…] From the ice-age to the dole-age
There is but one concern
I have just discovered: Some girls are bigger than others
Some girls are bigger than others
Some girls mothers are bigger than
Other girls mothers […]

The Smiths – “Some Girls Are Bigger Than Others“, (Queen is dead) 1986. Song written by Morrissey and Johnny Marr.

 ________________  §  ________________

NOUN:dole

Key: “S:” = Show Synset (semantic) relations, “W:” = Show Word (lexical) relations / S: (n) dole (a share of money or food or clothing that has been charitably given) / S: (n) dole, pogy, pogey (money received from the state) 

 ________________  §  ________________

(via William Gibson‘s blog)

SUBJECT: REQUEST FOR URGENT BUSINESS RELATIONSHIP
posted 12:29 PM

DEAR AMERICAN:

I NEED TO ASK YOU TO SUPPORT AN URGENT SECRET BUSINESS RELATIONSHIP WITH A TRANSFER OF FUNDS OF GREAT MAGNITUDE.

I AM MINISTRY OF THE TREASURY OF THE REPUBLIC OF AMERICA. MY COUNTRY HAS HAD CRISIS THAT HAS CAUSED THE NEED FOR LARGE TRANSFER OF FUNDS OF 800 BILLION DOLLARS US. IF YOU WOULD ASSIST ME IN THIS TRANSFER, IT WOULD BE MOST PROFITABLE TO YOU.

I AM WORKING WITH MR. PHIL GRAM, LOBBYIST FOR UBS, WHO WILL BE MY REPLACEMENT AS MINISTRY OF THE TREASURY IN JANUARY. AS A SENATOR, YOU MAY KNOW HIM AS THE LEADER OF THE AMERICAN BANKING DEREGULATION MOVEMENT IN THE 1990S. THIS TRANSACTIN IS 100% SAFE.

THIS IS A MATTER OF GREAT URGENCY. WE NEED A BLANK CHECK. WE NEED THE FUNDS AS QUICKLY AS POSSIBLE. WE CANNOT DIRECTLY TRANSFER THESE FUNDS IN THE NAMES OF OUR CLOSE FRIENDS BECAUSE WE ARE CONSTANTLY UNDER SURVEILLANCE. MY FAMILY LAWYER ADVISED ME THAT I SHOULD LOOK FOR A RELIABLE AND TRUSTWORTHY PERSON WHO WILL ACT AS A NEXT OF KIN SO THE FUNDS CAN BE TRANSFERRED.

PLEASE REPLY WITH ALL OF YOUR BANK ACCOUNT, IRA AND COLLEGE FUND ACCOUNT NUMBERS AND THOSE OF YOUR CHILDREN AND GRANDCHILDREN TO WALLSTREETBAILOUT@TREASURY.GOV SO THAT WE MAY TRANSFER YOUR COMMISSION FOR THIS TRANSACTION. AFTER I RECEIVE THAT INFORMATION, I WILL RESPOND WITH DETAILED INFORMATION ABOUT SAFEGUARDS THAT WILL BE USED TO PROTECT THE FUNDS.

YOURS FAITHFULLY MINISTER OF TREASURY PAULSON