The Ig History of Modern Economics

Giggle and Ponder

The Ig Nobel Prizes are awarded for “ideas that first make you laugh and then make you think”. Many of them simply point out random behaviour that might better have been consigned to the dustbin of bad ideas before anyone spent any time on them, but there’s a serious side as well and the annual award ceremony is regularly attended by winners graciously accepting their prizes and real Nobel Prize Winners presenting them.

Our interest here is in the Ig Economics Prize which yields a surprising insight into the world of investment over the past two decades, tracking with vague accuracy the surging ups and considerable downs of the world’s economic system. Not to mention some really remarkable inventions that could have changed the world but – fortunately – didn’t.

1991-1992: Junk and Insurance

Back in 1991 the very first prize went to the junk bond trader Michael Milkin “to whom the world is indebted”. For those too young to remember Mr. Milkin popularised the use of the junk bond in loading up perfectly good companies with debt and then letting them loose to fail as soon as the global economy hit a pothole. Which it did, pretty much immediately. Mr. Milkin, meanwhile, was manipulating the system to his own personal advantage and consequently spent some time incarcerated at the expense of the US government for securities violations.

In 1992, the award went to the investors in the 300 year old insurance market Lloyds of London for attempting to redefine the concept of “insurance” by trying to renege on their obligations to make payouts on genuine claims. At the time Lloyds was mainly funded by private investors, so-called “Names”, many of whom were know-nothings attracted by the high rates of return.

Like so many investment novices the Names failed to understand that the high returns were the consequence of high risk – in this case unlimited liability which, in effect, meant they pledged all their personal assets as surety on the policies. When, as is the way of the world, all the Black Swans landed at once and they found themselves facing ruin they squealed and tried to run away. Unsuccessfully. Cue personal bankruptcy.

1993-1995: Depression and Derivatives

The following year the prize was more focused, targeting the largely forgotten economist Ravi Batra. Mr. Batra was honoured for his single handed – and as retrospectively seen – successful efforts to prevent world economic collapse through the sales of his books on the “Great Depression of 1990”. Look out for numerous similarly named tomes in a bookshop near you soon: little changes other than the name on the flyleaf.

In 1995 the Ig’s moved from the trivially amusing to the monumentally eye-popping by rewarding Jan Pablo Davila, a futures trader from Chile. Mr. Davila, in a moment of absent mindedness, instructed his computer to buy instead of sell and found himself staring down the barrel of some rather nasty losses. Rather than admitting the problem and taking his punishment he set out on a course of increasingly and spectacularly badly judged trades which ended with total losses equivalent to 0.5% of Chile’s Gross National Product. A truly magnificent effort and a shining example of how one person can make an unexpected and unforseeable difference to an otherwise sound investment – no matter how careful your research.

As we moved through the middle years of the last decade of the last century the awards committee was presented with an embarrassment of riches and hedged their bets between two stunning efforts on different sides of the world. Through a series of awesomely bad derivatives trades, and aided by a system of oversight so lax it can only be described as “non-existent”, Nick Leeson of the 230 year old London based Barings Bank and Robert Citron of Orange County, California managed to bankrupt their respective institutions. The lesson – that where derivatives are concerned the unthinkable is merely tomorrow’s starting point – has yet to be properly learned a decade or so later.

1996 – 1997: From Gum Disease to Virtual Petting

If all of these trends weren’t worrying enough, investors’ teeth started to fall out. Yes, in 1996 Dr. Robert J. Genco received the award for research into the effect of financial stress on gum disease. Although as smoking is the most likely cause of such problems it might also serve as a study of illusory correlation. After all “financial stress causes people to smoke” might fall into the category of “bloody obvious”.

With the world moving through a reasonable period of financial stability the prize givers turned their attention to people generating new types of business model. Specifically to Akihiro Yokoi and Aki Maita, inventors of the infuriating Tamagotchi. These virtual pets, requiring almost constant attention to make sure they didn’t start beeping at you and dying in inconvenient ways, were responsible for the loss of thousands of hours of otherwise productive time as people frantically tapped away on their stupid little plastic cases thus proving that you can get people to do any damn thing as long as you make it cute and a little less boring than their everyday lives.

1998-2001: Of Clones, Mass Marriage and Tax Avoidance

Fortunately if you set a challenge someone, somewhere in the world will rise to it. Indeed the next recipient, the fortuitously named Dr. Richard Seed, was up to it many times and was awarded the prize for his unceasing efforts to clone himself and others, presumably to replace all of the people wasting their time playing with plastic pets.

So boringly successful was the world of economics as the dotcom boom took off that no prize was given in 1999. The following year the Reverend Moon of the Unification Church was honoured for his self-reported efficiency improvements to the marriage industry as he moved smoothly from a 36 couple wedding in 1960 to a 36,000,000 couple wedding in 1997.

With a neat sense of symmetry the awards committee gave the next award to Joel Slemrod and Wojciech Kopczuk who showed that Americans hate paying tax so much that they will put off dying if it leads them to qualify for a lower inheritance tax rate. That’s taking no taxation without representation to the outer limits. Spooky.

2002 – 2003: Auditors and National Entreprenurism

As the world economy went for a slide down the wrong side of the rollercoaster in 2002 the prize was shared by a whole host of organisations for “adapting the mathematical concept of imaginary numbers for use in the business world” – aka, the spectacular use of creative accounting techniques. There were too many recipients to mention all of them by name but think Enron, Global Crossing and Arthur Anderson. Remember: never trust an auditor further than the length of their propelling pencils.

Entrepreneurial enthusiasm on a national scale was rewarded in 2003 as Karl Schwärzler and Liechtenstein opened up the whole 63 square mile country as a venue for weddings and other celebrations. Mr. Schwärzler became the first recipient of the prize to personally attend the ceremony, probably because he was one of the few not in jail at the time.

Warming to the theme the next award went to another miniscule sovereign state: to the Vatican for its groundbreaking efforts in support of globalisation through outsourcing … of prayer to India. Disappointingly the Pope didn’t opt to receive the award personally.

2005-2007: Timekeeping and Thief-Catching

More economically important inventiveness received its just desserts in 2005. Quite rightly Gauri Nanda received the award for his invention of a productivity enhancing alarm clock. Despised by a whole generation of teenagers and work-shy employees, but loved by employers everywhere, when the clock goes off it also runs away and hides itself. Repeatedly. Mr. Nanda’s clock ensured he got to the ceremony on time.

Disappointingly nothing interested the panel enough to be bothered to give an award in 2006 but in 2007 the prize went to a six year old invention by Kuo Cheng Hseih for catching bank robbers. In essence the invention is a net, scooping up the master criminals as they attempt to make their getaway, presumably pausing only to wonder why someone has drawn a large ‘X’ on the floor. This unique piece of inventiveness, not previously seen since Wile E. Coyote repeatedly attempted to catch Roadrunner with an Acme ™ Roadrunner Trap back in the 1950’s, was awarded a US patent. Despite their best efforts the Ig organisers were unable to locate Mr. Hseih until after the ceremony. Presumably he’d been tied up somewhere.

2008-2009: Lapdancers and Icelanders

In 2008 some genuinely interesting research got its reward as Miller, Tybur and Jordan showed that ovulating lap dancers get higher tips than their colleagues. As human males supposedly can’t tell when females are at their most fertile this is a puzzle, but the stats don’t lie: we males know, even if we don’t know we know. The question now is: do females know we know, even if they don’t know that we know, even though we don’t?

Coming right up to date the latest awards rightly celebrated the magnificent achievements of bankers everywhere in proving that there’s no such thing as a stable and safe economy. The directors, auditors and executives of the largest four Icelandic banks were honoured for their role in making their tiny banks really, really big and then transforming them back again, while taking the entire national economy with them. Always remember: a trend is not a prediction, it’s merely an opening gambit.

We Don’t Know What We Don’t Know

The Ig’s are a quirky microcosm of the financial world over the past nineteen years, sometimes relevant and sometime not. If they tell us anything, however, it’s that there’s no such thing as certainty in economics or markets or, indeed, any system that has human beings as a component part. Whatever you think is going to happen almost certainly won’t. So don’t worry about the things you know you don’t know, worry about the things you don’t know you don’t know.

OK?


Related Articles: Black Swans, Tsunamis and Cardiac Arrests, Old? Prudent? You’ve Been Bilked!, Gaming The System

The Case of the Delusional Investor

In which Sherlock Holmes demonstrates that closely following markets is bad for your health and your investments, derides the popular press and other tipsters and argues that market values in the short-term are determined by unpredictable psychological forces rather than foreseeable trends. And Dr. Watson discovers that following others is rarely a successful strategy and that his wife is unexpectedly loquacious in the morning.

“Ah Watson,” said Sherlock Holmes, “I see your stocks have declined in value once more”.

“Good heavens, Holmes,” I expostulated, “However did you know that? I don’t believe I’ve ever discussed my investments with you? To be honest I never thought you would be interested. Although I do have this interesting tip about the 4.3% Consols …”

Holmes waved my best intentions away impatiently.

“You, I deduce, prefer to engage in risky stratagems for increasing your savings with no regard for the possible downside,” he said, gravely. “As a newly married man I’m surprised that you have so little regard for your wife. Or the child she carries that you have hurried here to inform me of”.

I admit that I dropped my copy of the financial paper in shock.

Holmes crossed the room with two strides of those long legs and folded himself into the armchair by the roaring fire. He gazed at me with amusement, his dark eyes twinkling at me from the deep recesses behind that aquiline nose; as they often did when he was musing over some personal triumph at my expense.

“Unlike you, Watson, I have no time for financial speculation. My savings are safely invested for the long-term on the best modern principles. With each fee I simply add a little more to my fund, at the lowest cost possible, without regard for the market’s undulations and I shall not call upon it until I retire to a little cottage on the South Downs”.

“Through the simple act of companies compounding their retained earnings and reinvesting dividends I will acquire sufficient savings to see me through my retirement,” he added, carelessly, “regardless of whether markets outperform or not”.

“But how …,” I started.

“How do I know your investment habits?” Holmes shrugged. “Consider the copy of that paper you habitually carry. No one with regard for the long-term nature of investment bothers with the financial news. It should have as little effect on one’s investment behaviour as the migration pattern of the swallow”.

“By Jove,” I exclaimed, “Selling on the sight of the first swallow and buying on the departure of the last is the very latest technique. I was reading about it in the Bow Street Tipsheet just the other month. Although it doesn’t seem to have worked very well this year”, I added, sadly, thinking of the remarkable boom in stocks since I had sold most of my holdings earlier in the year, on the best advice of many of the country’s most prominent financial experts.

Oddly enough most of these distinguished gentlemen now seemed to have forgotten their earlier recommendations and were discussing the great market recovery as though it had always been the most obvious thing in the world. It was extremely puzzling, but I was eagerly following their latest words of wisdom in order to determine the next best steps.

Holmes rolled his eyes and drew hard on his pipe. Swathed in smoke he waved a monograph on railway timetables at me, angrily. I thought gloomily about how badly my investments during the great Railway Mania had turned out despite the great hopes and claims of the promoters.

“Tipsheets, Watson, tipsheets. Do you mean your family to live in penury?” he scowled, “The people who can outperform the markets, if these mythical creatures exist, are not offering penny tipsheets to unwary souls such as yourself. They are investing silently, using other people’s money to accrue great fortunes. The last thing they will do is reveal their secrets to the great masses who will destroy them in their haste to take advantage”.

“Why aren’t these tipsters investing themselves if their investment knowledge is of any worth? Mark my words, Watson, these people are no better than travelling fortunetellers. Pah!”

“Gosh, Holmes”, I said brightly, “apparently there’s this stock tipping soothsayer over on Grays Inn Road that everyone says is remarkably good.”

Holmes threw his timetable extravagantly in my direction. I ducked with difficulty and turned to face Holmes who was now pointing a red-hot poker at me. On one hand I remembered the disappointments with my investments in the new Bessemer Steel processes. On the other he did have my full attention.

“Your risky strategies are easily implied from the way in which the price pages of your newspaper are always well thumbed. Only someone unable to fully apprehend the value of their investments and therefore constantly in need of reassurance about their prices would bother checking so regularly. It is a mercy that there is no way for you to get constant price updates since I fear you would spend all day following the random twitches of the markets instead of tending to the malformed flock who grace your surgery”.

“Well now you mention it I’ve just ordered one of those new stock ticker machines for the office. I thought it would give me an advantage over the majority of investors”.

Holmes had dropped the poker and was busily preparing his morning fix as I said this. He now turned and thrust his wad of Chinese opium at me angrily. My mood darkened, as I recalled the hope with which I had invested in the promise of the East. More pounds turned to pennies.

“If you install that machine”, he hissed, “I shall visit you and break it myself like a modern day Luddite. You have duties – to your patients, your wife and your unborn infant.”

“Yes,” I said, remembering, “About the baby …”

“Yes Watson, you need to develop a different approach to investing now that you are a man of responsibility. Mark my words, one of these days the modern approach to risky investment will lead to the ruin of the world. Put not your trust in the probity of your fellow man or the trustworthiness of governments.”

He put his arm around me, a gesture I found strangely touching, tinged only with concern about the blood flowing from his puncture wounds staining my suit and the tip of his syringe alarmingly waving around under my nose. He gestured at the bookshelves that constituted the walls of his study, floor to ceiling full of learned tomes on all the subjects he deemed important to his calling.

“Look here. How many books do you see on investing?”

I peered around me, daunted by the sheer volume of volumes. I shrugged.

“Precisely none. I need none because I know that the prices of stocks and consols are driven not by any of the endless changes generated by the ceaselessly restless and ingenuous financial business in its search to extract every last fee from the pockets of people like yourself. No, Watson, the key to successful investment is psychology, not finance”.

“Psychology? I’m sorry, Holmes, I’m not sure what that is. Do you mean the strange writings of the Viennese professor, Freud?”

“Poppycock!” exclaimed Holmes, whirling his arms in animated exasperation, “No I talk of the inestimable writings of the mentalist Dr. William James and the naturalist Mr. Charles Darwin, who between them have offered us an insight into the truth of human nature”.

“Darwin tells us that we are descended from apes, does he not?”, I said, trying hard not to picture the baboons we had seen at London Zoo the previous weekend, engaging in acts that I felt were not suitable for the eyes of my good lady whom I’d hurried away to an exhibition of the latest in communications technology given by the inestimable Italian inventor, Guglielmo Marconi, in whose company I had unhesitatingly invested on the Monday morning. In hindsight the lack of earnings or actual products was slightly concerning, but his telegraph was surely a world beating technology destined to dominate global communications for centuries.

“We are cousins, certainly. But we share many biases which are in-built and from which we can escape with only the greatest of difficulty. We run from danger and flock with the crowd for safety, actions which are of the greatest benefit to us in the course of our normal lives. Yet these are traits of the utmost danger in investment, where the beliefs of the masses are close to delusional. And Dr James explains that our world is constantly in flux and our emotions in flux with it, lessons most stock speculators should heed”.

“Gosh Holmes”, I frowned, “It sounds rather difficult.”

“Difficult!” exploded Holmes, “Have you learned nothing from your years as my faithful assistant? What could be simpler – we are all habitually controlled by inner urges we understand nothing of and influenced unconsciously by the people we spend our time with? These are the fundamentals of my trade, Watson, and you of all people should know this”.

“Well, I suppose so”, I mumbled, “but I still don’t understand …”

“If you invest on the basis of short term tips and hints, if you spend your time watching your investments instead of earning an income through your skills, if you spend your money on whims and fanciful speculations and if you persist in acting upon your investments on the basis of the words of people whom you know not then you will end up in the gutter. Is that so hard to understand?” Holmes pointed a long finger at me, “Trust me on this, as a friend”.

“No, no”, I said, “I trust you implicitly old man. It’s just I still don’t know how you knew my good lady was with child. That’s astonishing”.

“Oh that”, said the Great Detective carelessly, “Well, your beloved met my housekeeper at the bakers this morning and she couldn’t keep a secret I’m afraid”.

Holmes suddenly smiled and offered me his hand. “Congratulations. Come, a new day beckons”.

And so saying, he threw my paper upon the fire and stood there, warming his hands upon the bonfire of my vanities.


Related Articles: Darwin’s Stockmarkets, Contrarianism, Panic!

Debt Matters

Borrow Wisely

If anyone was in any doubt about how much debt matters to individual stockmarket investors and their preferred investments, the events of the last few years should surely have convinced them otherwise. Debt is one of the most critical factors investors need to consider in making their investments, and it’s not just a matter of the corporate borrowings of companies but also of personal loans – from mortgages through to credit card payments.

The problem is that when times get tough for companies, and they have trouble refinancing their borrowings, this generally foreshadows private investors having the same difficulties. Get this wrong and you find yourself with increasing debt, decreasing income, sliding investments, relationship difficulties and under extreme psychological pressure to do exactly the wrong thing. None us should be in any doubt – debt matters.

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