The Potato as Disruptive Innovation

There is a fascinating new NBER paper out making the case for the humble potato as disruptive innovation:

We have estimated the effect of the introduction of the potato on Old World population growth and  urbanization. The nutritional and caloric superiority of the potato, and its diffusion from the New  World to the Old, allows us to estimate causal effects using a difference-in-differences estimation  strategy. According to our most conservative estimates, the introduction of the potato explains  22% of the observed post-1700 increase in population growth. These results show that food and  nutrition matter. By increasing the nutritional carrying capacity of land they can have large effects on population.

To the extent that urbanization serves as a measure of the shift from rural agriculture to urban manufacturing, our estimates also provide historic evidence of the importance of agricultural productivity for economic development. According to our estimates, the introduction of the potato explains 47% of the post-1700 increase in the average urbanization rate. Our estimates suggest that increased agricultural productivity can play a significant part in promoting the rise of urban centers, industry, and economic development. [Emphasis mine]

Assuming these numbers are even close to being correct, they are astonishing gains indeed.

Source:

Nathan Nunn and Nancy Qian, “The Potato's Contribution to Population and Urbanization: Evidence from an Historical Experiment,” National Bureau of Economic Research Working Paper Series No. 15157 (July 2009), http://www.nber.org/papers/w15157.

[Update] My ever-eclectic Kauffman colleague Dane Stangler has even earlier musings on the same spud subject.


Readings

  • Huge blobs of “goo” floating past coast of Alaska (ADN)
  • Lance Armstrong represents clash of cultures in Tour de France (SI)
  • Feyman lectures on physics, part I (YouTube)
  • OTC Derivative Regulation Proposals – Neat, Plausible and Wrong! (Das)
  • Automobiles on Steroids: Product Attribute Trade-Offs and Technological Progress in the Automobile Sector (ITC-Davis)
  • 'You Are Here - Why We Can Find Our Way to the Moon but Get Lost in the Mall,' (NYTimes)
  • Surgery for Seizures Frees Athlete to Run Far, at a Cost of Remembering Little - (NYTimes)
  • Profile of CNBC’s Charlie Gasparino (FT)
  • NASA getting set to bomb the moon (SciAm)


Word Du Jour: Dietrologia

Dietrologia is the Italian word for the science of what is behind. Italians never believe things at face value. There is always something hidden behind it which provides the real explanation. The science of finding these hidden explanations is dietrologia (from dietro= behind), an expression coined in the 1980s. "Usually this concerns the background of sinister events: bribery; corruption; the misuse of power for private benefit; crooked politicians."

via kuro5hin


Diversions: Drugs and Power at the Tour de France

Great and quant-friendly post up at Sports Scientists mulling the relationship among power output, drug use, and Tour de France climbing rates over the last decade. The conclusion -- alongside freakish power output figures over time -- is the unsurprising and sad one that performance-enhancing drug usage remain a problem in the world’s greatest cycling race.


Guest Post: Nassim Taleb Got It Right

A guest post by Pablo Triana:


The punditry and the world at large have been hard at work trying to find ex-ante predictors for the malaise that has engulfed our markets, our economies, and our societies. Desperate efforts to find those who "called it" have been relentlessly launched. We all seem to want to know who among us really saw the mayhem coming. It was unavoidable that such agitated process would deliver a sizable dose of less-than-reliable prophets and less-than-robust explanations. The breathless quest for prospective explainers, the unquenchable thirst for totemic ex-ante seers has resulted in the crowning of individuals who, notwithstanding their many qualities, did not get it exactly right before the troubles initiated. Yes, many of those vaticinators did warn as to the unsustainability of the housing bubble, as to the insalubrious practices taking place in the subprime mortgage business, and (much less often) as to the toxic nature of certain new-flanged securities. But only one person among the appointed oracles truly pointed fingers prospectively at the true culprit behind the current devastation. And he did so not in 2005 or 2006, but as far back (at least) as 1997.

This is what Nassim Taleb, the famed author and iconoclast, said more than a decade ago that qualifies him, in my eyes, as the true and only visionary: "I believe that Value at Risk is the alibi bankers will give shareholders and the bailing-out taxpayer to show documented due diligence, and will express that their blow-up came from truly unforeseeable circumstances and events with low probability, not from taking large risks they did not understand...I maintain that the due diligence VaR tool encouraged untrained people to take misdirected risk with shareholders´, and ultimately the taxpayers´, money". In the midst of the credit nightmare, such pearls could not appear any more prescient.

For VaR did ultimately cause the crisis (and the Taleb-predicted bail-out), precisely by providing reckless bankers with an iron-clad, scientifically-smelling, regulatory-sanctioned alibi to monstrously leverage their balance sheets with the most toxic and illiquid of financial wares. Plainly stated, without the aid from VaR (a mathematical model which for the past years has been the tool charged with dictating the capital requirements for banks' trading activities, and which, because of the way it is calculated, consistently delivered very economical price tags for speculation activities thus enabling untold leverage) banks would not have been able to gorge on Subprime CDOs for amounts way larger than their entire equity base. Since those gigantic toxic positions are what truly sank Wall Street, and since the sinkage of the latter is what truly unleashed what is known as the credit crisis, it follows that without VaR the pain would have been much more diluted.

VaR is supposed to measure expected losses from a trading portfolio at a given statistical confidence level. It is calculated by looking at past data and then inferring future market behavior. If markets have been trotting along calmly, as was certainly the case prior to the summer of 2007, VaR will say that there´s no risk ahead. The VaR figure will be small, resulting in small capital charges, allowing banks to have to pay just a little upfront (maybe as little as less than 1%) in order to devour monstrous amounts of those "non-risky" assets. This is valid both for liquid and illiquid stuff since VaR, incredibly, does not discriminate between, say, a Treasury Bond and a CDO; all that matters is what past data says, potentially resulting in the obscene conclusion that a T-Bond may incur a higher capital charge than a CDO. That is, VaR can make it easier (cheaper) for you to gorge on deleteriously lethal stuff than on staid safe alternatives.

Many bankers love to have VaR setting capital charges, because they can use it as the perfect excuse to achieve their golden dream: building up hugely geared bets on hugely junky assets. Since the junk would deliver tasty yields (at least until it inevitably blows up) you would be able to claim extraordinary returns on capital. Headline-grabbing profits, enhanced share prices, and mouthwatering bonuses would surely follow. Traders know that VaR can be made to be negligible (just find the right combination of asset type and time series that would render a placid past period), permissively opening the gates of leverage paradise.

This crisis was not really a "housing crisis", but a "trading crisis". Mortgage defaults on their own would have never created this kind of tremors. The melting into oblivion of complex securities based on those mortgages is what did unleash hell. VaR unseemly allowed banks to afford the complexity feast, and that´s why I declare it guilty numero uno. Only Taleb saw this coming, more than ten years ago. If only we had listened to him more attentively.
 
Pablo Triana is the author of Lecturing Birds On Flying: Can Mathematical Theories Destroy The Financial Markets? (Wiley, 2009)


QOTD: We Murderous Bastards

If death rate of early human tribal warfare had continued in 20th century, there would have been two billion deaths rather than 100 million.

- Stephen Pinker 


Teens Don’t Tweet. But Who Cares What Kids Think.

A recent sell-side report in Europe highlighting what young people think about media apparently got a rapturous reception. And it irritated the crap out of me.

Why? Because the report is (at least in summary) the usual youth-obsession whereby researchers traipse around after teens, breathlessly reporting on their whims and predilections. But is it really news to find out that teens would rather not pay for things, or that they think that things that cost money that they can obtain illicitly for free are doomed? I think not.

Here you go, your comment of irritation (via the FT):

Morgan Stanley’s European media analysts asked Matthew Robson, one of the bank’s interns from a London school, to describe his friends’ media habits. His report proved to be “one of the clearest and most thought-provoking insights we have seen. So we published it,” said Edward Hill-Wood, head of the team.

The response was enormous. “We’ve had dozens and dozens of fund managers, and several CEOs, e-mailing and calling all day,” said Mr Hill-Wood, 35, estimating that the note had generated five or six times more feedback than the team’s usual reports.

However, he made no claims for its statistical rigour.

As elderly media moguls gathered at the Allen & Co conference in Sun Valley, Idaho, to fawn over Twitter and fret over their business models, Mr Robson set out a sobering case that tomorrow’s consumers are using more and more media but are unwilling to pay for it.

“Teenagers do not use Twitter,” he pronounced. Updating the micro-blogging service from mobile phones costs valuable credit, he wrote, and “they realise that no one is viewing their profile, so their tweets are pointless”.

His peers find it hard to make time for regular television, and would rather listen to advert-free music on websites such as Last.fm than tune into traditional radio. Even online, teens find advertising “extremely annoying and pointless”.

Their time and money is spent instead on cinema, concerts and video game consoles which, he said, now double as a more attractive vehicle for chatting with friends than the phone.

Mr Robson had little comfort for struggling print publishers, saying no teenager he knew regularly reads a newspaper since most “cannot be bothered to read pages and pages of text” rather than see summaries online or on television.


Diversion: Semi-Live WSOP Report

At the risk of a) being late, and b) bringing all sorts of spammers to the site, here is a nice report sent to me a few days ago by my friend Jeff who was playing in the World Series of Poker in Las Vegas this past week.

Day 3
It’s three in the morning and I’m grabbing a late snack at the Bellagio.  …I started  Day 3 with an average stack of 88,100 and great hopes for my table as no one had any major live tournament cashes.  These days, however, there are a seemingly infinite number of tough young players with thousands of internet tournaments in their belts.  Except for a couple of soft spots my table was so aggressive that it was only folded to me on the button once all day. 

I raised with 8 3 and the blinds were openly confused:  “We have no idea what your range is since this hasn’t happened yet.”  The big blind called and bet 5500 into the A 5 2 flop.  I smooth called, hoping for a 4 or an opportunity.  The turn was a Ten, he checked and I fired out 9000 as confidently as I could and was very relieved when he folded.   Shortly thereafter someone limped and I was able to play Q J from the small blind.  The flop came K 10 9 giving me the nuts.  I bet 5000 and the limper raised 45,000 more all in.  Not only that but the button thought and thought and finally folded two pair.  Of course I called; he had 10 10 for a set and I just had to hope the board didn’t pair.  It didn’t and all of a sudden I was up to 170,000 and feeling just great about the day.

I stole and restole a few pots to stay more or less at that level for a few hours when the following hand came up.  The hijack seat (late position) raised to 5200 and, since I had re-raised him twice and never called, I called in the cutoff with J 10 of spades.  The big blind also called and we took the Kc 6h 5h flop 3-handed.  It was checked to me and I bluffed at it with a 12,000 bet.  The big blind folded but the original raiser check-raised to 26,000.  It was 14,000 to me and I had no hand and no possible draw but a little voice told me to re-raise it so I made it 40,000 (26K more to him).   He thought for a few seconds but it was clear right away he was folding.  This is one of the most outrageous bluffs I’ve made and to do it in the World Series was very satisfying…particularly when [family]were on the way and I really didn’t want to jeopardize my fine start.  I resisted the urge to show them because I wanted to do it again.

[Family] arrived full of yin and sweetness and they watched me for perhaps half an hour.  I was really excited to see them and, of course, wanted to show them my stuff.  But I only played one hand when I called the under-the-gun raiser with A Q only to have the big blind re-raise and the opener call.  They played a huge pot with a Kc 8c 7c board, turn 3h, river 3d.  The re-raiser showed 7 3!  Another maniac!  Personally, I think he made the play partly because I had an audience and he thought I wouldn’t want to get too involved with my wife watching without a big hand.

They finally decided they were bad luck and left.  I can’t say I was sorry to see them go but looked forward to relaxing with them over dinner.  The last hand before the dinner break the under the gun player raised to 6000.  I thought he looked a little shifty and after he raised he covered his mouth with his hand—supposedly a sign of lying according to professional interrogators.  The next 3 people called and I looked at my J 5 in the small blind and raised to 30,000.  They all took their time folding and the last person folded two jacks face up!   I showed the bluff and went off to dinner pretty happy.

I came back from dinner with a little over 200,000 and hit the worst Poker Wall I’ve ever had.  For three hours I didn’t win a single pot with more than just the blinds and antes.  It was hell, watching my healthy stack slip to average, than below average, and finally down below a hundred thousand again, wondering if I was even going to make day 4.  A few times I’d pick up something like A 10 suited in late position and raise, only to be re-raised and re-re-raised by people with A K and K K.  I got really discouraged and welcomed the break.

On the break I sought support from my friends.  [One] put it best:  “Jeff, do you know what I am doing?  I’m sitting here at home clicking the refresh button to get updates on my computer.  I’d give $10,000 in heartbeat to be in your shoes.”   This was just what I needed—my actual tournament equity was still $30,000 dollars or so.  Everyone also suggested having a beer, so when I went back I ordered a beer and put on Lady Gaga’s Poker Face on my I-Pod at full volume:
I’d like to ride with you a hard pair we will be,
A little gambling is fun when you’re with me.
Russian Roulette just ain’t the same without a gun
And baby when it’s love if it ain’t rough it isn’t fun
Puh puh puh poker face puh puh poker face

Now each round (9 hands) costs 9100 and my chips are melting like a late spring snow.  I’m down to 87,000 when the button raises to 8500 and I look down at K K in the big blind.  I re-raise to 25,000 expecting a quick fold since I’ve been [apparently] playing so ridiculously tight for so long.  The button hesitates and I do my best nervous Nelly imitation: I fumble a little while shuffling my chips and then take a nervous sip of water.  It works!   He moves all in and I quickly call.  He shows A 3 and all I have to do is dodge the 30% chance that he hits an Ace (note: this is far from automatic).   Two Kings are often described as “Ace magnets” but this time they hold up and in a single hand I’ve gained back most of my losses and all of my equilibrium.

The last 45 minutes I am emotionally drained and do not play my best poker.  I have the table image of a nit—the perfect time to be crazy—but can’t muster anything imaginative.  Still, I am thrilled to have regained most of my stack.

We are down to around 800 out of 6449 starters.  648 make the money so it will be dicey for the first three hours or so tomorrow.  My stack of 185,500 is below the average stack of 250,000 but very respectable.

Jeff went out at the end of Day 4, but he did end up in the money, in the final few hundred players. Huge congrats.