Highlights

Board gaming with the FT: Michael Lewis

“This game is going to end up like the tortoise and the hare,” Michael Lewis declares, halfway through his inaugural game of Saint Petersburg. Lewis’s green wooden pawn is well ahead on the board, but he’s already picked up enough of the game to realise that – to paraphrase one of the characters he describes in his book The Big Short – he’s about to get his eyeballs ripped out.

It is hard to understand quite why Lewis has agreed that I will teach him an obscure modern German board game while he is interviewed. Poker would have seemed the obvious choice. Liar’s Poker, Lewis’s description of the surreal Wall Street world he inhabited for two years as a bond trader at Salomon Brothers, was definitive of an era and, to some extent, of Lewis’s own career as a narrative writer. But Lewis isn’t interested.

“I haven’t played poker since I was in high school,” he says. “It would be false to portray me as a gambler. It bores me. It’s always bored me.”

Was that why he left Salomon Brothers to become a writer? “No. It was fun gambling with other people’s money. I liked that.”

In a small meeting room in a Mayfair hotel, the logistics are awkward: I can’t take notes and it’s hard even to talk because we’re concentrating on the board. Even a simple game can be baffling to a first-timer, and Saint Petersburg is not a particularly simple game. It describes the building of the city by Peter the Great and his minions (but the theme is very loose: the artwork depicts Czarist Russia).

Players buy cards which provide a flow either of roubles – the currency to buy more cards – or of victory points, which advance the player’s pawn and bring victory closer. There are four types of cards: aristocrats, who supply money and victory points and a bonus at the end; buildings, which supply victory points; peasants, who supply money; and upgrades, which improve the other three types. Returns on investment are very high, but there are never enough roubles to buy all the bargains on offer.

I am about to offer some opening hints when Lewis cuts me off. “Don’t tell me tactics. You don’t have to tell me. I’ll screw up. I’d rather just get beaten, and learn that way.”

We play in fits and starts, for the first half hour talking only about the game and its rules, before switching to Lewis himself while the game is forgotten for a while.

I’ve been reading The Big Short, his account of the men who bet against the subprime bubble, and express my baffled admiration at his ability to get inside the heads of his characters. One, the hedge fund owner-manager Michael Burry, gave him access to every e-mail he had ever sent. “God’s gift to the narrative writer was Michael Burry’s e-mail trove. He lived his life via e-mail.”

But how does he persuade people to give him such access?

“I never really thought about it. I’ve had so many people enter into the spirit of the arrangement. It starts with the relationship before it becomes a literary engagement. It’s a very long-term investment.”

The only time he’s had someone pull out after beginning such a relationship was with George Soros, whom he had accompanied on a private plane all over eastern Europe in 1994. Lewis published a magazine piece which suggested that Soros’s qualities as a philosopher were overrated.

“He was furious with the piece. It just said what I thought. Is it my turn?”

“Your turn.”

Lewis is fascinated at the revelation that Germany is the world’s board-game heartland. “This game is all about trade-offs … it’s made for the Anglo-Saxon Protestant work ethic. The Greeks would never appreciate it.” He tries to persuade me to write a piece about the German response to the euro crisis, using board games as a motif.

Although I am building a winning position, producing a flow of roubles that will in due course allow me to buy what I need to overtake Lewis, he understands what is going on. He knows why he’s going to lose. After I reap a particularly profitable investment, Lewis expresses alarm.

“Sorry,” I offer.

“That’s OK.”

Talk turns to Lewis’s upbringing in New Orleans. His father had a largely hands-off philosophy, but begged Lewis not to turn down Princeton in favour of a life in New Orleans with his high-school sweetheart. “He went white and said, ‘I’ve never told you what to do, but don’t do this.’”

Lewis followed his father’s advice. “It was the right decision. But I really was in love with that girl, and it ended up ending our relationship. And I always felt I violated something in me, making that decision.” When the time came to quit Salomon, he steeled himself against any further paternal entreaties.

. . .

Explaining his decision to leave Salomon, he casually compares the $40,000 book contract to the $250,000 salary and potentially millions more – big sums in the late 1980s. But he insists that money does not motivate him.

“I grew up with a mother who came from a pretty wealthy family – in fact a very wealthy family by New Orleans standards – and my father was kind of a poor boy.” By the age of nine he’d abandoned any sense that money brought fulfilment, because “my father’s family was so happy and my mother’s family so miserable”.

Although there is outrage in Lewis’s descriptions of high finance, it is muted by the fact that he seems to regard much of life on Wall Street as risible. His former tutor at the London School of Economics, a certain Mervyn King, didn’t always see the funny side.

“Four or five months after I got the job at Salomon, the head of the London office comes over to me and says, ‘We’ve got this guy in the lobby. He’s the academic adviser to the new FSA, and he’s been sent in to see how the markets really work and nobody wants to sit with him. Could you sit with him?’ It was Mervyn.”

After three hours “listening to me selling people stuff”, King asked what Lewis was paid.

“It was two-and-a-half times what they were paying him to teach me at LSE. And he was, ‘This is just criminal, this is outrageous.’ He couldn’t believe it.”

I realise that Lewis has been hoping to overtake me, banker-style, by scooping a big bonus score at the last gasp, but he has missed a subtlety of the scoring and gets less than he hoped. He is, in any case, too far behind for any bonus to help him. The final score – 197 to 147 – is a comfortable win for me, but no disgrace to my pupil. We’ve been playing and talking for two hours.

“How do you feel?” he asks me.

“Pretty scummy, actually.”

“No that’s alright, that’s alright. I learned.”

…………………………………………..

Also published at ft.com.

What we can learn from a nuclear reactor

Hinkley Point B is an ageing power plant overlooking the Bristol Channel. The location was once designed to welcome visiting schoolchildren, but is now defended against terrorists by a maze of checkpoints and perimeter fencing. At the heart of the site, which I visited on a mizzling, unseasonable day in late July, looms a vast grey slab of a building containing a pair of nuclear reactors.

Hinkley Point B began operating shortly before the doomed TMI-2 reactor at Three Mile Island in Pennsylvania, US, and is due to be decommissioned after 40 years of service in 2016. As parts of the plant are showing the industrial equivalent of crow’s feet, it runs at 70 per cent capacity to minimise further wear and tear. But when I asked EDF Energy, a subsidiary of one of the world’s largest nuclear energy companies, whether I could visit a nuclear facility to talk about safety, Hinkley Point B was the site they volunteered.

It might have seemed a strange choice on their part, but I was on a strange mission. I hadn’t come to Hinkley Point B to learn about the safety of nuclear energy. I’d come because I wanted to learn about the safety of the financial system. Continue →

Happiness: A measure of cheer

‘The welfare of a nation can … scarcely be inferred from a measure of national income.’
So the US Congress was warned in 1934 by Simon Kuznets, who thus continued a long tradition of pointing out that there is more to life than money. But the economist’s comments broke particular ground: they were attached to the first serious attempts to produce national income accounts – the tally of all that a country produces and earns – for the US. Kuznets and his small research team had built them, and he knew their limits.
Where Kuznets led, others have followed. From the upper echelons of the administration of President Barack Obama to the offices of Nicolas Sarkozy, his French counterpart, to David Cameron, UK prime minister, the goal of gauging a nation’s well­being has captured the imagination of policymakers. They join less likely countries such as Bhutan, whose mission to measure “gross national happiness” has made the Himalayan mountain kingdom a trendsetter.
Mr Cameron was the most recent to take up the cause, saying Britain needed to look for alternative measures that would show national progress “not just by how our economy is growing, but by how our lives are improving; not just by our standard of living, but by our quality of life”. While some analysts suspect each politician has his own motives – appearing nice to electors, flattering the economy and so on – the result has been to create a sense of momentum behind happiness economics. Continue →

Crisis confessions of the Undercover Economist

Illustration by Ingram Pinn

Anniversaries are a time for reflection and, as the third anniversary of the credit crunch approaches, I have been doing some reflecting on where I went wrong as an economist. My own errors, of course, are of particular interest only to me, but I fear that they are fairly representative of the economics profession. Continue →

A sunlit Keynesian uplands awaits our grandchildren

Illustration by Ingram Pinn

It says a lot about the talents of John Maynard Keynes – and just as much about the shortcomings of modern macroeconomics – that when the financial crisis struck, policymakers instinctively reached not for their fancy models, but for the Keynesian idea of fiscal stimulus. These pages have been filled with eminent thinkers arguing over whether it is time to bring the stimulus to an end.

Perhaps we should turn the question around: if stimulus were to be the solution, what would be the problem? The problem would be that too many of us wanted to save money or pay off debts; that is, we wanted others to pay for our services but weren’t so keen on paying for theirs right now. Simple arithmetic suggests this would leave slack in the economy. In addition, the problem would be that businesses, pessimistic about prospects for recovery, didn’t harness all the spare savings floating around and plough them into new investment projects. The slack would stay slack, possibly for a long time. If that was the problem then government stimulus would be the solution.

And the above paragraph doesn’t seem to be a bad description of the US or UK economy, which suggests the case for stimulus is strong. True, the patience of the bond markets is surely not boundless (and say what you like about kowtowing to the markets, if we’d like them to lend us money we have good reason to care whether they are willing to lend it). And there already is an awful lot of stimulus spending going on right now, so it’s not absurd to suggest we could get by with less as the economy bounces back. I realise that I am sitting on the fence here, but it’s part of my new maxim, which is never to stand in the middle of a fight between Paul Krugman and Niall Ferguson.
Fiscal multipliers are certainly fun. If the fiscal multiplier is 0.5, we’re getting government projects at half price: the government project draws half its resources away from private-sector activity, but the other half is just soaking up slack. If the fiscal multiplier is 1.6, as President Barack Obama’s Council of Economic Advisers has estimated, we get a free government project and a larger private sector. And if the multiplier is 2.5, as Keynes believed of the US economy in the 1930s, government spending soaks up slack like a sponge, and also catalyses the private sector into a frenzy of action. (I beg your indulgence while you picture a slack-soaking catalytic sponge; patent pending.)
The quality of government spending still matters. If you think the multiplier is 2.5 then you can gladly follow Keynes’s suggestion of burying banknotes down mineshafts and leaving it “to private enterprise on well-tried principles of laisser faire to dig the notes up again”. If you think it is 0.5 or zero, you might want government projects chosen with more care. And as Keynes himself remarked, no matter what the multiplier, “it would, indeed, be more sensible to build houses and the like” if only politics would allow.
Keynes’s General Theory may well be a work of genius, but I have always been more attracted to his short 1930 essay, Economic Possibilities for Our Grandchildren, in which, in the teeth of the Great Depression, Keynes reminded us that the long-run trend was inexorable growth. “I would predict that the standard of life in progressive countries one hundred years hence will be between four and eight times as high as it is to-day,” he wrote. After 80 years, a world war, and a depression, citizens in the US and western Europe are about five times richer than when Keynes was writing. We seem to be on track.
Keynes’s essay explored something his modern disciples often ignore, namely what would happen when “the economic problem” was solved. By the standards of the 1930s, this problem has been solved. But our response has not been what Keynes expected. He acknowledged that human beings had an insatiable desire to feel superior to each other, and that some people would always blindly pursue wealth. But he felt that most of us would adjust, albeit grudgingly, to a life of plenty. We would work less and amuse ourselves in other ways. We have not, and civilisation continues to depend on the production, purchase, consumption and disposal of the kind of stuff you can see anywhere from the shelves of Walmart to the pages of How To Spend It. One of the multiple causes of the crisis, after all, was that so many people wanted to borrow more than they could repay.
It is true that we do choose to work a little less. According to the economists Mark Aguiar and Erik Hurst, despite a large increase in women’s participation in the workforce, in the US they have at least four hours a week of extra leisure compared with 1965. Men have at least six extra hours. And there is the time we spend studying and travelling before our careers, or in early retirement, to say nothing of the many hours spent goofing off at work and looking at Facebook. But if you want to work a three-day week, your boss and colleagues will assume it is because you are caring for a baby or studying for a PhD, rather than because the weather is lovely at this time of year.
So while the debate of the day is rightly about how quickly and how severely governments should tighten their belts, I hope that when the crisis is over we will remember to come back to Keynes’s long-run forecast. Keynesianism may be about trying to maintain full employment, but Keynes understood that full employment could mean everybody who wanted a job working up to three hours a day, at which frenetic pace we should still have twice the wealth of Keynes’s generation. It was in this future paradise that Keynes famously imagined that the economics profession might be thought of as “humble, competent people, on a level with dentists”. We economists have a way to go yet.

First published at ft.com

Why we still love board games

In a sprawling convention centre in Essen, western Germany, the busiest day in the German board games calendar – Saturday at “Spiel” – is about to begin. Hall after hall of stands are piled high with board game boxes, most eschewing the garish graphics of the toy shop for evocative paintings of lands far off and times long ago.
A few minutes before the official start time of 10am, the doors are thrown open. There’s a rumble and then a roar as thousands of gamers surge into the hall, breaking and swirling around the stands, sweeping into the farthest corners of the halls, seeking out rare second-hand products or the hottest of the 500 new games being launched, or simply a good place to sit and play. The biggest stands resemble pavement cafés whose patrons grab games instead of coffee: they are filled with tables, each just big enough to seat four players and a board. Before long, the spaces in between the tables are colonised, too, with gamers sitting cross-legged around their boards.
Beyond the sheer number of enthusiasts, the striking thing is that they look, well, normal. The convention centre boasts nearly as many mothers with prams as heavy-metal-T-shirted, body-pierced teens. In one of the farthest halls, Dungeons and Dragons merchandise is on sale, and I counted more than one person wearing a sword and a cloak. But for the most part, the convention centre’s population wouldn’t look out of place on any German high street.
“If you go to a games convention in the UK, you’re generally surrounded by fat, smelly people with bad social skills,” says Martin Wallace, a British game designer at a boutique games publisher called Warfrog. “That’s not true here.”
Wallace recalls an occasion when a group of his gaming friends were too embarrassed to admit their identities to a pretty waitress back home in the UK. “One of us told her that we were stamp collectors. I thought: great. We’re lower than stamp collectors.” But in Germany, if the leading game designers travel incognito, it is to avoid being surrounded by admiring fans.
A queue of autograph hunters forms at the Kosmos company’s stand: Klaus Teuber has arrived. Teuber, once a manufacturer of dental supplies, is an unlikely star. He is an avuncular man in his fifties with a hairless pate and a perfect trapezoidal moustache that fans out to the corners of his mouth. But for four days in Essen, he is the biggest name of all: the designer of the multimillion-selling blockbuster board game, The Settlers of Catan. Continue →

FT Comment: Political ideas need proper testing

Illustration by Ingram Pinn

I don’t recall it myself, but like most babies born in 1973, I apparently slept face down in my cot. This was the standard advice, made famous by Benjamin Spock in 1948. We now know that for many unlucky families, this well-meaning advice was fatal. According to research published in 2005, putting babies to sleep on their fronts has led to about 60,000 cot deaths.

The story is a favourite of Sir Iain Chalmers, a campaigner for better standards of evidence in medicine and beyond. Because it is possible to do so much unwitting harm in medicine, many medical interventions are now subjected to a randomised controlled trial. Austin Bradford Hill performed the first properly controlled clinical trial in 1948, although he had predecessors, including James Lind, who used a randomised trial to show that citrus fruit prevented scurvy. There’s even a controlled trial in the Bible (Daniel 1:8). Such trials have proved the effectiveness of countless treatments, and the dangers of countless others.
It is a shame, then, that there is so little appetite from politicians for the same standards of evidence outside medicine. In fact it is more than a shame – it’s a scandal. While randomised trials are not going to tell us when to raise interest rates or get out of Afghanistan, there are many policies that could and should be tested with properly controlled trials. Is Jamie Oliver right to emphasise healthy school meals? Run a trial. Should young offenders be sent to boot camp, or to meet victims of crime? Run a trial. What can we do to persuade households to use less electricity? Run a trial.
Yet such trials are not common in the US, and downright rare in the UK. There is no financial, ethical or practical excuse for this. Trials are cheap. (Even if they were expensive, solid practical knowledge is well worth paying for.) This is not a question of carrying out dangerously speculative crank experiments, but simply adding the essential ingredient of randomisation to a standard pilot project that would have happened anyway. Randomising is often what distinguishes proper evidence from statistical mush, by removing biases in the setting of experiments – such as running pilots only in the most needy areas.

When the UK government recently introduced the “synthetic phonics” method of teaching young children to read, they were told by Carole Torgerson, an evaluation expert at the University of York, that they could easily bolster the slim evidence base by randomising which schools joined the programme first. They didn’t. (More encouragingly, Ms Torgerson has been commissioned to evaluate maths teaching.)
Some people feel queasy at talk of “experimentation” in the classroom, prison or benefit office – but politicians experiment on us all the time with their latest policy wheezes. We learn little or nothing because the experiments are badly designed.
What is missing is the political demand for tests of what really works. Too many policies on education, welfare and criminal justice are just so much homeopathy: cute-sounding stories about what works leaning more on faith than on evidence. Politicians and civil servants, faced with some fancy new idea, should get into the habit of asking for a proper randomised trial. And we, as citizens, should be equally demanding.
It’s no coincidence that one of the few fields of social policy to feature more than 100 robust trials is the study of how to get voters to turn out in elections. Politicians seem perfectly happy to turn to scientific method if it will get them elected. They are less interested in using it for the good of the people they govern.
It is embarrassing even to have to make the case for randomised trials in social policy. For medical researchers, such trials are just the start. Realising that inconvenient – or just plain boring – trial results are less likely to appear in print, medical journals now refuse to publish trials that were not logged before they started in a register of trials. Such registers ensure embarrassing results cannot be made to disappear. This is vital in medicine, and just as important in social policy.
Trial registers also feed into systematic review bodies such as the Cochrane Collaboration, which is an international offshoot of a National Health Service initiative. In less than two decades, the Cochrane Collaboration has published 4,000 systematic reviews of medical treatments, digging up data from unpublished trials, and providing the information to save many lives. A parallel body for social policy has far fewer trials to evaluate.
The Cochrane Collaboration has become a byword for a fair and comprehensive review of a treatment – the latest word (never the last word) about what works. We need the same shorthand in policy, a quality kite-mark that tells us politicians have actually done some homework before they roll out their latest brainchild. We’ve had FairTrade coffee – what about FairTest policies? Most voters don’t know much about randomisation or trial protocols, but they’ll know when they see the FairTest logo that a policy has had a proper, scientific test to see if it works.
Many social, educational and economic policies are the modern equivalent of Dr Spock’s advice that babies should sleep face down: well-meaning, authoritative – and wrong. No doubt it would be awkward to see the wisdom of experts punctured and the pet policies of politicians discredited on a regular basis. But if politicians really cared about those they represent, they would insist on more randomised trials and more systematic reviews of what works. Honest policy mistakes, quickly reversed, should embarrass nobody. As voters, we should demand more such mistakes.

First published on ft.com

Listen to the bearers of bad news

Illustration by Ingram Pinn

We are sometimes admonished: “Don’t shoot the messenger.” Since there is rarely a logical reason to shoot messengers, such advice should not be needed. But it is, because bad news hurts, and organisations find it difficult to deliver such news to the person in charge.

Andrew Rawnsley’s account of Gordon Brown’s premiership has received attention for its claims that Mr Brown was abusive and physically threatening to his staff, grabbing lapels, stabbing upholstery with his pen and causing his advisers to cower for fear of violence. If true, that is disturbing – but few people will have found it surprising. High-status men sometimes do abuse that status.

I am worried not so much that Mr Brown may be beastly, but that he is cutting himself off from good advice. Mr Rawnsley describes Mr Brown’s fateful decision to pull back from a widely trailed snap election in late 2007. His inner circle waited until he was out of the room before agreeing that such a course would be disastrous. When the prime minister reconvened the meeting, however, this was not conveyed: “No one expressed a clear view. No one wanted responsibility for the decision.”

This is a more significant anecdote than any tale of flying spittle. Any leader needs frank advice, and the biggest obstacle to receiving it is often the leader himself. Even a polite and level-headed boss will be tempted to cut naysayers out of the loop. Knowing this, sensible juniors will avoid expressing criticism or grim tidings if at all possible.

“If you deliver bad news, you’re disempowering yourself,” says Professor David Sims of Cass Business School. “You’re less likely to be listened to in the future.” For some ambitious subordinates, this is a far worse fate than the threat of being thumped.

A new reality television show, Undercover Boss – which has migrated to the US after airing on Britain’s Channel 4 last summer – tries to tap into the dissonance between bosses and front-line staff by filming as a senior executive works incognito in the trenches. It is a delicious premise.

When bosses must don a disguise to learn about how their organisations really work, trouble is in store. Continue →

Rebooting Britain: encourage failure (Wired)

“Dare to Fail” was a week-long course taught by a Peter Cook character, the football manager Alan Latchley – a man whose chief contribution to the beautiful game was to get his team to stand on each others’ shoulders, backs to the opposition, in an attempt to block the goalmouth.

Politics is supposed to inspire satire, not the other way round – but I think the government needs to take a leaf out of Alan Latchley’s book. Failure is inescapable in a complex world, and the more governments are in denial of that fact, the more they will cling to bad ideas.

Take a look at the private sector: most businesses fail eventually, and ten per cent of companies disappear every year. The most dynamic sectors, such as computing, see the baton handed over again and again, from Transitron to Intel, IBM to Microsoft to Google. Figuring out what consumers want, and the best way to give it to them, is a challenge that requires a great deal of trial and error. The economic growth of wealthy countries has emerged from this process of evolution, with more successful ideas growing from the ashes of disaster.

In principle, why shouldn’t ten per cent of government policies also disappear as “failures” every year, to be replaced by something better? Whether it’s a drive to reduce hospital infections or to persuade people to recycle, a new literacy scheme in the classroom or a new regime for rehabilitating offenders, most policies can be rigorously evaluated, copied if they work and culled if they don’t. If private-sector performance is anything to go by, about half of all such policies are likely to be duds. And that’s just fine – as long as the duds aren’t allowed to live forever.

The obstacle is politics: if failure is so common, no sensible politician really wants to take such pains to discover it. Alan Latchley claimed that the other side of failure was success. Quite by accident, he was right. Good policies will often be right by accident, too.

First published in Wired.

The Economist’s Guide to Happiness

First published in the Sunday Times, 9 August 2009

Spend less time with your children. Don’t underestimate the benefits of a divorce. Never serve dog food at a dinner party. These are some of the unexpected revelations to have emerged from an unlikely combination: happiness, and economists.
You might think that the “dismal science” has done enough damage for now. Economists have hardly emerged from the banking crisis with their reputations enhanced. But forecasting financial meltdown was never going to be easy, so perhaps it is best of economists stick to simpler questions, such as “how can we be happy?”
A growing number of economists have been attempting to answer this question. Not only are the statistical tools of economics surprisingly well-suited to unlock the secrets of happiness, but the research topic is good box office, too… and these are economists we’re talking about.
Some of the results sound as though they come from hippies rather than economists. For instance, economic growth does not seem to make the citizens of a rich country such as the UK any happier. A good job too, considering the current prospects of any economic growth seem slim.
Other discoveries are less intuitive. For instance the economists Andrew Oswald and Nattavudh Powdthavee has discovered that teenagers and the elderly are actually rather happy. “Your late 30s are the most unhappy period of your life,” Oswald cheerfully tells me. Thanks, Professor, from a grateful 35-year-old. Continue →