08/03/2009

Not Exactly Like Scales

Michael Lewis's article on why Iceland is so spectacularly bankrupt gets a lot of linkage. Some call it "absolutely must-read", some call bullshit.

It reads a bit like a Malcolm Gladwell piece with all the bits about the shape of the interviewees' eyebrows left out. In other words, it's a bit too neat. I don't only mean the substance (see below), but also the way it is narrated. Lewis flies into Iceland and checks into a hotel which he likens to "a hip Manhattan hotel":
I curl up in silky white sheets and reach for a book about the Icelandic economy—written in 1995, before the banking craze, when the country had little to sell to the outside world but fresh fish—and read this remarkable sentence: “Icelanders are rather suspicious of the market system as a cornerstone of economic organization, especially its distributive implications.”
He didn't read that sentence before going to Iceland, nor afterwards, nor in his hotel room while sitting on the loo, but just when it conveniently fits into the narrative. Also, almost immediately afterwards he hears the sounds of explosions - "Boom!" - which, we soon learn, symbolize the Icelandic recklessness, which is Lewis's main explanation for the economic downturn:
With local interest rates at 15.5 percent and the krona rising, [Icelanders] decided the smart thing to do, when they wanted to buy something they couldn’t afford, was to borrow not kronur but yen and Swiss francs. They paid 3 percent interest on the yen and in the bargain made a bundle on the currency trade, as the krona kept rising. [...]

It must have seemed like a no-brainer: buy these ever more valuable houses and cars with money you are, in effect, paid to borrow. But, in October, after the krona collapsed, the yen and Swiss francs they must repay are many times more expensive. Now many Icelanders—especially young Icelanders—own $500,000 houses with $1.5 million mortgages, and $35,000 Range Rovers with $100,000 in loans against them. To the Range Rover problem there are two immediate solutions. One is to put it on a boat, ship it to Europe, and try to sell it for a currency that still has value. The other is set it on fire and collect the insurance: Boom!
Maybe Lewis did reach for that book after curling up in silky white sheets, but I'm not buying the Boom! story: Contrary to what you learn in the movies, burning cars don't detonate (although deflagrations rarely happen): No Boom! (link in German).

On the basis of spending a few days in Iceland and talking to a few people, Lewis develops a two-factor explanation for the Icelandic disaster: Men's taste for risk-seeking coupled with everybody on the island knowing everybody else.

The second part of the explanation is illustrated by everybody knowing Björk. Now, I do see that 300 000 might seem like a small population for a nation for an American (bizarrely, he wonders why such a small group of people needs four major political parties to cover the various political preferences), but, even allowing for hyperbole, it does not seem to follow that everybody knows everybody else, does it? Maybe everybody knowing Björk has to do with something else? Anyway, the network density on the Island, according to Lewis, lead to mutual backscrubbing and a lack of control: "You have a dog, and I have a cat. We agree that they are each worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners, but Icelandic banks, with a billion dollars in new assets."

Lewis makes an even more compelling case for Icelandic men's taste for risk-taking:
[Fisherman-turned-investment banker-turned fisherman Stefan Alfsson explains that fishing is] risky [...], especially as practiced by the Icelandic male. “You don’t want to have some sissy boys on your crew,” he says, especially as Icelandic captains are famously manic in their fishing styles. “I had a crew of Russians once,” he says, “and it wasn’t that they were lazy, but the Russians are always at the same pace.” When a storm struck, the Russians would stop fishing, because it was too dangerous. “The Icelanders would fish in all conditions,” says Stefan, “fish until it is impossible to fish. They like to take the risks. If you go overboard, the probabilities are not in your favor. I’m 33, and I already have two friends who have died at sea.”
The fishermen took that attitude into investment banking, and look what happened.

Is Lewis right? Maybe, there's just no way of knowing. It's not just that in journalism "you could get away with damn near anything, so long as it made a good story", it's that flying into Iceland and talking to a few people just isn't a valid tool for learning whether Icelanders are untypically risk-taking.

But how to do it? Well, to test Lewis's very simple theory, you could compare a sample of nations on network measures and risk-taking and see whether those predict how hard a nation was hit by the financial crisis. To measure risk-taking, you could simply ask people to state their level of agreement with statements such as, "I am the kind of person that likes to take risks" - and indeed such measures are used. But the problem with them is that to answer that question people have to compare themselves with others. And while some Icelanders might compare themselves to Russians, the majority will compare themselves to other Icelanders. This means that international comparisons of answers to such questions will underestimate the amount of variance between nations, possibly leading to a rejection of the hypothesis when it is actually correct.

To a lesser extent this problem is likely to occur with intranational comparisons, as people tend to hang out with others who are like themselves. It is well known that the measurement error personality measures suffer from is likely to depress the correlation between measured personality trait and some outcome. The peers-as-comparisons-problem seems likely to introduce measurement error. (Either I've read the wrong books or this is not widely discussed.)

That's tough, and I don't know what to do about it. What I do know is that there is at least one financial crisis I'm thoroughly happy about.

3 comments:

Political Scientist said...

I think Sailer's comments relect the difference between the UK and the US view of the media. In the US, magazines employ "fact checkers" to actually check on the details in an article are, if fact, true. In the UK, I think "poetic truth" is more acceptable (well, judging by the Daily Mail "outright lying" is acceptable) - if I saw that article in the UK press I'd interpret the direct quotations as being something like a parable - something a person might say that would illustrate the point the journo wants to make, but not true in the sence "I actually met someone on a plane and she said...".

Which raises the question: do German magazines employ fact checkers?

LemmusLemmus said...

I think Sailer's wasn't criticizing Lewis for reporting (or making up) those incidents, but rather, constructing theories on the basis of trivial anecdotes.

In Germany, Der Spiegel prides itself on having fact-checkers, which leads me to believe they're the only ones. But of course they can only check checkable facts, not whether the reporter bumped into someone on the plane.

In my view, if a reporter "reports" something that isn't true, s/he's lying, full stop.

Over here, we get a lot of articles that start along the lines of "Nina Müller couldn't believe what she saw..." which were once criticized by eminent German journalist Wolf Schneider as "often obviously made up".

Of course, my post's main point was about psychometrics - which is obvious given that I crammed that topic into two short paragraphs towards the end.

Ronduck said...

PS, the US media varies widely in quality. The New York Times, one of the largest circulation papers in the US has had numerous reporters caught lying in parts of stories or fabricating entire articles.

One very old example is NYT reporter Walter Duranty lying about what was happening in the Ukraine while Stalin was engineering a famine that killed millions. Duranty got a award for his outright lies, and the NYT has never retracted his stories or even issued a clarification.