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Sunday 11 October 2009

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 (tm) 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.


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

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