Monthly Archives: June 2008

Using Fear of Identity Theft to Fix the Credit Industry

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According to an article in the New York Times, there is an effort ongoing by the Information Card Foundation to establish a central manager for online accounts. On the surface, it seems like this might help block security holes in online accounts by making phishing mostly obsolete and eliminating the use of browser password tools. However there is more to this initiative than to protect people from fraud.

Equifax, one of the three major credit bureaus, is a member of this foundation. They might be interested in the data related to financial transactions. Further, Google, Microsoft and Oracle all are heavily involved in writing search software, something that would be necessary to extract useful data from the service’s logs.

The motivation for a move like this is that there is little confidence in the credit bureaus. Lending institutions have drawn back their willingness to lend because they don’t have an accurate picture of who it is they are lending to. While a lot of the credit problems were caused by irrational expectations with regards to the future values of homes, there was also rampant credit rating manipulation in the sub-prime market where credit repair services were and are being used to manipulate the system. One strategy is to contest legitimate black marks in your credit report. If the credit bureau doesn’t investigate in 30 days , they have to remove it.

Lenders were avoiding looking too carefully at those they were lending to because they wanted to do more business and mistakenly thought there was little risk. Now, they still want to do more business so they can make profit, but they still feel the pain from earlier mistakes. A credit bureau that were to differentiate itself by offering more information to skittish lenders might seize more business in an environment which is probably not very good currently.

I am not fond of the notion of a centralized system keeping track of my activity online so I’m not fond of this “product”. However, it is obvious that the credit bureaus have to improve the methods they use for compiling credit ratings. They currently put too much weight on having had significant debt in the past, which makes someone that has had modest loans look an awful lot like someone with a checkered past, unreliable. They need to get a better look into all of the times someone pays a bill and a better idea of how someone handles their finances. This will require a better system. Maybe it will be this one, maybe another.

An Evolutionary View of Economics

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I recently became aware of an article on the Singularity in the IEEE periodical Spectrum. It resembles to some extent my previous post on the topic, but misses some fine details. The key attribute of the explosions in growth is hierarchy, which is powered by specialists collaborating. The Industrial Revolution was a case of collaboration in a factory. What Hanson mistakes as an “agriculture” revolution was actually the beginning of civilization, which is collaboration in a town or city. Previous to that was collaboration between different regions of higher thought to create a complex world model. The next earlier step was collaboration between the internal and external senses to produce learning. The next earlier step was the collaboration of cells to produce a multi-cellular organism. And the first step was the collaboration of molecules to produce a single cell organism. There are the nasty little exceptions like mitochondria and chlorophyll, which are technically subsumed in the cell of a larger organism. However, those can be reasonably lumped in the cells collaborating category.

This makes six generations instead of five as mathematically estimated by Hanson. It might be argued that there is very little value in the human’s ability to model their environment that doesn’t merely lead to civilization. This would lead to five steps, and considering that there need to be changes previous to the actual addition of a new level of hierarchy, the 100k-200k years is probably not too long a preparatory step considering the previous step was hundreds of millions of years earlier. As a result, I can accept that there have been five hierarchical events.

The growth graph from Delong suggests that we are on the cusp of another growth explosion. I think it is already happening. It is being driven by modern communications which enable the worldwide scientific community to collaborate. As an example, even though designing electronics is getting harder, the rate of advance is speeding up. Electronic agents perform more complex tasks for us every year. They do searches for us, manage our computer hardware, gather items for shipping in warehouses and many other things. Clearly, hordes of electronic specialists will be a big part of the next level of hierarchy, just as will the communication system we use to communicate with them. Beyond that, it will be rather difficult for an individual human to comprehend the next hierarchy, even if it is staring them in the face.

Thoughts on Why U.S. Markets Have Been So Unstable

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Seeing yet another commodity bubble headline at USAToday , I feel compelled to make a short post on this topic, which had been my originally planned topic last week.

Over the last decade, there have been at least two speculative bubbles of considerable magnitude, one in stocks and one in real-estate. There might also be a third that has formed in commodities as well. Historically, speculation on of this magnitude is not common. Having back-to-back events indicates that there are forces present in the investment community that are fueling these events that probably weren’t present in the recent past, though might have been present in the early part of the 20th century.

There are many forces of change out there with the rise of far eastern economies and globalization. They are most certainly a big part of the rise in the price of commodities, which to some extent also drove the housing boom. However, there has been a change in behavior on the part of investment managers, corporate executives and bankers. The appetite for risk is ridiculously high. At the height of the internet stock bubble, buying shares on margin had greatly increased. This has continued with the private equity funds that have bought companies wholesale, largely with borrowed capital. Companies like Blackstone are not doing so well. In banking, the sub-prime crisis is an example of banks racing to discount the risk premium in their loans to get in on the “can’t lose” boom. The same mentality is common amongst company executives, who are only worried about the next quarter.

The important question is, what is happening now that is causing this appetite for risk to be prevalent? My answer is that the tax system isn’t forcing investors or executives to worry about having income in the future. This is because the tax code isn’t sufficiently progressive as to make it worthwhile to put off profits in the future. If I’m not going to pay significantly higher taxes on my second ten million than my first ten million, why should I not try to cash out immediately? This leads to the decision to immediately monetize a brand or asset. This is why we’re seeing sequels out the wazoo in the movie theaters. Overexposure isn’t a concern, because there is a rape and pillage mentality. And it is all driven by the tax code which has ridiculously low taxes for unearned income and little increase in tax rate for high income. This is due in part to the consistent lowering of high tax bracket rates over the last twenty odd years and the income of the very wealthy growing far beyond the scope of the tax schedule.

Having made the argument that taxes on the very wealthy are lower than is healthy for our economy, I will also counter that we don’t want the top 10% of earners paying 30+% either like was the case in the 70s. My concern is more with the top 0.1% and above to make sure that they have some disincentive to not cash out all of the opportunities they have. There needs to be more disincentive to only think about today. There needs to be better accountability for money managers and corporate executives when things go wrong for this to happen, but there also needs to be a change in the incentives for investors so they will not want someone that only cares about today handling their assets.

The Forgotten Amygdala

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It occurs to me that my previous post on the relationship between motivation and pleasure doesn’t account for fear as a motivator. I’m inclined to think that those motivated by avoidance of negative outcomes are generally less successful than those that are motivated by the positive. However, they are unlikely to have a spectacular failure.

Motivation vs Pleasure

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Research that I’m currently doing for the Weordan project has revived thoughts about the nature of motivation and how physiology relates to behavior. What motivates people to spend long hours working or elite athletes to push through grueling training regimens? Most are clearly motivated beyond the potential return. They aren’t just fixated on the benefits of success. They have to be attracted to the idea of accomplishment itself. They want it more than they will enjoy it when it occurs.

The foundation of motivation comes from the interoceptive system. This is the system in the body that communicates the body’s status to its higher order systems in the brain. This is accomplished through chemical and stretch sensitive neurons as well as hormone signaling through the circulatory system. Satisfying the internal needs of the body can be accomplished by physiological means such as shivering when one is cold or by behavioral means such as acquiring and putting on a coat.

Behaviorally, there are two distinctive aspects of motivation. There is “liking”, which is the derivation of pleasure from partaking in a particular activity. The experience of “liking” leads to future pursuit of the experience, which can in turn be defined as “wanting”. Motivation is essentially “wanting” rather than “liking”. Further, especially in the case of addictive drugs, there doesn’t have to be much “liking” for a strong “wanting” to occur. This is because the chemicals contained in the drug act directly upon the “wanting” system rather than through “liking”.

Physiologically, “liking” and “wanting” are somewhat interdependent. However, they are modulated by different neuromodulators. This coincides with a difference in how “liking” and “wanting” wax and wane.

“Liking” is generally modulated by the neurotransmitter serotonin. Serotonin doesn’t perform the actual signaling between neurons. Instead, it acts to enhance or dampen the excitability of neurons in the region it is deposited and is supplied by neurons that originate in central regulating bodies. “Liking” is also homeostatic, meaning there is negative feedback. When a normally functioning individual engages in a behavior that is governed by a homeostatic system, they become sated to the point that they avoid the behavior.

“Wanting” is generally modulated by the neurotransmitter dopamine, which operate similarly to serotonin in that it doesn’t perform explicit signaling, but instead stimulates or depresses signaling globally within a region. “Wanting” is an allostatic system, meaning that it can’t turn itself off through normal signaling. It requires a homeostatic process to regulate it. This can happen if it is stimulated by a homeostatic system, such as those that are regulated by serotonin. It can also happen if over-stimulation causes post-synaptic neurons to desensitize. However, it seems that this desensitization isn’t as strong as a normal homeostatic response, as it doesn’t cause a negative response such as aversion, only desensitization.

This is a simplified view of the system. Many factors are at play in these systems. However, these are the strongest players, at least according to the best of my understanding. Further, the simplicity of the system is well supported by the distribution in the population. I would contend that extremely driven individuals aren’t all that uncommon. Neither are extremely unmotivated people. The distribution is flat compared to something like intelligence or athletic ability. This implies that a smaller number of factors govern innate drive to “want” than those more complex systems.

The differentiation between “wanting” and “liking” is nothing new in neuroscience. However, interesting behavioral consequences and world views present themselves when one considers these two drives as separate dimensions. One might expect someone with a strong “liking” system to spend more time enjoying the fruits of their accomplishments. Such a person would be inclined to accomplish less than another person who is otherwise identical but has a weaker “liking” system. Likewise, one might expect someone with a strong “wanting” system to spend more time in pursuit of accomplishments that are important to them. Such a person might be inclined to take on more challenging tasks and spend more effort on them than someone who had a weaker “wanting” system. This model suggests that a combination of strong “wanting” and weak “liking” would result in an extremely driven individual, the type of person that starts their own business and works long hours to make it successful. At the other end, someone with a strong “liking” and weak “wanting” would result in an extremely unambitious individual, the type of person who lives in their parents’ basement and spends all of their time on a hobby.

Serotonin and dopamine also happen to be associated with two other behavioral phenomena, depression and addiction. People that are depressed have a tendency to have a poorly functioning serotonin signaling system. This is treated pharmacologically with drugs called Selective Serotonin Re-uptake Inhibitors(SSRI). Prozac was the first such drug on the market. SSRIs increase activity of neurons affected by serotonin by blocking the systems that remove serotonin from the synapse. Dopamine is instead involved in addiction. Drugs like cocaine and methamphetamine have a similar affect on dopamine sensitive neurons that SSRIs have on serotonin sensitive neurons. Ritalin is a time-released low dosage amphetamine pill that is used to treat ADHD. The definition of the attention deficit portion of ADHD is quite compatible with a lack of “wanting”. Presumably, someone with a well functioning system for “wanting” would be more vulnerable to addictive substances than someone that has less “wanting”.

If high achievers have a tendency toward high dopamine and low serotonin, it is likely they are more prone than average to depression and substance abuse. Professional athletes and actors work in an extremely competitive environment where talent is usually not enough to make it. By and large, they must be extremely driven. They have to really “want” it and can ill afford to be spending their time enjoying what they’ve accomplished to maintain their position. Anecdotally, this group of individuals has a high incidence of depression and substance abuse. It is likely that this is in some part due to the stresses of celebrity. However, it seems possible that they also are more prone to these conditions due to the physiology that helped them to succeed.

The Singularity is Occurring and We Don’t See It.

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Reading articles at the New York Times about Ray Kurzweil and his notions regarding the evolution of intelligence have, along with recent discussions and the themes of the Weordan novels Katherine and I are working on, stirred up my evolving view of evolution, which is similar in many ways. The primary difference between our points of view is that while Kurzweil is more interested in looking at the evolution of specific technologies within the context of this pattern, I’m more interested in the underlying mechanism that causes the greater complexity. The power of evolution is hierarchy.

In biological systems, more complex systems are composed of multiple components that perform specialized tasks and communicate with one another. These individual components are usually systems in and of themselves that in turn are composed of multiple components that perform specialized tasks and communicate with one another. As hierarchies of systems stack on one another, they become more capable of regulating their interior and changing their environment to suit their needs. This difference in capability is evident in a comparison between a squirrel and the bacterium that reside in its GI tract. The bacterium is highly specialized such that there are thousands of different species that inhabit the GI tract of any given animal because they each need a very specialized environment to prosper. The squirrel doesn’t need as specialized an environment. It maintains body temperature when it is cold or warm. It can handle a lot of moisture or very little. It is able to actively search for food and store it for use later when there is a shortage. The squirrel is more adaptive as an individual than is the bacterium.

Hierarchical evolution can be seen in a series of steps. Some of these steps are molecule to cell, cell to multi-cellular organism, lack of nervous system to nervous system, reactive nervous system to learning nervous system, and conditioned learning to emotion driven learning. Each successive system stacks on top of the other to the extent that the higher system consists of the components of the previous hierarchy with enhancements at the next level that rely upon the functionality of the previous. Clearly, these transitions didn’t happen overnight. A large number of small changes happened where specialized roles and communication methods developed. These allowed the power of the new hierarchy to be realized.

This leads one to question what has been going on with the evolution of hierarchies over the most recent ten millennia and what is happening presently. My answer is that the hierarchies have evolved beyond biology. Human civilization is merely a collection of task specialists and communication systems that function to adapt to the environment. Initially, people settled down and created communities to change the environment so it would produce a more plentiful and reliable food source. They cooperated, individually taking on portions of the task. They discussed their plans for the future. They created systems for trade so that individuals could specialize. Conceptually, this is no different than the specialization of cell types to create organs in the body where special communication proteins called hormones communicate needs from one type of cells to another. Civilization is more adaptive than the individual person much the way the squirrel is more adaptive than the bacterium.

While there are a number of very important advances that have allowed civilization to flourish, they are merely tools that either allow an entity to fulfill a role performing a specialized task or they are tools for communication that allow a number of specialized entities to work in concert. As one can see from the list I linked to above on Kurzweil’s Singularity site, advances in tools for specialization and communication often come roughly at the same time. Writing and the wheel appear in roughly the same period, as do telephone, radio and electricity, or printing and the scientific method. The Industrial Revolution was entirely about specialization and communication in the workplace improving productivity.

Unfortunately, neglected from Kurzweil’s list are advances in trade and banking. Currency and accounting greatly streamlined trade by allowing individuals to acquire goods or services from someone that didn’t want anything they personally had to offer. It might be said that the invention of writing was necessitated by the business of keeping accounts. Likewise, banking has evolved from the personal account to the business of lending one’s own capital, to the collection of capital for lending to others, to trade markets where ownership is bought and sold like any commodity. Banking enables resources to be applied where civilization at large deems is the best place for them to be used based upon the information available. Prioritization of the use of resources is a very important mechanism to the future prospects of an entity.

I have implied what we refer to as civilization is merely a continuation of evolutionary hierarchy. It is the only arena of evolution that is currently producing greater complexity. Biological evolution has reached its limits in producing humans, whose metabolisms are already largely devoted to keeping the brain functioning. If any biological evolution is occurring, it is related to conforming to civilization, not nature. The evolution of the social system isn’t just one level of hierarchy. There have clearly been a number of steps made throughout history. There are clearly multiple levels of hierarchy within our governments with a spectrum between local government and nations and the bodies they create to regulate international law. Likewise, business is the same. Seldomly does a business produce a product all of the way from extracting raw materials to selling that product to a non-business consumer. These hierarchies are enabled by our ever advancing communications systems, which all hinge on the notion that an idea or object can be represented by a symbol, which is the essence of language and writing. Our tools are advanced by our learning system, the scientific community and by our financial and governing systems which select which ideas get resources. It is a complex, deep hierarchy. The burden of individual human survival is embedded in this system much the same way that a cell is embedded in the body.

Vinge, when he coined the term “Singularity” was convinced that there would emerge a super-intelligent computer intelligence that would be able to improve itself at a staggering rate such that humanity would become irrelevant. To some degree, the definition of the term has been softened by the community at large to be a more general definition that a system will evolve that is capable of advancing at a rate beyond human comprehension. The problem with Vinge’s super-humanly intelligent computer taking over is that it has to do more than just compete with the intellect of an individual human. It has to compete with the combined capability of all the organizations of civilization powered by billions of humans. There will have to be substantial work done in organizing the vast arrays of processors to take on specialized roles an communicate the proper information to the right processor. Needless to say, we aren’t nearly as good at making groups of processors work together as we are at making a single processor. This will put off the machine driven vision of Vinge for a good part of a century if Kurzweil is correct. While the art of automated computation is a century old, cluster computing is closer to a decade. The Cray computers of the 80’s were not multiple processor systems. The notion was new in the late 80’s and early 90’s.

The important idea behind the notion of the Singularity is that humanity as a species is not at the top of the intellectual hill. The capabilities of the evolved social hierarchies we have created have transcended our individual capabilities. While the individual scientific advances of the past century are attributed to individuals, they don’t belong to them. The ideas were already in the community. They just put on the finishing touches. This is becoming more the case every year. There are no more Da Vincis because the game is a lot harder. There is a lot more to learn just to get started and the problems are more complex. Cutting edge science and engineering are increasingly taking more and more manpower to get done. The system acts and solves far beyond the individual’s capacity. We have been working our way toward the Singularity for over five thousand years and I suspect Kurzweil is counting down how long it will take before an individual human will no longer be able to comprehend what is going on at the highest levels of evolved hierarchy. That day might have already arrived.