How actuarial science "made a difference"

I left the actuarial field primarily because I thought it made no impact on anyone. After reading this article from Wired, I know I was wrong. Actuarial science did make a huge impact on everyone in the world, though the impact is negative, and hugely so.

According to the article, it was David X. Li, a bright Chinese mathematician with a "master's in actuarial science and a PhD in statistics", who invented the formula that underlies credit default swaps. The formula was originally published in the paper "On Default Correlation: A Copula Function Approach" in 2000. The formula somehow made its way to the real world and was soon "adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators."

However, Li is apparently innocent. He was just a geek who wanted to publish in a journal. In fact, he was quoted to have said in 2005, "The most dangerous part is when people believe everything coming out of [the formula]."

Here's the link to the article: Recipe for Disaster: The Formula That Killed Wall Street
It even has a brief description on the actuarial/statistical concepts used in the deadly formula.

Valentine's Day Economics reading list

For those who only see women (men) as curves...

1. A Theory of Marriage: Part I by Gary Becker (an attempt to explain behavior in marriage using economic models)

2. A Theory of Marriage: Part II by Gary Becker

3. Career and Marriage in the Age of the Pill, Claudia Goldin and Lawrence Katz
(explores the effect of birth control pills on marriage and career choices)

4. For Love or Money--Or Both? by Nancy Folbre and Nancy Nelson
(tells us why market can't provide incentive to love, and therefore can't provide good quality elderly and child care)

5. Intergenerational Economic Mobility and Assortative Mating by John Ermisch et al (IZA)
(the main conclusion seems to be: how much you earn depends on how much your parents and your spouse's parents earn)

Another stimulus plan (the most economically sound proposal by far)

Let's blog our way out of recession!

At least it's much better than a tax credit for homebuyers...

Libertarian stimulus package

From Jeff Miron.

Abuse of the word "liberalism"

It is perplexing how the word "liberalism" evolved into its meaning of "active government intervention in the economy" in America. The Economist reviewed Alan Wolfe's book on liberalism.

Quote:
"Odder still, put this question to people who live, or would like to live, in a liberal democracy: “Which of the following values do you espouse—personal freedom, rule of law, active but accountable government, free but responsible markets, mutual toleration and equal concern for all?” It is a fair bet that people will tick most or all items on this list. Ask them if they are liberals, on the other hand, and many will turn contemptuously away."

Bookstores should expect a lot of customers returning this book a few days after purchase. American readers who buy it based on its name may be expecting a totally different topic than what the book really is about.

Attention Job Seekers! Lists of Companies That Are Still Hiring Aggressively

Survivors of the crisis so far are: audit, insurance, health care, and grocery retail.

CARPE DIEM: 13 Companies That Are Hiring in 2009

CARPE DIEM: They're Hiring!!

How market failure is causing traffic accidents in the US

This is not a conclusion of any serious research...yet. But if anyone wants to give me funding, I'll be more than happy to work on the empirical evidence and produce a rigorous research! :)

So, here's my theory:

Not everyone is good at driving or enjoy driving. In a Ricardian world where everyone specializes according to his/her comparative advantage, the bad drivers should not drive at all--but should spend his/her time on doing what he does better (e.g. fixing computers, teaching, farming, cooking, etc. you name it). The teacher or farmer or cook can then pay for transportation service from those who have comparative advantage in driving.

If you have lived your whole life in California, the abovementioned world may sound ridiculous to you. However, if you're from Hong Kong (Singapore, Taipei, or New York City), you know how natural and desirable that is. There people have access to reliable public transports within a few minutes from their doors, or they can flag a taxi right at the doors. Consequently, people who can't drive aren't forced to drive, leaving the road safer. Moreover, fewer cars are left idle. It does the environment a big favor. For those who still decide to drive, it's easier to find parking.

Now, look at what's happening in the US. The road is filled with bad drivers who would stop in the middle of the road suddenly, change lanes when there's another car 25cm away, take up 2 parking spaces when they parallel park...

Being a lousy driver myself, I sympathize with the drivers. I know clearly that driving requires talent. If you don't have the talent, you may still be a dangerous driver even though you try hard to drive safe. Moreover, if you know you're a bad driver, chances are that you won't like to drive either. However, if you can't go to work without a car, you are forced to drive even though you aren't good at it and don't like it.

Public transportation systems in the US are indeed so bad that people can't rely on them as the sole means of transportation. Taxicabs are inaccessible and/or prohibitively expensive.* To make the matter even worse, urbanization hasn't quite happened in the US. As many people live in suburbs, the population is too scattered to be served by public transport.

These form a vicious cycle: As people can't use public transport, they drive. Because they drive, they live in the suburbs where they can park for free. Since most people live in suburbs, demand for public transport is low. With the thin market, public transport remain scanty.

I think that is why so many people who are not supposed to drive are driving in America. Next time when you're pissed off by a bad driver, don't blame the driver--blame the market.

*: Here is an article about why taxis are so expensive (and services so poor) in Boston.