Secrecy – rebuttal

An opinion on the The Social Cost of Transparency — a defense of secrecy — was given by an Australian economist on Mish’s blog.

Steve Keen says:

One quick perusal of that article and I could consign it to neoclassical gibberish. The key giveaway is in the first sentence of the abstract:

“I study a class of models commonly used to motivate monetary exchange, extended to include a physical asset whose expected short-run return is subject to exogenous news events, but whose expected long-run return is independent of this information”

The part of bold is the give: this is a model where the future is subject to randomness, but not change: whatever happens in the short term has no impact on the future.

Remember the main conclusion of the paper is that secrecy is justified where the long run value of an asset is compromised by short term volatility.

The examples we used were climate science, where non-disclosure of code and data allowed those with an equity interest in those assets to use them as a token of exchange, ie. for further grants, coauthorships, etc. Geoff also raised the issue of a mining exploration company, where (apart from competition) that ‘news’ could lead to failure of a company from shortage of cash.

It seems to me the statistical issue is the questionable assumption that an expected long-run return exists at all. Some statistical distributions have a mean, and a variance, and these are called expected values. In some distributions, those with ‘fat tails’, the variance or even the mean is infinite, and so have no finite expected value. For example, a random walk can go off to plus or minus infinity. It has no expected long run value. Long term persistence (LTP) where correlations persist for a very long time is another.

This seems to be Steve’s objection when he says:

This is precisely the sort of modeling that failed to even conceive that the Global Financial Crisis (GFC) was possible (for instance, there is no runaway accumulation of aggregate debt in this model). How then can it be expected to inform policy in a post (or present!) GFC world?

For the climate science or mineral exploration example, secrecy seems justifiable when there is a long run expected value for the research or company. But does a mineral exploration company have an expected value?

Given a set of exploration companies, that at in the distant future may be valued anywhere from zero to very high, it would not be too much of a stretch to say that the future value is effectively unknown – i.e. there is no long run expected value. Similarly for a speculative research program.

It would seem in that case there would be a strong motivation for maintaining the pretense of a certain expected future value, for convincing people with brochures and press releases that the intrinsic, and long term value of the enterprise is sound. That would explain suppression of any bad news in the short term term, on the basis that it doesn’t reflect the intrinsic (albeit imaginary) value.

But Steve’s objection is that the notion of such an intrinsic value (or at least independent of short term effects) is demonstrably flawed in the first place.

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0 thoughts on “Secrecy – rebuttal

  1. “That would explain suppression of any bad news in the short term, on the basis that it doesn’t reflect the intrinsic (albeit imaginary) value.”In a blue chip minerals world these concepts are not really used. The method says “We have X% of our income that we can put aside for exploration. If it finds n*X in new resources, then we will do well”. Informing the market or setting possible targets has no great value because guesses are seen as such. The real value is placed in delivery of the goods, that is, making n large year after year. Part of the way to do this is to staff up with top people and another part is to have a ready, almost over-enthusiastic, interchange of ideas at all levels. It's more a matter of internal organisation that external impressions.That's why it is so different to climate science, especially the type revealed in the email flood. Antithetic in almost evey way.Sooner or later you have to be accountable.

  2. “That would explain suppression of any bad news in the short term, on the basis that it doesn’t reflect the intrinsic (albeit imaginary) value.”

    In a blue chip minerals world these concepts are not really used. The method says “We have X% of our income that we can put aside for exploration. If it finds n*X in new resources, then we will do well”. Informing the market or setting possible targets has no great value because guesses are seen as such. The real value is placed in delivery of the goods, that is, making n large year after year. Part of the way to do this is to staff up with top people and another part is to have a ready, almost over-enthusiastic, interchange of ideas at all levels. It’s more a matter of internal organisation that external impressions.

    That’s why it is so different to climate science, especially the type revealed in the email flood. Antithetic in almost evey way.

    Sooner or later you have to be accountable.

    • Its the way good science should be to. We put x% of GDP into research. What return have we got from global warming research? Zero?

  3. Its the way good science should be to. We put x% of GDP into research. What return have we got from global warming research? Zero?

  4. Nah, I would not go as low as zero. There were a number of preexisting uncertain aspects of climate that have now found answers; and general knowledge has advanced. I'm in favour of a high expenditure on science, pure and applied, but there has to be a plan, review points, tough oversight on refunding and above all, open reporting. But all that is elementary. The lesson is not to start with preconceptions, then try to support them. I can tell you, as you would know, that in mineral exploration you can gaze a long time at an expanse of featureless land before saying “We will invest funds in testing this”. One day we had a letter from Uri Geller of spoon bending fame who wanted to use our bizjet to fly over vast distances, during which he would note those areas with high potential for discovery. Well, science does not work that way. It's far harder slugging than you see on TV with CSI New York, CSI Miami or CSI Moe.

  5. Nah, I would not go as low as zero. There were a number of preexisting uncertain aspects of climate that have now found answers; and general knowledge has advanced. I’m in favour of a high expenditure on science, pure and applied, but there has to be a plan, review points, tough oversight on refunding and above all, open reporting. But all that is elementary.

    The lesson is not to start with preconceptions, then try to support them. I can tell you, as you would know, that in mineral exploration you can gaze a long time at an expanse of featureless land before saying “We will invest funds in testing this”. One day we had a letter from Uri Geller of spoon bending fame who wanted to use our bizjet to fly over vast distances, during which he would note those areas with high potential for discovery. Well, science does not work that way. It’s far harder slugging than you see on TV with CSI New York, CSI Miami or CSI Moe.

  6. Nah, I would not go as low as zero. There were a number of preexisting uncertain aspects of climate that have now found answers; and general knowledge has advanced. I'm in favour of a high expenditure on science, pure and applied, but there has to be a plan, review points, tough oversight on refunding and above all, open reporting. But all that is elementary. The lesson is not to start with preconceptions, then try to support them. I can tell you, as you would know, that in mineral exploration you can gaze a long time at an expanse of featureless land before saying “We will invest funds in testing this”. One day we had a letter from Uri Geller of spoon bending fame who wanted to use our bizjet to fly over vast distances, during which he would note those areas with high potential for discovery. Well, science does not work that way. It's far harder slugging than you see on TV with CSI New York, CSI Miami or CSI Moe.

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