False positives

What do breast cancer tests and airport screens for terrorists have in common? Answer: Both involve huge uncertainties. Nothing in life is for sure. Nothing in life comes for free. There really are no free lunches in life. This is as true of testing as of any other area in life. Whenever, and wherever, we run tests there are always two errors that float around. The first, which is called a Type I error, occurs when the test fails to detect a problem. For example, one might have an inspector looking for a gas leak in a house. If the machine fails to detect a leak, when one really does exist, then one has a Type I error. For the homeowner in question, this can be very inconvenient if not plain downright distressing. On the other hand, the world is full of natural gas, so if the machine is set at a level that is too sensitive it will detect natural gases in the air of a house that does not have an actual gas leak. The result for that homeowner might be a wholly unnecessary and very expensive repair job. This kind of error is called a Type II error. It results in “false positives.” All scientific testing involves a balance between these two errors. Continue reading

New beginning

So we have moved this blog to a new host and I hope to get inspired to keep a regular flow of slanted comments coming on the news of the day, mostly the financial news, but not just the financial news. For the record, I am an immigrant to this glorious country and have lived here for many, many years. I am passionately attached to the ideals of the Republic and, if I sound critical now and then, it is only because I think we are falling short of our ideals. I like neither big government nor big business. I believe everyone should receive a fair reward for their efforts. I cannot see any reason, though, why some should be earning millions while others are out of work. I believe in competition. I go with Adam Smith who showed that perfect competition drives out abnormal profits and conclude that if at any place in the economy there are abnormal profits and abnormal earnings that there is something wrong in the economy at that point. The observant reader will see these and my basic religious bent in the slant that I give to things.

Fair value

Apparently Sir David Tweedie is trying to distance the IASB from the FASB on the subject of fair value. He is quoted as saying: “Their proposal is everything at fair value. I don’t think that is acceptable worldwide and in some segments of the United States either.” The G20 agreed at their meeting in Pittsburgh, USA the end of September 2009 that accounting rules would be comparable by June 2011. The disagreement between the two major regulators of how to implement fair value threatens that deadline, bystanders say.

FSA’s Turner Report

The Financial Services Authority (FSA) has just issued the Turner Report  which traces the causes and suggests the cure for the current financial crisis that it describes as the worst in a century. It notes that “the crisis also raises important questions about the intellectual assumptions on which previous regulatory approaches have largely been built. At the core of these assumptions has been the theory of efficient and rational markets. Five propositions with implications for regulatory approach have followed: Continue reading

Not populism but opposition

Chris Caldwell (3/31/09) makes several astute observations in this morning’s Financial Times, noting that what “looked like discontent with a slow economy is strating to look like opposition to a system.” The past justifications by financiers that their stratospheric salaries were appropriate because of their genius status now rings hollow to most people, except, perhaps, the financiers themselves. It may be that the compensation model for those in finance will never return to the levels enjoyed in the recent past. He also notes, perceptively, that the public’s tolerance for opacity has greatly diminished. We no longer trust the elite and want to know what they have done with our money and who is reaping riches at our expense. “Americans are beginning to view those who wrcked the financial system like the secret police in a former comunitst country.” Where this will all lead, no-one knows at present.