March 11, 2015

I'm so stupid - The market for aid is a Spence insufficient information market

I just figured it out, in a flash: Aid is Spencian.

3 years after my Kenyan adventure started, and I feel like I've got the intellectual dexterity of a slug. But I'm leaving sonic booms running past the World Bank, so maybe relativity is a good thing.

My epiphany was triggered by the fallacy in this article, but it's just another one in a long series of pinpricks to my angst.

And now, everything is explained, or explainable. So, slowing down, take breath, take time to write some words, open the wine. Deep breathing.

Here goes.

The problem with THE AID WORLD, speaking broadly, is observed thusly: we keep doing it, and nothing much happens. In short, the aid budget is approved, carved up into tranches, and the slices and dices get scattered across the poverty-sphere like so much glitter. We sit back as happy church goers and do-gooders and believe we've done our religious duty. We wait for results.

Whatever the psychology of why we do it, what does happen is ... nothing much. The results are always short of expectations.

OK, so there are some very rare exceptions that we all talk about, but everyone in the business knows how rare they are because they are a household name. That's why we talk about them! I speak of mPesa of course, and ... well I don't actually know another in the last decade, but hey, that's what comments are for. Corrections please.

Fact is, most all aid is wasted. Most all government and private sector charity is mostly dead before it gets there, to that country far far away, and what little that does get there is stolen. Often, it is stolen in ways that tick ALL the boxes, and the beneficiaries will debate vociferously that it is not stolen at all, but I will say to you now - it's literally managed out of your hands, and out of the hands of its intended beneficiaries.

Yet we keep doing it. (So do they.) Why? So there are two serious questions here, being why it doesn't work, and why we keep doing it in the face of lifetimes of experience.

And finally it clicks for me: the market for aid is a Spence market in insufficient information. Which explains *everything* I just said, but now we need to walk through what this means. Because Spence is subtlety wrapped in a riddle, encrypted within a fairy tale.

In a Spence market, there is insufficient information, on both sides. This assumes a market where there is a nominal buyer and a nominal seller, but don't get too hung up on that. It's two people and they are trading something: graduates trading with employers, security providers selling to big scared corps, military contractors selling F35s to governments. In this case, there is a donor and a recipient.

The issue of insufficient information is symmetric -- neither side knows what is needed, nor what the other side wants. In effect, there is a vacuum of information. What happens with a vacuum? Of course, it is filled, by laws of physics. However what it is filled with is not information but "something else" being whatever is to hand.

Michael Spence postulated in his "Job Market Signalling" paper that what fills the vacuum of information insufficiency are signals. He was quite peculiar about what signals are: they were things that might say something, but actually they were not strong enough to be reliable. Importantly, signals could be misinterpreted to be "what I wanted to be told!"

Oops. We have a market where the information rushes in to fill the vacuum, but the because of the nature of this market, it isn't sufficiently confirming or disconfirming of the product as to generate a useful result. In essence, the signals are interpretable as confirming by the listener, when they may very well be the opposite: disconfirming.

Or, in other words, if we don't know what we're asking for, we shouldn't be surprised when our partner tells us what we'd like to hear. Ask your spouse about that one.

In such a market, Spence postulated that the signals can generate feedback loops which become reinforcing, over time and over cycles, even though they are not actually delivering information, or the information is irrelevant, or even wrong.

Now - AID. We want to do aid, it's kind of an inbuilt human reflex for good people, as well as a learnt behaviour, and one that generates positive feedback from our peers. So we take a swag of money down to our nearest poor country and hand it over.

What does the recipient in our model do?

Whatever the recipient does with the money isn't relevant. What is relevant is what the recipient tells us. He tells us ... what we want to hear. He feeds us the signal. Because of the nature of the market, we can't tell, so we simply are incentivised to believe what he says. Which we do, probably because our motivation is as much about feeling good about ourselves as anything else.

I mean, it's not as if anyone has a good handle on this economic growth thing in the western world, so it would be a miracle if we actually could make it go better in the developed world.

But, leaving aside how we address the paucity of approaches, the result is: neither donor nor recipient *know* anything useful. But the donor is incentivised to invest, and praise the recipient's hard work. Recipient is incentivised to do whatever he is told to, and tell the donor that which he thinks the donor wishes to hear.

In such a market, the signal is misinterpreted, but the market is stable around the signal. Including the misinterpretation; Life goes on. Every aid cycle, the same thing happens, and nobody notices that there is no real tangible confirming information.

Which explains everything: this explains why extremely smart people go to these places and prepare big programmes that cost a *lot* of money. It also explains why the programmes never work, because the information from the recipient isn't precise or rich enough to actually develop a useful programme. It explains why huge numbers of people work on programmes even knowing in their honest moments they don't know what they are doing, and that the system doesn't work.

And it explains why the western aid movement does such terrible damage to these developing peoples -- because the developing peoples keep telling us it's good, in order to get the money. But the corrupting influence of the aid money is so evident on the ground it's not even funny.

It's utterly, viscerally the saddest thing I've ever seen; rich white people and poor africans, asians, latinos, locked in a deadly embrace of self-harm.

But at least I now have a model to explain this to all those aid / NGOs / governments that haven't a clue. After rain, there can be a small ray of sunshine.

Continue reading "I'm so stupid - The market for aid is a Spence insufficient information market"
Posted by iang at 05:40 PM | Comments (2)

March 10, 2015

Finally, someone is facing up to the critical problem of our age: Starfighter

What is the critical problem of our age? Getting people back to productive work.

The economic statistics in the west are the worst in living memory, all the way back to the Great Depression. Not the official, manipulated political advertisements from the Bureau of Lies, Damn Lies & Statistics, but the anecdotes and wails of our friends and companions who are facing obscurity of unemployment or loss-of-soul with the big 5, no choice, nothing in between.

We -- in the aggregate -- have no understanding of how we got to here, what here is and how we're going to fix the issue.

I know one factor, the Spence observation that we live in an insufficient information age where employers cannot accurately predict employees, and employees likewise cannot see past plastic brand to the wholesomeness of their future career. The result is a deadly embrace of spiralling disquality.

This insight has propelled me along a partial journey to create systems that solve the core dilemma, but what I know and do is not enough. So it is with vicarious pleasure that I share with you:

Announcing Starfighter

Thomas Ptacek, Erin Ptacek, and I are pleased to announce Starfighter, a company that will publish CTFs (games) that are designed to develop, improve, and assess rare, extremely valuable programming skills.

Starfighter CTFs are not fantastic Hollywood-logic depictions of what programming is like. There is no "I built a GUI interface using Visual Basic to track the IP address."

You will use real technology. You will build real systems. You will face the real problems faced by the world's best programmers building the world's most important pieces of software.

You will conquer those problems. You will prove yourself equal to the very best. Becoming a top Starfighter player is a direct path to receiving lucrative job offers from the best tech companies in the world, because you'll have proven beyond a shadow of a doubt that you can do the work these companies need done.

We're not here to fix the technical interview: we're here to destroy it, and create something new and better in its place. ...

Posted by iang at 07:28 AM | Comments (0)

March 09, 2015

Auditors grow a pair - Heta Bank to be wound up after external audit found a hole

Maybe, after many long years, something has finally happened in the sleepy audit world:

The rating action follows the decision of the Austrian Financial Market Authority (FMA) on 1 March 2015 to initiate resolution measures on Heta Asset Resolution AG (wind-down entity of former Hypo-Alpe-Adria), in accordance with the Federal Banking Restructuring and Resolution Act (BaSAG). BaSAG is the national implementation law of the European Bank Recovery and Resolution Directive (BRRD), effective since 1 January 2015. The FMA also imposed a temporary payment moratorium on Heta's liabilities until 31 May 2016. This follows the disclosure of Heta's recent asset review by external auditors, which indicated an additional shortfall of assets of up to EUR7.6 billion, compared to the EUR4 billion expected before.

Is this an outlier? Response to the worst cut of them all, indifference? Austrian values? An accident? We'll have to wait and see - for now, I'm happy to signal that the drought has ended:

An auditor has rung the bell on a bad bank!

What is also perhaps interesting is the painful causality of the new world of bank guarantees. Because (allmost of) the governments have now passed legislation-on-the-sly to wind back the 100 year rein of complete backstopping and depositor guarantees, the government of Austria declares itself clean hands.

Carinthia provides a statutory deficiency guarantee on a very high portion of Heta's senior debt; the total guarantees are equivalent to nearly EUR10.2 billion, or nearly five times the state's 2014 operating revenue.

Alley-oops! Not so fast, Austria, you may be able to ditch a bank, but an entire province is another thing. So this is Cyprus all over again -- which went down because the rule there was that banks had to hold Greek debt. When that went into haircut mode, Cyprus sunk.

This is no small thing. It is somewhat of a surprise that the media isn't in overload mode. Maybe the perception is that all the banks are in trouble, and the collapse of one is already factored into media finances? Who knows. But one thing we know, many billions' worth of assets held by other parties are now turning to mush.

Who holds this stuff? Austrian banks, and ...

German banks yesterday also emerged as major Heta bondholders. Dexia's Dexia Kommunalbank Deutschland AG said it owns 395 million euros of Heta bonds and will take an unspecified charge in the first quarter. Deutsche Pfandbriefbank AG also owns 395 million euros of Heta bonds and said it will write them down by 120 million euros, cutting its expected pretax profit by two-thirds.

NRW Bank confirmed it owned Heta bonds, declining to specify the size of its exposure. WDR TV station reported the bank owns 276 million euros of them.

German banks! As an unintended consequence of cleaning up their exposure to Greek tissue paper, the Germans had loaded up on 100%-risk-adjusted Austrian wood. Only to fall to ... Swiss peg collapse. Which fell to ...

Can you say, contagion?

Posted by iang at 12:33 AM | Comments (2)