The risks of financial managers, part 2

With reference to this post.

Unknown commenter pointed out the issue with portfolio E in particular, that although it had an expected gain of 5% per year, investors who persist with this portfolio over the long term would probably lose more in the bad years than they would gain in good ones. Sounds contradictory? Not quite. If you do the sums, you will see that the expected gain over a long sequence of years is generated from a very small probability of a extremely large gain, together with a very large probability of losing almost all your initial investment. The distribution of wins and losses is binomial (which tends towards Gaussian for a lot of years) but in order to come out ahead the investor needs to get lucky roughly 3 out of 5 years, and the probability of this happening will shrink exponentially (in the long term) as the number of years increases because it's moving further and further into the tail of a Gaussian.

As an extreme version of this, consider being invited to place a sequence of bets on a coin toss where the result of a T means you lose whatever your stake was, but H means you get back 3 times your stake (ie you win 2x stake, plus get your stake back - odds of 2:1 in betting parlance). This bet clearly has positive expectation, each pound bet has an expected return of £1.50, so if you want to maximise your expected wealth then rationally this bet is a great offer. If you start with a pound in the pot and do this 20 times in a row, betting your entire pot each time, you either end up with 3^20 pounds (with a 1 in a million probability, when you get 20 heads) or else you lose everything (with 999,999 in a million probability, when a tail turns up at any time). (2^20 is actually 1,048,576 which is close enough to a million for many purposes and can be a useful rule of thumb to remember). The expected gain at the end of the 20 bets is about £3400 but the vast majority of players will end up with nothing. Would any of my readers pay £1000 for the right to take part in this game? 

In fact, for most people, most of the time, increasing wealth by a factor of 10 doesn't really make life 10 times better, but most people would be very averse to a bet where they could lose everything they own, including their house and the clothes off their back, even if the expected return was positive (eg betting the farm on the coin toss as above). A standard approach to account for this is to evaluate uncertain outcomes in terms of expected utility rather than expected value, and a utility function which is the logarithm of value is a plausible function to use.  One typical implication would be that the subject would be ambivalent about taking a bet where they might either double or halve their wealth with equal probability. The expected value of the bet is positive of course, but expected utility (compared to the prior situation) is zero. It should be noted that no-one really behaves as a fully rational utility-maximiser in realistic testing, but it's a plausible starting point widely used for rational decision theory.

This logarithmic utility maximisation idea leads naturally to the Kelly Criterion for choosing the size of the stake in betting games like the coin toss above. The point is that by betting a proportion of your wealth (rather than all of it) you can improve your return in terms of expected utility. Note that the log of 0 is infinitely negative, so losing all you own is best avoided! In 1956, Kelly proposed a formula for the stake which gives the maximum expected gain in logarithmic terms. The Kelly formula of (p(b+1)-1)/b, where p is probability of winning and b is odds in the traditional sense, implies a stake of (0.5*3-1)/2 = 0.25, ie you should bet a quarter of your wealth on each of the "triple or nothing" coin tosses. After the first bet, you will have either 0.75 or 1.5 pounds etc, so you either gain 50% or lose 25% and if you were to have an equal number of wins and losses you will more than triple your money in 20 bets. A smaller win in absolute terms, but a much better outcome in terms of expected utility and the majority of players who follow this strategy will make a profit.

So what does this have to do with the investment portfolios? Returning to the investments, each portfolio can be considered a bet where you stake a proportion of your wealth with a particular odds and 50% chance of winning. Eg with portfolio E the investor is betting 0.48 of their wealth with odds of (1.06/0.48 - 1):1 = 1.21:1. Kelly says that with such odds and a 50% win chance, you should really bet only about 9% of your wealth, which would return either 0.91 or 1.11 which gives a small gain in log terms. Of course the investor doesn't get to choose their stake here, but it still provides an interesting framework for comparison. The 5 investments have the following implied odds, stakes, geometric mean returns and Kelly-optimal stakes respectively:

A 1.6 0.07 1.02 0.18
B 1.7 0.10 1.03 0.12
C 1.6 0.16 1.02 0.18
D 1.4 0.27 1.00 0.14
E 1.2 0.48 0.91 0.09

C has a better return than A (having the same odds and a closer to optimal bet) but the rounding conceals it. B is better than either due to having better odds and a near-optimal stake. D is useless and E is worse than useless in these terms, implying a massive bet on rather poor odds which means most of the time you'll actually lose money in the long run.

It is fair to say that not everyone necessarily wants to maximise the expected log of their wealth, but I was surprised to see investment strategies proposed that were actually loss-making in log space. It's also true that investment E has the largest gain in purely expected value terms, but it would require an extraordinary appetite for risk to take it (rather than tolerance or indifference). And this wasn't a single accident, the other similar question had no fewer than 3 out of 6 options having the same property. I actually wonder if it's partly due to a cognitive error due to presentation. One of the questionees said that they wouldn't be bothered by a 40% loss one year if they could expect a 60% gain the next. If that was written as dividing their investment by a factor of 1.7 one year and then multiplying it by 1.6 the next, it might seem less attractive! 

The risks of financial managers

The following question is a slightly reworded version of a real question in a real financial management company's risk questionnaire that was provided to someone locally. I've tried to be fair to the financial company while making their question a bit less vague, they actually had two similar questions which cover this issue in slightly different ways.

"You have the choice of placing your investment in one the following 5 portfolios, ranging from low to high risk. For each portfolio, you can assume the return over each consecutive year (edit: was 5 years) takes one of two possible values, with 50% probability of each outcome. Which portfolio would you prefer for your investment?

A: 50% chance of either +11% or -7%

B: 50% chance of either +17% or -10%

C: 50% chance of either +25% or -16%

D: 50% chance of either +37% or -27%

E: 50% chance of either +58% or -48%"

So, which option(s) do you like, and why?

“stop this ridiculous Brexit nonsense ever from happening”

How times have changed. It's hard to imagine anyone saying this on Any Questions 5 months ago and being met with strong applause. Is there finally some light at the end of the tunnel?

Brexishambles

So on Tuesday we will learn whether the USA is going to take the UK's crown as having the World's Most Stupid Electorate. Predictions are apparently quite close, with fivethirtyeight.com putting the odds around 2:1 at the time of writing. Colorado is a particularly close state, not that you'd know it from Boulder of course. I ran past a Trump poster on Sunday, and someone in the group I was with mentioned it was only the second one they had seen.

I've written about brexit before, and it's shocking to see how little progress has been made in the intervening 4+ months. Perhaps the most significant change is that brexit is now an official word in the Collins English dictionary, so I can use it without embarassment (I mean, without embarassment about the word - embarassment about the shambles itself is less easily cast aside).

Apart from that, we've got the unedifying and dangerous spectacle of those who called for the sovereignty of British Parliament, now denouncing this sovereignty as anti-democratic - and worse, labelling judges who upheld it with the chilling Nazi-era “Enemies of the people” slogan.

Great to see the Telegraph get in on the act too, patriotic poppy and all. And rather than supporting the independence of the judiciary, the govt response was to issue mealy-mouthed evasions about the importance of  a free press. So much for the so-called Party of Law and Order.

It's blatantly obvious that the reason May doesn't want to reveal her cunning plan to parliament is that there is no plan. What is more puzzling is how those who are supposed to be among the brightest and best minds in the country haven't yet worked out the problem, which is quite simply that there is no “good brexit”; there is no sensible way though the process of cutting ourselves off from our largest trading partners and source of much-needed labour. Yet the Three Brexiteers are still blethering on with their idiot fantasies about how we can pick and choose exactly what we want from the EU27, and they will just roll over and accept it. Economics isn't everything and no doubt there are quite a number of xenophobes who would think a recession is a price well worth paying to reduce the number of young europeans coming here, studying in our universities and/or working and paying taxes. What's more troublesome from my own point of view is the growth of anti-rational populism fed by deliberately malicious and dishonest politicians and the media.

Of course the question is not even whether brexit is a good idea or not. Brexit isn't an idea at all, it's an incoherent mishmash of contradictory ideas, connected only in that they involve some change from the status quo. The vote for brexit is the logical equivalent of voting to go out for dinner - we might all agree that my cooking isn't great but if one person thinks they've been promised a curry, another is wanting to go to a French restaurant and a third is expecting fish and chips - and all have been promised that it will be completely free, in fact they'll be paid to eat it - then there is likely to be disappointment and disagreement as a result. As the chant goes: “What do we want? Well if you didn't know why did you vote leave?” At least, that's how it should go.

Jules says (quite rightly) that I shouldn't just criticise without coming up with a solution. What would I do? Well, nothing has change my previous opinion that the only reasonable solution is to abandon the process. This will take a lot of backtracking now that May has backed herself into a corner so firmly, but the reality of the situation is that there is no plausible brexit that will actually satisfy the British public, and all options for change are substantially worse than the status quo in basically all aspects. Will this actually happen? I don't know, the betting odds give about 70% probability to article 50 being invoked next year, 30% probability to 2018 or later or not at all.

Still, at least we can all rely on the BBC to do its patriotic duty and bend over backwards when some reactionary bigot demands that they play the national anthem at every opportunity:

The Europound

Received in the post yesterday, the new currency of europounds:

It's been introduced as a means of converting us to the euro permanently, once they have converged to the same value. Which shouldn't be too long now.

(Actually, it's the tenner I won off Nick Barnes for predicting correctly that Cameron would not invoke Article 50 within a week of the referendum. Suggestions for suitable purchases are welcome in the comments.)

Cop out or tipping point?

Jim Hansen isn't right about everything these days - this paper has rightly had a rough ride (ignoring the delusional nonsense) and I wait with interest to see what transpires. But on the Paris talks, he's pretty much right. He's worth quoting in full (as reported in the Guardian and elsewhere):

It’s a fraud really, a fake. It’s just bullshit for them to say: “We’ll have a 2C warming target and then try to do a little better every five years.” It’s just worthless words. There is no action, just promises. As long as fossil fuels appear to be the cheapest fuels out there, they will continue to be burned.
James Hansen, Columbia University

It is also interesting to see that, just as most scientists have regretfully given up on 2C as a plausible target (maybe we could still just about do it in theory, but we certainly won't without lots of serious and immediate effort), the politicians decide they will aim at 1.5C instead. I predict a lot of Canute analogies and cartoons as the temperature continues to rise steadily.

On the other hand, it could be seen as a positive sign that at least the politicians are talking seriously about the need to cut carbon emissions, even if it is merely talk. It's not beyond the bounds of possibility that at least some nations might act in accordance with their words and put their money where their mouths are. If we really did achieve carbon neutrality before the end of the century, I'd regard that as a pretty positive outcome. But it's a long way off from here. Of course a carbon tax/fee/whatever as espoused by just about everyone who's thought about the problem and who does not have a vested interest in it would be the obvious starting point, and what matters from here is the start rather than the endpoint. What does everyone else think?

Spot the difference

This Greek thing seems to be all the rage on some blogs I could mention, but I struggle to get excited by it. According to the Grauniad website today, The IMF views a debt-to-GDP ratio above 120% as unsustainable. Here, for some context, are some recent data for a couple of countries:

I won't be offering prizes for guessing the identities of Countries A and B. One of them has a collapsing population (1 million down in the past 5y, will be dropping at a rate of 1m per year by 2030), a flatlining economy, and a skyrocketing worker-to-dependent ratio that will exceed unity by the middle of the century (and keep on getting worse). The other is Greece.

Polynomial cointegration tests of anthropogenic impact on global warming

Apparently global warming has been refuted, buy some economists writing in Earth System Dynamics:

Therefore, greenhouse gas forcing, aerosols, solar irradiance and global temperature are not polynomially cointegrated, and the perceived relationship between these variables is a spurious regression phenomenon.

Were I Judith Curry, I would probably be saying "wow" at this stage. Alternatively, it could just be some dross that has accidentally found its way into print after having been rejected at least twice at different journals.

The review comments are interesting, to say the least. Reviewer #2, in particular, seems awfully keen on a number of silly sceptic claims that have been presented in recent years.

I suppose it just goes to show that you can fool at least one person sometimes, and if that person happens to be a journal editor, you're in luck.

I see this Beenstock thing has done the rounds before, though I'm not sure any of the commenters quite get to grips with it.

More betting on global warming

Here's an interesting video here from Mark Boslough (of "pi = 3" fame, among other things).

It is interesting that people from as diverse standpoints as Ross McKitrick can also call for a tax that depends on the temperature rise - not quite the same thing as the bonds that Mark Boslough was describing, but not a million miles away either. Of course the devil is in the details, such as the level of payment/tax required.

Off the cliff

Politics pushes Japan towards fiscal cliff as money runs out:

without fresh borrowing the government will run out of money by October.

We have the somewhat embarrassing situation here presently where a handful of research scientists have already been laid off and re-employed on casual contracts of about ¥1000/h (minimum wage is ¥800), with the supposed promise of a proper job if and when the money comes through. But recruitment for these proper jobs (which are themselves only short term contracts, naturally) has been frozen. (Let's not even mention that under the new "formal" procedures, all recruitment has to take place via open competition.)

Various managers seem to be running round in a panic. Jules and I have been "warned" that JAMSTEC HQ has only actually guaranteed our salaries to the end of September, at which point (back in April when this budget-shuffling was organised) a tranche of soft money had been expected to appear. However, our contracts clearly run for a full fiscal year, so I am interested to see if they will actually try to renege on them. Given the parlous state of employee rights here, it wouldn't entirely surprise me. I don't think that JAMSTEC is actually out of money, it is just that the bureaucrats would have to agree to change their budget plans, which usually takes several months of discussions. They might consider it simpler to break the contracts.

We are off on holiday in the middle of September, and I wonder what we will return to in October...of course the most likely outcome is that the Govt will cobble together a budget, on a promise of an early election. But even so, the money probably won't percolate as far as JAMSTEC in time. I suppose if I actually cared, it would be quite stressful, but at the moment I can't seem to make myself feel particularly bothered either way. For the future of climate science in Japan, it might be better if this entire field was taken over by an institute that had more of a commitment to it.

(FWIW, the position we are currently recruiting for seems entirely unaffected, as that is coming from a different fund.)

The costs of uncertainty

Some time ago, Stephan Lewandowsky wrote an article on planet3.0 "The Inescapable Implication of Uncertainty" (also available on his own blog as part of a series), which made the fairly straightforward point that the expected cost of climate change is greater as a result of uncertainty about its magnitude (eg, the canonical example of climate sensitivity), and thus those who argue that uncertainty is a justification for inaction are precisely backwards in their thinking.

It's a pretty simple point, which has been talked about by Michael Tobis for a long time. And it's not at all controversial, scientifically speaking. So I didn't think it needing commenting on.

But recently Ben Pile wrote a really bizarre attempt at criticism, so it might be worth revisiting the topic.

The crux of Stephan's argument is quite simple. The cost of climate change is generally considered to be a nonlinear (concave convex - see comments) function of the magnitude of warming. This is a standard result of all attempts at economic modelling that I am aware of, and in my opinion is very intuitive and natural. For example, I used the quadratic function C(T) = 0.284T² (where T is temperature change, and the cost is expressed as % GDP loss) in our Climatic Change paper (available here). This function was directly based on the DICE model of Nordhaus. AIUI all credible economic modelling generates qualitatively similar results. (Incidentally, it doesn't affect the argument in any way at all if the loss function actually has an optimum at some nonzero temperature change, as some others have found.)

The point about a concave convex function - indeed it's (almost) the very definition of concave convex - is that for any small t, (C(T+t)+C(T-t))/2 > C(T). Or in words, the average of the costs of T+t and T-t is greater than the cost of T. The consequence of this is that symmetric uncertainty about the value of T leads to an increase in expected cost, compared to a deterministic outcome.

The application to climate change is straightforward, as illustrated with the following simple example. If we know that the sensitivity is 3C (say), then the cost function based on the DICE model gives a ultimate loss of 2.6% GDP for a highly simplistic scenario in which CO2 doubles and is then held constant. If instead of a known sensitivity of 3C, we thought the sensitivity might equiprobably be 2C or 4C, then even though the mean value (our expectation of the temperature change) is unchanged at 3C, the expected cost is (1.1+4.5)/2 = 2.8% GDP. For a 50-50 chance of either 1C or 5C, the expected cost rises to (0.3+7.1)/2 = 3.7%, and for 0C or 6C it's 10.2/2 = 5.1%. The discerning reader may have noticed the first hints of a pattern here...

Another way of saying it, is that the expected cost of (uncertain) climate change is greater than the cost of the expected climate change. (This is using the concept of expectation in the mathematical sense - note that in the uncertain case, there is no possibility of the cost actually being 2.8%, it will either be 1.1 or 4.5, and we don't know which.) The result is not specific to the particular example, of course, but applies widely. Increasing uncertainty (for any sensible definition of "increasing uncertainty") will generally lead to an increase in the expected cost.

So what's Ben Pile so worked up about? He accuses Stephan of producing "the most remarkable attempt to formulate — or reformulate — the precautionary principle I have ever seen", describes it as "an incredibly tortured attempted to alternate between word play and maths abuse". There's more:

"Lewandowsky, over the course of three posts – one, two, three — reinvents the precautionary principle without ever calling it the precautionary principle. This is interesting in itself… An academic in the field of climate policy has forgotten that the precautionary principle already exists, is already applied to the science, and is already manifested in policy. "

And there's plenty more vacuous hyperbole where that came from.

Unfortunately, Pile is dead wrong. Lewandowsky's argument has nothing to do with the precautionary principle, so it's hardly surprising that he doesn't mention it. Instead, it's just a simple application of standard economic analysis under uncertainty, which is implicit in all academic work in this area. It was certainly implicit in our Climatic Change paper - I didn't think it worth specifically highlighting in that work precisely because it is so elementary and well known. But Pile has got such a bee in his bonnet about the PP that he doesn't even realise that Lewandowsky isn't even using it. It's a bit odd, because from what I recall of previous posts of Pile's, they are usually fairly sensible (I'm not an avid follower though). But of course it is hardly the first time that a social scientist has blundered into a debate and a made fool of himself though not having the requisite (albeit rather minimal) mathematical skills to understand the issues...

NOC NOC Who's there? Not as many as you thought....

Sad but generally unsurprising news from the UK, where it seems that the latest installment of austerity means another round of scientists losing their jobs, including up to 15 (out of 45) at the small lab where we used to work.

Mind you, I wonder what on earth NOC was doing with a 35-strong (or more?) "Directorate of Science and Technology" in the first place! Sounds like someone might have been building themselves a little empire there...which brings back memories of our time there.

Over here, the approach is one of salary cuts all round, which from our point of view seems preferable, though it may not be so good for those on a tight budget. Although we are not officially civil servants, I think this is going to apply to us, on top of JAMSTEC's recent disgraceful behaviour. But this additional cut is not actually JAMSTEC's doing and given events of the past year, it would be difficult to complain too bitterly. It's not like they are cutting our pay down to UK levels :-)

Happy Christmas to us

Possibly the last hurdle that was standing between us and next year's budget has now been jumped:

Cabinet crafts record ¥96 trillion budget

We still have to actually apply for our jobs in the next few weeks, but at least it seems there will be jobs to apply for.

Not that the budget actually makes any sense, but Japanese economics never has, at least not since we got here. The basic budget would stretch credulity by itself, but on top of that there's a chunk of "extra budget" to plug the gaping holes that the tsunami punched in the nation's infrastructure. When the borrowing requirements come home to roost we can leave easily enough. The natives, on the other hand...

Inflation, base rates and the Monetary Policy Committee

I think what I'm going to say in this post is blinding obvious, and I've been surprised over recent months about the lack of any public debate over the issue. Maybe some of the economically-minded readers can explain if/how I'm wrong...

The Monetary Policy Committee of the Bank of England has one duty, which is to set the Bank of England Base Rate so as to hit the inflation target which has been set at 2% for some time now. However, inflation is currently double that figure. It is not in dispute that a higher base rate will act to bear down on inflation, and vice-versa. When the inflation rate fails to stay within 1% of the target (as is the case now) the MPC even have to write a letter to the Chancellor to explain their failure and present their strategy for fixing things. The CPI has been above this threshold (2%+1%=3%) for well over a year. The Base Rate has been at the record low of 0.5% for the past 2 years without any hint of upward movement. So why is this?

The obvious answer, that does not seem to be openly acknowledged, is that the official policy on inflation has actually been abandoned for the foreseeable future. A major cause of the current economic problem is the state of the housing market with prices still being stupidly high, but any significant drop in prices would hurt those who took out unreasonably high mortgages to pay hugely inflated prices over recent years. The (unstated) new policy seems to be to protect those who over-extended themselves, by simultaneously keeping mortgage rates at record low levels while inflating away the debts themselves. After a few years, even if house prices stay stagnant in real terms, the debts will have withered to the point at which negative equity is no longer much of a threat. For example, 5 years at 4% inflation will rescue anyone who currently finds themselves "underwater" to the tune of 25%.

The "downside", if you can call it that, is that this sleight-of-hand is being effectively paid for out of the pockets of those fools who didn't mortgage themselves to the hilt, but who actually saved their money, only to find these savings vanishing due to the same low interest rates and high inflation that is wiping out the mortgage debts. What idiots we were, not jumping in head-first onto the debt gravy train. Forget the banks, the housing market really is "too big to fail".

In most circumstances, I would expect journalists to gleefully highlight such a glaring inconsistency between stated and actual economic policy. But somehow, this de facto wealth redistribution from savers to borrowers seems to be taking place without any serious debate. Could it be that the journalists are also up to their necks in mortgage debt and delighted that the Govt is baling them out using our money?

Restraint order

Just before we left for the EGU, I heard that Ishihara, Governor of Tokyo, had called for "self-restraint" to show sympathy with the victims of the Tohoku earthquake/tsunami/meltdown disaster. I assumed that everyone would ignore the old buffoon who is continually making a fool of himself - he already said the tsunami was divine retribution for the Japanese being soft and self-indulgent, which would be idiotic enough even if it hadn't hit a relatively poor rural area rather than, say, central Tokyo. However he was comfortably re-elected recently - it would perhaps be a bit cruel to say that as an ageing surly grumpy xenophobe he is ideally suited to represent Tokyo, but only a little bit!

Anyway, back we came to Japan and found out that in fact most of the main sakura festivals have been cancelled. I even saw a report that the Tokyo Fireworks have been cancelled - these are scheduled for the middle of August! Mind you, my Japanese colleagues didn't seem to have heard this, it may be an error of the English-language press (and this article seems to contradict the story). The "restraint" has hit the tourism trade hard, and a particularly unfortunate consequence of Ishihara's campaign is the threat of a slump in sales in sake from Tohoku, which is one of the major production regions. In response to the slump in sales, Tohoku sake brewers have started a counter-campaign to get people to buy their products again. It would be a sad irony if these nth-generation family businesses, having survived war, recessions, earthquakes and tsunami, were put out of business by the mawkish sentimentality of people thinking that sitting at home being resolutely glum is somehow sharing the pain of the troubles up north, rather than merely adding to them. The mood has been a bit sombre than usual here, not surprisingly, and there is no reason why anyone should be forced into an insincere show of jollity, but conversely, the idea that we should all be coerced into "self-restraint" by order of the governor, or through fear of public criticism, is self-contradictory at best.

So, jules and I decided to have a small hanami party, and bought some Tohoku sake (Nihonshu, to give it its real name - sake is a generic term for all alcoholic drinks) to enjoy under the falling blossoms.



Plenty of people seem to agree with us, a famous old cherry tree was swarmed by visitors in Fukushima despite the cancellation of official festivities. I'm not really a huge fan of Nihonshu but I'm prepared to give it some serious consideration as part of my contribution to the regeneration of the region. Cheers!

Bounds, climate sensitivity, and costs of climate change

Hot on the heels of our paper (which is still languishing in the publishing queue, though published on-line) I was rather surprised to come across another paper recently talking about upper bounds on climate sensitivity, and the costs of climate change. It is open access, so you can all read it for yourselves. The authors consider the "long tail" of possible temperature change and how this influences the economic analyses of climate change. They point out that the pathology of Weitzman's result vanishes if an upper bound on climate sensitivity is imposed. They use a Cauchy distribution for sensitivity, and show that the optimal climate policy is fairly insensitive to where this bound is placed, within the range tested of 20-50C. However, they don't appear to justify why these bounds should be used, rather than (say) 500C or 500,000C, at which point the results would probably be rather different.

Though the authors appear to not know about our Climatic Change paper, they actually do cite two of our other papers, in a way that I'm not really enthused by. They interpret us as explicitly ruling out a value for sensitivity greater than 8C, where in fact all of our results are probabilistic and do not arrive at an absolute value (other than any assumed in the prior). But this is only by way of a throwaway comment at the end of their paper, and isn't in any way central to their argument.

Coincidentally, Myles Allen and co are also going on again about how the Jeffreys' Prior solves all the problems of subjectivity (see here for previous). The whole enterprise appears to be a dead end to me and as far as I can tell, they haven't actually demonstrated any practical results, but maybe when he has eliminated all other possibilities he will reluctantly come around to embracing the standard Bayesian interpretation of probability. At least while he is presenting abstruse technical notes on the Arxiv he isn't causing more trouble elsewhere, and it must now be increasingly difficult for him to defend his previous claims. This could make life a little embarassing for the next IPCC report if people don't start producing climate sensitivity estimates that are not based on the now thoroughly discredited uniform prior...

Debt-laden Japan completely unperturbed by UKP630bn spree

Of course the Times headline tried to hype it rather more than that, but no-one here took any notice :-) The Japan Times talked about "long-simmering worries" but there are still worries about ongoing recession, so the spend-first, worry-late approach may be justified. Anyway, the Japanese economy has been running on funny money for decades, and despite all the sound and fury, I for one don't expect the new govt to be very different from the old one in fundamentals - there may be shifts in spending priorities, but not in the basic philosophy of dirigisme. Indeed I suspect that most Japanese will not even have considered the possibility that there might be an alternative.

In these straitened times, our budgetary worries continue. A project I am involved in just had its annual review, and on the basis of a mediocre middling ranking (someone described it as a B+) next year's budget has been......increased by a substantial 10%. There is some ongoing restraint on salaries, so we won't actually get paid more, but will have to splash out the excess on electronics and travel, which is presumably the point of the bonus.

Of course we had to provide detailed budget plans to the Ministry some time ago, so will now have to provide new plans, along with an apology for getting it so badly wrong first time :-)

Inflation soars to 1.9% on rising fuel prices

No particular point to this post other than to observe that it's a funny old world where we get to see the headline "Inflation soars to 1.9%". That's the UK's Consumer Price Index. The Retail Price Index is a whopping 0.3%.

Japan is back in deflation, but no-one seems to care much, because our economy doesn't work along conventional lines anyway.

Hot air (capture)

There's bit of correspondence in Nature Geoscience about air capture, specifically some promotion from RPJr which seems to think that all our problems will be solved by future cost reductions and better technology, and a letter from Andrew Dessler pointing out that the energy cost provides a stiff barrier irrespective of economics.

RP says:

The primary uncertainties surrounding air capture stem more from the lack of large-scale testing rather than scientific or technical concerns.

Dessler replies:

Thus, using today's technology, it takes at least 0.5 J of energy to capture the emissions generated in producing 1 J of fossil fuel energy. If the energy for capturing carbon comes from fossil fuels, then at least a third of society's fossil fuel energy would have to be diverted to air capture to eliminate all emissions. Alternatively, it would require an increase in the total production of fossil fuel energy of at least a third.

While I would not be surprised to see an engineer claiming that the reciprocal of 1-1/3 is 1+1/3, I would hope most physicists would sum a few more terms in the Maclaurin series and get to 1+1/2 :-) However, a mathematician (me) might point out that the correct numbers based on the energy estimates above are actually 1-1/2 and its reciprocal, 2 :-) That is, half of total power output would have to be devoted to air capture, or alternatively total power output would have to double to reduce net emissions to zero; 2J of total power, with 1J devoted to sequestration, would leave 1J usable.

Of course, the general point (that energy matters irrespective of the economics) is one that has been made repeatedly on RP's previous blog when he has promoted air capture in the past (eg the comment thread here, also here and here). It's unfortunate that Dessler's letter drawing attention to this point actually understates it by such a wide margin. Of course future advances can be expected to reduce that energy cost, but there is a hard lower limit. I vaguely recall it's something in the region of 10% of the total output energy for coal, meaning 25% of the usable power for a 40% efficient power station. But I could be wrong. It may be in the comments linked above.

Update
Andrew Dessler explains via email that he was assuming that the "extra" power would use standard on-site carbon capture and storage at low energy cost - but it seems to me that this still makes the relevant figure for fossil fuel use to be at least a 50% increase rather than the quoted 33%, and probably 60% or more if we use a realistic assumption about CCS.

Bankers "have learned lessons"

The headline was actually that bankers "have not learned lessons" (though this is strangely absent from the web page) but I beg to differ. They have learned that they are "too big to fail" and that any blunders, no matter how colossal, will result in unending and unlimited taxpayer-funded bail-outs. The bigger the failure, the better, in fact, as losing a few million quid might actually cost a job or two, whereas losing several trillion guarantees the big pay-day (see "too big to fail" above). Thus, they have returned to business as usual at the first opportunity.

If I was a banker in this environment, I'd be betting someone else's farm - and pension - on every heads I win, tails you lose proposition I could think of. Wouldn't you?

One saving grace is that I'm not a UK taxpayer, and hopefully won't become one within the next few years :-) Of course Japan has been digging a hole for the past few decades, but that's all been done on funny money, and there are no signs of them attempting to raise it from the population as a whole.