On Benford's Law and Accounting.

In my opinion it is not that Benford's law is over-rated, just that it is mechanically overworked with data in accounting. It is a very useful technique in accounting forensics and is in fact used extensively in practice.

It is our job as academics to provide a theoretical basis for its use rather than use it simply in a mechanical fashion. That is what people in other domains do. For example, parametric extensions of Benford's law have been shown to better approximate the behaviour of certain integer sequences (for example, prime numbers follow Benford's law asymptotically, but for smaller primes less than 10,000 they do not follow Benford's law at all but follow Pareto Benford law). Such extensions have been found to be useful in some domains. I can cite the following example among thousands that exist.

Dorp, J.R. van and S. Kotz (2002). The standard two-sided power distribution and its
properties : with applications in financial engineering. The American Statistician
56(2), 90-99.

Statisticians have looked at the problem from two different perspectives: 1. what are the common distributions that follow Benford's law (suggested by Theodore Hill in a paper in 1995), and 2. Find a process that generates Benfor'd compliant data. We in accounting need to ask the question what is the process that generates the data and then see under what conditions the data approximates Benford. My point is that most Benford studies in accounting I have seen (including the SSRN paper you sent the links to) have really no accounting content; they are merely mechanical application of Benford's law to accounting data.

And, most importantly, the discovery of the so-called Benford's law was not by Benford, but by the Canadian-American astronomer Simon Newcomb who, in 1881 in an article in the journal American Journal of Mathematics, expressed it as "The law of probability of the occurrence of numbers is such that all mantissae of their logarithms are equally likely".  Benford was only two years old when Newcomb wrote that paper. History has been rather cruel to Newcomb. (I am attaching to this message one of the best presentations of "Benford's" law I have seen).

Simon Newcomb not being remembered is probably his bad karma coming back to haunt him. He was a good friend of the Peirce family and in fact was a frequent guest at their house. However, he did not seem to like the Benjamin Peirce's son, one of my heroes Charles Santiago Sanders Peirce whom Bertrand Russell called "one of the most original minds of the later nineteenth century, and certainly the greatest American thinker ever". The Santiago in his name was added to indicate CS Peirce's gratitude to his biggest supporter at Harvard, William James. Santiago is the Spanish for St. James.

Newcomb haunted CS Peirce most of his adult life and ensured that he did not succeed. When Peirce was up for tenure at Johns Hopkins and the president was about to sign his tenure,   Newcomb informed him that Peirce had lived and traveled with a woman who was not his wife (Peirce then was separated from his first wife but they were not divorced then; later they divorced and he married the lady). He was denied tenure. Later, towards the end of his life he had applied for a grant to publish his work to Carnegie Foundation, but was rejected, thanks to Newcomb who served on their board. Tragically, he spent much of his life in abject poverty, supported by his friends such as William James. John Dewey was a student of Peirce at Johns Hopkins.

Today, CS Peirce is revered around the world as one of the most profound philosophers, but Nwecomb is largely forgotten.  Provides some evidence that bad deeds do come back to haunt.
 

On Caste System

Recently, some one wrote on FaceBook:

"For the past few days, I have been noticing some friends uploading some posters on their walls seeking pride for the respective castes they belong to. The sentence remains the same; the name of the caste changes depending on who is seeking pride.

This is both sick and funny. In Indian history, every caste is found to have done something horrendous at some point of time that its members must be embarrassed about in this modern age. First, identifying with this unscientific classification is regression. Second, if you must relate to it, have the moral courage to own up your mistakes as well: from persecutions to capitulations to manipulations."

I do not see anything wrong in one celebrating success by any caste provided they also own the horrendous treatment of other castes, especially the downtrodden castes. For example, I am proud of my "caste"; I am a Chitrapur Saraswat Brahmin. We are a community of just about 20,000 world-wide, but have incredible achievements. One of us (Sir B Narsing Rao) was one of the drafters of the Indian Constitution. We have had four star generals and Air Chief Marshals (a distant uncle of mine), and we have had some of the finest Bollywood producers and directors. There are literally thousands of doctors, professors, engineers among us. It is virtually impossible to find among us non-college educated, and almost no one goes to bed hungry. That is certainly an achievement worth celebrating about.   

And yet I am ashamed of the way our temple musicians, who are usually of lower caste (so-called untouchables,  perform from outside the temple and yet are not allowed inside the temple. But then I am also very proud that my father treated everyone alike and even allowed the so-called untouchables inside our house even for food. That is the way I was brought up, to treat all human beings respectfully. That is worth celebrating too.

Caste system can peacefully and amicably coexist with decency and respect for each other if there is a will.

On Indian Independence.

It was FDR (Roosevelt) and the US that played the crucial part in the Indian independence movement. Churchill and Britain would not have let go of India even if they had to eat grass. USA also tolerated the Ghadar movement even though it impacted the one-sided so-called batshit "special relationship" with Britain. Indians should be eternally grateful to the US and President Roosevelt.

Read the following:
Source: http://east_west_dialogue.tripod.com/american_system/id10.html
___________________________
An eyewitness account of the struggle between President Franklin D. Roosevelt and Winston Churchill, over the fate of the post-war world is contained in the book by the President's son, Elliott Roosevelt, 'As He
Saw It,' (New York: Duell, Sloan and Pearce, 1946). Elliott Roosevelt was an aide to his father at all but one of the Big Three conferences during World War II. Elliott Roosevelt recounts how his father, the American President laid out his determination to shape a post-war world free of colonialism, and his perspective for the economic development of the former colonies to eradicate poverty and illiteracy.
The following are two excerpts from Elliott Roosevelt's book. The first is from a meeting of Roosevelt and Churchill at the Bay of Argentia, of the coast of Newfoundland. It was at this meeting where Roosevelt forced Churchill to sign the Atlantic Charter on August 14, 1941. This charter contained key aspects of Roosevelt's vision of the post-war world.
The first section is Elliott Roosevelt's account of the conference between Roosevelt and Churchill at Argentia Bay off Newfoundland. The Atlantic Charter was signed at this meeting on Aug 14, 1941.
(It should be emphasized that Roosevelt is not promoting the British doctrine of free trade. Indeed the British only followed the free trade approach when it was to their benefit. The British Empire was based on monopolistic trading arrangements that enriched Great Britain and impoverished the colonies. Trade between British colonies and other countries was severely limited.)
Roosevelt and Churchill Meet in August 1941
It must be remembered that at this time Churchill was the war leader, Father only the President of a state which had indicated its sympathies in a tangible fashion. Thus, Churchill still arrogated the conversational lead, still dominated the after-dinner hours. But the difference was beginning to be felt.
And it was evidenced first, sharply, over Empire.
Father started it.
'Of course,' he remarked, with a sly sort of assurance, 'of course, after the war, one of the preconditions of any lasting peace will have to be the greatest possible freedom of trade.'
He paused. The P.M.'s head was lowered; he was watching Father steadily, from under one eyebrow.
'No artificial barriers,' Father pursued. 'As few favored economic agreements as possible. Opportunities for expansion. Markets open for healthy competition.' His eye wandered innocently around the room.
Churchill shifted in his armchair. 'The British Empire trade agreements' he began heavily, 'are--'
Father broke in. 'Yes. Those Empire trade agreements are a case in point. It's because of them that the people of India and Africa, of all the colonial Near East and Far East, are still as backward as they are.'
Churchill's neck reddened and he crouched forward. 'Mr. President, England does not propose for a moment to lose its favored position among the British Dominions. The trade that has made England great shall continue, and under conditions prescribed by England's ministers.'
'You see,' said Father slowly, 'it is along in here somewhere that there is likely to be some disagreement between you, Winston, and me.
'I am firmly of the belief that if we are to arrive at a stable peace it must involve the development of backward countries. Backward peoples. How can this be done? It can't be done, obviously, by eighteenth-century methods. Now--'
'Who's talking eighteenth-century methods?'
'Whichever of your ministers recommends a policy which takes wealth in raw materials out of a colonial country, but which returns nothing to the people of that country in consideration. Twentieth-century methods involve bringing industry to these colonies. Twentieth-century methods include increasing the wealth of a people by increasing their standard of living, by educating them, by bringing them sanitation--by making sure that they get a return for the raw wealth of their community.'
Around the room, all of us were leaning forward attentively. Hopkins was grinning. Commander Thompson, Churchill's aide, was looking glum and alarmed. The P.M. himself was beginning to look apoplectic.
'You mentioned India,' he growled.
'Yes. I can't believe that we can fight a war against fascist slavery, and at the same time not work to free people all over the world from a backward colonial policy.'
'What about the Philippines?'
'I'm glad you mentioned them. They get their independence, you know, in 1946. And they've gotten modern sanitation, modern education; their rate of illiteracy has gone steadily down....'
'There can be no tampering with the Empire's economic agreements.'
'They're artificial....'
'They're the foundation of our greatness.'
'The peace,' said Father firmly, 'cannot include any continued despotism. The structure of the peace demands and will get equality of peoples. Equality of peoples involves the utmost freedom of competitive trade. Will anyone suggest that Germany's attempt to dominate trade in central Europe was not a major contributing factor to war?'
It was an argument that could have no resolution between these two men....
The conversation resumed the following evening:
Gradually, very gradually, and very quietly, the mantle of leadership was slipping from British shoulders to American. We saw it when, late in the evening, there came one flash of the argument that had held us hushed the night before. In a sense, it was to be the valedictory of Churchill's outspoken Toryism, as far as Father was concerned. Churchill had got up to walk about the room. Talking, gesticulating, at length he paused in front of Father, was silent for a moment, looking at him, and then brandished a stubby forefinger under Father's nose.
'Mr. President,' he cried, 'I believe you are trying to do away with the British Empire. Every idea you entertain about the structure of the postwar world demonstrates it. But in spite of that'--and his forefinger waved--'in spite of that, we know that you constitute our only hope. And'--his voice sank
dramatically--'{you} know that {we} know it. {You} know that {we} know that without America, the Empire won't stand.'
Churchill admitted, in that moment, that he knew the peace could only be won according to precepts which the United States of America would lay down. And in saying what he did, he was acknowledging that British colonial policy would be a dead duck, and British attempts to dominate world trade would be a dead duck, and British ambitions to play off the U.S.S.R. against the U.S.A. would be a dead duck.
Or would have been, if Father had lived.

On College and grades

When I completed my masters degree I started working for  a large pulp and paper company (www.bilt.com). It was founded by one Karam  Chand Thapar
 (http://en.wikipedia.org/wiki/Karam_Chand_Thapar), an Indian industrialist. The corporate folklore has it that while a student at the well-known Forman Christian College at Lahore Pakistan (http://www.fccollege.edu.pk/about) in undivided British India, he flunked five times in his sophomore year. Forman Christian College was then the equivalent of Harvard in South Asia. Its students went on to occupy the top positions in the industry, government, and education in South Asia.
Failing five times provided K.C. Thapar an incredible advantage; he came to know the students in five class years. That paid handsomely when he started his career (without a degree). He knew everybody in the industry and the government. He went on to create the Sugar, Pulp & Paper, Electronics, Banking, Coal, Chemical,... industries and was a billionnaire in an era when you could count billionnaires in India on one hand. His sons served on the Boards of universities including USC (one of his grandsons donated $1 million to SUNY Albany three years ago, I had nothing to do with that).
The reason I narrated the above story is to make a point that for the employment (and entrepreneurial) market the grades are absolutely irrelevant so long as you have the right address. The market does not need a finer signal than that you got in and that you have the backing of its enormous social network, and if you do not want to alienate any one, it is stupid to have grades at all. That is the reason why when I was at Claremont Colleges I used to joke that they should auction to the highest bidder their degrees once students were admitted.
Once the prestige is established what counts is that you got ion, and that you have the entire social network behind you. With that, it must be a miracle if you fail.

What matters is what you do when you succeed with or without Ivy education. Thapars were wonderful employers; I literally cried when I left them. They provided rent-free housing for all employees, provided schooling, college, and even had a university (http://www.thapar.edu/) for the employees along with others. The place IO worked at they even had a country club for the managerial employees. So I was not at all surprised when I heard that they were the first Indian company to gain ISO certification.

When my daughter got into an Ivy school (Brown) and other fancy schools, I advised her to go to a state school (University of California at San Diego) that did not have a football team and did not have a business school. She was not very happy then, but she did fine. This year she was nominated for an Emmy award in the news category for one of the news programs she produced.

Life is a wonderful cruise if you get into one of these schools, but making it without all that tail wind must be exhilarating and self-fulfilling.

On the compensation of Accounting faculty.

In my humble opinion, the demand for accounting PhDs is artificially created by AACSB and us the accounting faculty to keep the salaries high. Being a practice field, there should no reason why for most courses except for PhD pnce (it is questionable if most of them are accounting at all) a CPA is not adequate. At least the way accounting is taught presently.

As department chair I found it unconscionable that we paid more to accounting ABDs than what we paid senior faculty with stellar research records and prestigious awards (such as Guggenheim, Mcarthur genius,...). I hope one of these days some one calls our bluff. I can not accept that it is the "market", for the so-called market is a fake, a figment of our imagination created for our own aggrandizement.

On an Einstein (or Keynes) Quote.

"Whether you can observe a thing or not depends on the theory which you use. It is the theory which decides what can be observed." http://en.wikiquote.org/wiki/Albert_Einstein

It is incredibly naive to say that physical scientists stole all of the easy problems. It is probably more meaningful to say that weaker physical scientists stole all the low hanging fruit. But then there is a clearly defined hierarchy of problems in the physical sciences when it comes to what is important, and that is why Einstein is revered but many others are not.

We should not be surprised at all if Nate Silver misses the results at times. After all, the domains he deals with are probably not governed by laws even in a statistical sense (that does not mean statistical analysis has no role to play).

In the old days when I took my econometrics course, OLS and all that stuff was disposed off rather quickly and we were told to concentrate on building a structural model of the problem domain, study it, derive from it the reduced form model and so on. I think those days are gone, and these days most (not all) feel quite satisfied with a single equation model.  The concept of a rich model to represent mathematically some aspect of nature, the hallmark of physical sciences borrowed in to the social sciences, has just abut disappeared. In the physical sciences, usually you start with a system of equations (differential/difference) and ultimately come up with a solution that is very easy to comprehend. In accounting we start with an equation and end up with a cartload of statistical mumbo jumbo.

In the physical sciences there is a clear distinction made between those who model and those who test them. Theoretical physicists work with mathematical models, but experimental physicists just verify them in nature. Nevertheless, the two collaborate in rather peculiar ways so that the science can advance (I have given instances of this in earlier postings). This enables theoreticians to hypothesize things that have not even been shown to exist. Bosons were conjectured by Satyen Bose with Einstein in the 1920s, but experiments to confirm their existence is now becoming possible 40 years after the death of Bose.

In accounting, on the other hand, we all pretend to do both with the result that we have perverse incentives to claim advances in both. We do not recognize that the skills needed for theoretical and empirical/experimental research are very different and rarely does one come across a person who can do justice to both.

Most sciences see this dichotomy between theoretical and experimental/empirical aspects of research but collaborate in ways that help the domain. When I switched to Computing towards the tail end of my career I found the way these two collaborate absolutely fascinating. I wish there was more of that in accounting.

Incidentally Keynes was a mathematical tripos student, and graduated twelfth wrangler at Cambridge. His thesis was in mathematics (Treatise on Probability, a classic). )Unfortunately, he lacked the genius in mathematics and so chose Economics  as told by the economist Harrod in his biography of Keynes, "... logical faculty, his accuracy and his lightning speed of thought made him a thoroughly competent mathematician. He had no specific genius for mathematics; he had to take pains with his work; ... he did not seek out those abstruse regions which are a joy to the heart of the professional mathematician.". (See http://www-groups.dcs.st-and.ac.uk/history/Biographies/Keynes.html).It is likely that, Keynes said those words. On the other hand, I think it was Einstein who said something to the effect that he opted out of economics because it was too difficult. It is possible that Einstein found the verbosity of the then German economists tiring.
 

On cooperatives.

Here is a fascinating video. Co-operative movement was popular when I was growing up, but disappeared with the emerging dominance of corporate capitalism. Now the clock seems to be turning back.

https://www.youtube.com/watch?v=qCDV7IUqSfs

Auditing Chinese companies listed in the US.

This whole case (http://dealbook.nytimes.com/2014/06/19/judge-dismisses-suit-against-auditor-who-failed-to-detect-fraud/) is surreal. American shareholders suing a Hong Kong auditor of a Chinese company in American courts. Should we be surprised that the communist chinese government is stubborn when it comes to auditing? They know that with US it can get away with anything, and they have nothing to lose. Unfortunately, we US taxpayers are left holding the bag while China  gets all the benefits of American capital markets while suffering none of its handicaps.

I doubt this decision will stand on appeal, but with kind of freewheeling justices in the majority, who knows?

Furthermore the cases against the underwriters and the outside auditors are still pending. It is difficult to believe that SEC has problems serving papers on Puda's chairman and CEO. We must discover a commercial equivalent of extraordinary rendition to cover cases like this.

And yet most Americans think China is a great place to do business. Lenin was prophetic when he said they would sell the capitalists the rope to hang themselves with.

Trygve Haavelmo.

As a graduate student a long long time ago I studied some of Haavelmo's papers (mostly in econometrics courses). His influence on econometrics has been profound and yet not sufficiently recognised. He was perhaps the first economist to look at causal relations (a no-no in a positivist's world) seriously.

This issue of Econometrics Theory seems to be exclusively devoted to the work of Haavelmo. I have just looked at the TOC and it looks like a treasure trove. Should keep me busy for some time.

I can do no better than quote a passage from Wikipedia:

______________________________

______

Source: http://en.wikipedia.org/wiki/Trygve_Haavelmo

Judea Pearl wrote "Haavelmo was the first to recognize the capacity of economic models to guide policies" and "presented a mathematical procedure that takes an arbitrary model and produces quantitative answers to policy questions". According to Pearl, "Haavelmo's paper, The statistical implications of a system of simultaneous equations,^[4] marks a pivotal turning point, not in the statistical implications of econometric models, as historians typically presume, but in their causal counterparts."^[5] Haavelmo's idea that an economic model depicts a serious of hypothetical experiments and that policies can be simulated by modifying equations in the model became the basis of all currently used formalisms of causal inference. It was first operationalized by Strotz and Wold (1960)^[6] who advocated ``wiping out selected equations, and then translated into graphical models as ``wiping out incoming arrows.^[7][8] This operation has subsequently led to Pearl's do-calculus^[9][10] and to a mathematical theory of counterfactuals in econometric models.^[11][12] Pearl further speculates that the reason economists do not generally appreciate these revolutionary contributions of Haavelmo is because economists themselves have still not reached consensus of what an economic model stands for, as attested by profound disagreements among econometric textbooks.
____________________________________

The Taung child.

Here is a fascinating narration about the discovery of the Taung child and its impact on the science of the day.

http://www.radiolab.org/story/taung-child/

When the Taung child skull skull was discovered in the kalahari escarpment in South Africa, the letter about the discovery was published in the journal Nature. However, mainly because of the Euro-centric (that humans could not have evolved in Africa) bias, the fact was not accepted by the scientific community in Europe. When the piltdown man was proved to be a hoax, the interpretation of Taung child as our ancestor became more acceptable. The piltdown man,  "discovered" (more truthfully, engineered) in Britain, fit the Euro-centric view of the world.

The moral of the story, as far as science is concerned, is that deep seated beliefs have no place in science. They retard the development of science.

Financial accounting theorists must take note of this story.

On voting NOTA (None of the above).

It might be time to reevaluate voting.

In the recent elections i India, for the first time voters were allowed to vote "None of the above (NOTA)". Incredible as it might seem, 1.1 percent of the voters chose NOTA. In addition, in many constituencies NOTA got more votes than all who stood for election. It might be worth considering this NOTA option in the US..

I do not think cross-voting can be avoided at all. There is nothing that prevents one from changing parties just for a few days around the election date and reversing oneself. In fact this practice has been popular in India in the past; they even have given it a name: "aayaa Ram Gayaa Ram". " aayaa" means came and "gayaa" means went. Party membership becomes a turnstyle. Unless there are clear laws against such behaviour you can not avoid cross voting.

Cross voting occurs for strategic reasons: as insurance when one's own party primaries are a foregone conclusion, and as raiding where one crosses party lines to vote for a candidate who in the voter's opinion does not stand a chance of winning. In case of the Mississippi it was neither. Wikipedia has a short but good article on it: http://en.wikipedia.org/wiki/Crossover_voting.

There is a literature on the topic in Political Science. Unfortunately, I am not familiar with the literature even though I took one of my Game Theory courses at SUPA at CMU (while I was a student at Pitt) from two political scientists, Richard McKelvey and Peter Ordeshook.

On environment and health

My ancestors were not gluttons for punishment (both work and food). Nevertheless there are parallels. My maternal grandfather lived for a good part of his adult life in Rangoon, Burma (now Myanmar) but returned to India some time between or during WW2. He chose to settle in Bombay rather than the village that he was brought up in. My paternal grandfather lived most of his life in a small village, population probably 2-500 then but around 10,000 when I was growing up.

Both my maternal and paternal families ate reasonably well. My paternal family had no refrigerator but maternal family succumbed to it early.  And the food that our ancestors in the US ate in a day would have been sufficient for mine for more than a week. 

Yet there are dramatic differences between the two families in terms of health. Most of my paternal relatives (who continued to live in villages and small towns) lived well over 90 years and quite a few living well beyond a hundred with a quality of life better than mine now at 68. On the other hand most of my maternal relatives did not make it to 80, some of my cousins passing on in their forties. Most of the maternal relatives died of cancer, and water borne diseases such as typhoid.

Stress, lack of exercise, quality of public services (water), and pollution al have a role to play in cutting short people's lives.

On soccer

The popularity if soccer, I think is related to the low cost of  entry to a player; you need to pay only for the ball, the goalpost, and the clothing. When I was a boy growing up in India even shoes were not necessary. Most in India (including the professionals until recently) played soccer bare foot. In fact the reason given for India declining an invitation to attend FIFA world cup (it used to be then called the Jules Rimet cup, not world cup), in 1950, was FIFA's insistence that the players play with their shoes on.

In school I played soccer barefoot until I broke my left big toe. Haven't played it since.  And then my enthusiasm waned and I started playing cricket one of the most expensive games ever invented by humans.

The part of India that my ancestors came from, Goa, was an overseas province of Portugal and not a colony. There, even today, soccer is more popular than cricket. During the world cup every one is glued to the TV, and even today most root for Portuguese soccer team, and if they don't do well, for the Brazilian team. Eben now Goa (as representing India) participates in the Lusophone games.

On retraction of papers by academic Journals

I am quite pessimistic about this. All that one needs these days to publish accounting papers are databases and an army of serfs who can massage those data with arcane statistical methods that statisticians themselves gave up a long time ago. If this business model becomes the standard operating model for academic accounting research, we are in for serious trouble. However, that this is in fact becoming the standard business model is borne by the fact that papers come from schools that can afford these (money for databases, serfs, and expensive faculty to serve as overseers over the serfs). If you don't believe, look at the slew of papers coming out of schools in Hong Kong (and to a much lesser extent from China)  the past decade or so.

I stopped reading the Accounting Review a long time ago when the papers started looking very cookie-cutter-ish. They add little to our understanding of the phenomena under study, and they do not add anything we know about the methodology used or the research methods utilised.

I see brighter prospects for non-mainstream journals and established journals in collateral fields such as Statistics, Economics, Psychology, Sociology, and Computer Science. These days it is routine to see articles entirely outside the field. The best papers I have seen on social network analysis have NOT been in sociology journals but in Physics journals, and the best articles on Operations Research I have seen have been in Computer Science, and so on.

But there is a difference between those fields and accounting. In those fields publications outside one's field are respected. In accounting only publications in the very small number of anointed journals are acceptable. If we persist with this ostrich's-head-in-the-sand policy,  academic accounting might as  well be on its way to being a sterile and useless field.

FASB proposals on inventory and extraordinary items.

The FASB proposal on inventory might make sense, but I do not think the proposal on extraordinary items does.

The information on extraordinary items has value no matter how you define extraordinary items.
____________________

FASB believes eliminating the concept would relieve preparers from the burden of assessing whether events or transactions are extraordinary.

____________________
Does this make sense? It is as difficult to define extraordinary items as it is to define a capital lease (vs. operating lease). In both cases the definition under FASB is ARBITRARY. However, the definition of capital lease LOOKS more complete in some sense because it is expressed in language that is seemingly more "scientific". By the logic of FASB, shouldn't we relieve the pteparers of the burden of estimating useful lives, appropriate interest rate, and whether there is a "bargain" price option by mandating that all leases are treated as operating leases (or capital leases)?  Aren't we on a slippery slope to a regime where no disclosures beyond trial balances are really necessary? Further, is it at all necessary to have any disclosures beyond those mandated by the present judicial system?
Since when the "burden" of classifying events become a criterion for financial disclosures?  Isn't the burden of valuation of derivatives or credit default swaps at least as onerous as the burden of classifying an event as extraordinary?
I think we are better off with  the judicial system determining GAAP.

On Gini coefficient and the poor in India.

Gini coefficient for India is meaningless considering the over $2 trillion of black money stashed by the well-heeled in Swiss and other overseas bank accounts. And that ill-gotten wealth is enough to wipe out most of India's federal deficit and public debt.  If you include that sum, India's Gini coefficient would be much higher. India, Germany and Canada being in the same Gini coefficient range should give you a clue as to what is wrong with that number.

Any one who has ever been to India would have observed staggering inequality of wealth. The costliest family home in the world is in India (Antilla, cost over $1 billion), and it is just one of the hundreds of palaces. On the other hand you see millions who lack a roof over their heads and wander scavenging for food.

Also there are many poor people in India simply because there are many more people there. There are also many poor people because of the socialist and protectionist policies followed for over half a century.

In all this, the most incredible fact is that there has not been a single famine in India since independence. By contrast, famines were a part of Indian life during the Raj. In the Bengal famine of 1943 alone the deaths due to the famine have been estimated in the 1.5-4.5 million range; that famine was caused primarily by the diversion of food from India to Europe to feed the soldiers there during the war WW2.

On High Frequency Trading, Front-running, Basket option contracts, maps and colts.

In my earlier posts I have always defended high frequency trading, but decried the bad behaviour that often accompanies such trading, mostly by hedge funds and trading on dark pools.

An ingenious practice that exploits a a loophole in tax law enables HFT practitioners to treat short term gains as long term ones for tax purposes through strategies using basket options contracts, and products called maps and colts. There is a fascinating article at http://www.theguardian.com/money/us-money-blog/2014/jul/24/wall-street-fooling-people?CMP=ema_565

Most of these contracts involve a hedge fund and an investment bank, partners in crime. Incidentally, apparently there is nothing illegal in this practice that has yielded over $6 billion in taxes avoided. The prime practitioners of this sinister artform, apparently, are Deutsche Bank and Barclays. One of the main operatives in this arena is, unfortunately, a hedge fund (Rennaissance Technologies) founded by one of my heroes, Jean Simons, a mathematician from MIT and Berkeley and a philanthropist.

In all these cases, the trick is to not trade in a usual brokerage account in order to circumvent the 2:1 maximum leverage introduced after the 1929 crash; the conversion of short term into long term gain is the icing on the cake in this game. The leverage in many of the cases has exceeded 20:1. Carl Levin has called these "fictional derivatives" for a good reason. A report by the United States Senate PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, Committee on Homeland Security and Governmental Affairs titled "ABUSE OF STRUCTURED FINANCIAL PRODUCTS: Misusing Basket Options to Avoid Taxes and Leverage Limits"  is attached.

Here are some diagrams detailing the strategies (Source: http://www.zerohedge.com/news/2014-07-21/how-rentec-made-more-34-billion-profits-1998-fictional-derivatives):

1. MAPS (Managed Account Product Structure)

2. COLT

Like Jean Simons, I still think HFTs perform a tremendous service by providing liquidity and better pricing of products. The culprit is the bad behaviour that HFT  engenders (such as front-running and deliberate introduction of information asymmetries). We should hope that in getting rid of such bad behaviour we do not throw the baby with the bathwater.

Some sources:
www.theguardian.com/money/us-money-blog/2014/jul/24/wall-street-fooling-people?CMP=ema_565

http://www.zerohedge.com/news/2014-07-21/how-rentec-made-more-34-billion-profits-1998-fictional-derivatives

http://www.hsgac.senate.gov/subcommittees/investigations/media/subcommittee-finds-basket-options-misused-to-dodge-billions-in-taxes-and-bypass-federal-leverage-limits

On Hindi as a national Language: A personal History.

TV and the media have made gutter Hindi the de facto language. Not the kind of language that is music to my ears. I do not speak Hindi for the fear that by mistake I might belt out some of that ghastly media Bombay Hindi.

There is a need for ONE language for communication between the states. And that language can never be Hindi and has to be English, because there is virtually no opposition to the use of English anywhere but there is opposition to just about every other language including Hindi. Tragically, the old Hindi imperialists brought this fate to Hindi. When I was growing up right after independence, there was a lot of goodwill for Hindi in the them Madras, Mysore, and the itsy-bitsy kingdoms in present-day Kerala (there was no Kerala, Karnataka, or Andhra Pradesh then). And then the Hindi fanatics hit the fan. Had INC been more understanding things would have been different.

You must remember that after independence the politicians tried their best to keep English out of the list of national languages. They failed utterly because in 1967 Nagaland proclaimed English to be their state language; the consensus was that all state languages should also be national languages of India. We all should be eternally grateful to Nagaland for this wonderful gift.

My father was transferred from Delhi to a place Kasaragod (now in Kerala) in 1951. He knew no Hindi but was favourably disposed towards it also because of his interest in Hndustani classical music. He was a botanist working at a research Institute. The the Hindi imperialists ht them and all researchers were required to put their research on the back burner and attend Hindi classes. It was such a joke! I know because my father took me with him to one of those classes. There were these researchers reading some journal article or simply dozing off while the teacher droned.

Rajaji (Rajagopalachari) was favourably disposed to Hindustani but NOT HIndi. Even DMK probably would have lived, though uncomfortably, with Hindustani. But that was not enough for the Hindi zealots. Nothing short of Sanskritised Hindustani was good enough. That was the last nail in the coffin for Hindi as national language.

This chauvinism has pervaded Indian politics even in areas other than language. For eample, in music, Harmonium was banned on All India Radio until fairly recently on the contention that it was not an Indian but a Western instrument. But then much of Indian music, especially that espoused by muslims, was harmonium based (try looking for qawali music without harmonium). It shut out more than a generation of musicians from All India Radio.

In a democracy, in the long run, nothing can survive without popular consent.

On Indian National Language.

Hindi is NOT the national language of India, it is ONE of the national languages. There are 22 of those, each with equal status. This is a fact clarified by court decisions, and is not an opinion. That is the reason that the rupee note carries its denomination in all those languages. If you look at 50 and 100 rupee notes, you will see that Hindi is the ninth language in which the denomination is listed (in alphabetic order since Assamese and Bengali are the first two).

I like Hindi as a language, especially because of my interest in Hindustani classical music. But while in college, I was a victim of Hindi imperialism. I was forced to study and take university exams even though I did not even know the alphabets well. It was "additional English" that saved me since, luckily for me, the university considered pass in Hindi jointly with that subject. I might have been more enthusiastic about Hindi if I was given the opportunity to develop it a more meaningful pace and not within nine months to master the literature of stalwarts such as Sumitranandan Pant, Harivansh Rai Bachan, and Munshi Premchand.

It is important to realise that Hindi will NEVER be the national language of India so long as a majority of the states do not accept it. If even states in the Hindi belt, and Odisha can be considered a part of it, do not accept it, proponents of Hindi have a tough row to hoe.

Hindi will never replace English. At best it will be a very very distant second language favoured by the uneducated. In fact it is not even a language, but just a dialect, it borrows ts script from Sanskrit like many of the other languages.

On writing

My brother-in-law, an ex-banker and a journalist, sent me the following about Bertrand Russel's thoughts on writing. Thought some of you might like it:

________________________________________

"First: Never use a long word if a short word will do.

Second: If you want to make a statement with a great many qualifications, put some of the qualifications in separate sentences.

Third: Do not let the beginning of your sentence lead the reader to an expectation which is contradicted by the end.

Take, say, such a sentence as the following, which might occur in a work of sociology: " Human beings are completely exempt from undesirable behaviour-patterns only when certain prerequisites, not satisfied except in a small percentage of actual cases, have, through some fortuitous concourse of favourable circumstances, whether congenital or environmental, chanced to combine in producing an individual in whom many factors deviate from the norm in a socially advantageous manner." Let us see if we can translate this sentence into English. I suggest the following: 'All men are scoundrels, or at any rate almost all. The ones who are not must have had unusual luck both in their birth and in their upbringing.' This is shorter and more intelligible and and says just the same thing. But I am afraid any professor who used the second sentence instead of the first would get the sack."

(Portraits From Memory London: Allen and Unwin 1956)
______________________________________

On Tenure

No matter which way you look at it, tenure is a political process, and so it perpetuates the political astuteness of senior faculty (unless, of course the culture of the place makes the process apolitical). After all, the tenured are those who have been astute enough to play the right tune to please the committees. This holds irrespective of whether the university is "liberal", as some would allege, or "conservative" as some can be (believe me, there are plenty of those too).

I served on the tenure committees at SUNY Albany, and as department chair I had to put faculty up for tenure and defend my decisions before the tenure committees as well as the deans. Having worked with programs involving more than a dozen departments (from over half a dozen schools) across the campus my experience was that the quality of the tenure candidates, be they liberal or conservative, are strictly a function of the quality of "senior" faculty. Mediocre senior faculty perpetuate mediocrity, and meritocratic senior faculty perpetuate meritocracy. Both mediocrity and meritocracy are self-perpetuating. This means every tenure case is crucial, and even a very few poor tenure decisions can sink the culture and the reputation of any department.

Having served at many universities, my experience also has been that business schools, especially in accounting,  almost always push mediocre candidates for tenure based on the  argument that it is difficult to recruit without paying exorbitant salaries to incoming faculty.  That, however,  is a recipe for disaster and for long term sinking of productivity. There was a time when I advocated closing a department rather than following the convenient recipe, but then I am sure my colleagues suspected I was snorting something. (In fact that was the rule a long time ago even at SUNY Albany, which shut its Nursing school some time before I went to Albany).

If the tenure decisions are right, there should be no productivity problems provided the university provides a path for those at the tail end of their careers when the productivity is likely to taper (through administrative appointments). That was the presumed rule, at least until recently (Read Rosovsky's fascinating book "The University: An Owner's Manual"). Now, however, administrative positions in the universities have become an alternative career path with the tenure process serving as just an obstacle.

That makes a mockery of the whole tenure process.

In my ideal world, unless one acquired an administrative position at the tail end of one's illustrative career, one would lose tenure at appointment to an administrative position. This also will take care of the present situation where most senior administrators play the musical chairs in a game where no chairs are removed whenever the music stops, and so it is the same set of characters in the game.

I have serious doubts post-tenure review improves the situation because it introduces just one more political stumbling block, penalizing the most precious resource of productive teachers at the tail end of their careers: time.

The only way to solve the problem is to have a culture of productivity (not just in publications that no one reads) in the departments, and then to  defend it as if the department's life itself depends on it.

On M ichael Lewis's latest book and High Frequency Trading

I have not red Michael Lewis's new book (I am a fan of his, and have used some of his older books as texts in my courses before). However, I have read the recent articles in the press about the book.

I do not find any logical arguments there specifically against high frequency trading. On the other hand I do see valid arguments against a whole host of nefarious practices on Wall Street such as front-running, preferential access (at a fee) to flow of orders, investment banks running their own private exchanges (dark pools), adding extra decimal places to pricing, etc. I also see a bunch of bogus arguments such as investments in high tech (use of private networks with very low latencies), superior algorithms, etc.  They are bogus because the alternative is to use ancient technologies that can not support the trading volume on the market and can not facilitate liquidity, the main reason for the very existence of markets.

As long as the economy follows the power law distribution for everything there will always be some using high-powered computers and some, at the opposite end of the spectrum, using the abacus. The solution is not to slow down the adoption of newer technologies but to provide the incentive to adopt such technologies. The SEC has not been doing its homework well when it comes to market technologies. SEC should look at everything in terms of ensuring equitable access (not necessarily equal) to order data and an impartial market clearing system.

 

High frequency trading is a red herring. The culprit is some one else.

In the US, until recently, the stock trading was concentrated in a handful of exchanges, but the market was not fragmented in that VERY few companies listed themselves on more than one US stock exchange (exceptions include HP, and Charles Schwab). With the development of the dark pools, the market got fragmented. There is nothing wrong with such fragmentation per se because it does provide some benefits: increased competition, and innovations in trading. However, it does have certain problems: lack of transparency, greater search costs, etc. as long as there is no single national market information system.

It is the lack of transparency that makes the fragmented system inherently unfair. They are called "dark" because of this; others haven't a clue what you are doing. The main purpose of such pools is to keep what they do a secret while having full information about what others are doing.

In the old days, when a very large order arrived at NYSE and there was a reason to suspect lack of liquidity leading to adverse market reaction to the trade, the order would be sent upstairs (to the ornate board room above the exchange, for those who have seen NYSE) or elsewhere, where in smoky rooms decisions would be taken on how to execute the order without upsetting the markets. That too, in a sense, lacked transparency, but those who indulged in that had a personal reputation to protect.

To repeat, high frequency by itself does not cause harm. What does cause harm are all the aspects of trading and execution that lack transparency because of artificially created information asymmetries. SEC should be taking a closer look at those factors rather than letting us move back to the abacus age by banning HFT altogether.

On the pathetic status of Management Accounting.

I realise the value of a management accounting course in MBA programs as well as the value of hands-on experience in industry.

I started my career as an industrial engineer doing what are really cost management tasks, and later when I entered accounting academia taught mostly management accounting topics for the first five years. The time period  between my time in industrial engineering (1968-72) and accounting academia (1977-) was a transformative period for management accounting. 

First, all illusions of accounting in a manufacturing environment just about disappeared  from management accounting except for a lot of hand-waving about manufacturing. When I entered industry cost accounting was a very new term (it used to be referred to earlier as Factory Accounts, a relic of classic British understatement). Collateral to this was the dumping by management accounting of all aspects of factory accounts, such as cost engineering & estimation, project management, inventory management, and all accounting aspects of operations management,... These were precisely the  parts that were grabbed by industrial engineering. This transition was already underway when I started my career in industrial engineering. Those days I was happy because my then chosen avocation was becoming more attractive. Now I feel more ambivalent because the accountants lost important skills.

Second, management became a superficially scholarly field. Outright plagiarisation (I say so because it is questionable if the work shed any new light on our domain enough to impact practice)  of work in Economics on principal-agent models and statisticians' models of decision-making under uncertainty  did not really hold our interest except for a fleeting moment in history.

Third, we gave up modeling as a way of studying the property of operational systems. With this went the idea of rigour in  representation and careful attention to assumptions. We substituted them with impressive vocabulary. Since such modeling is the staple of engineering disciplines, they moved into what was traditionally our domain. Today, the most rigorous courses in cost/management accounting are to be found in engineering and not accounting. You put an industrial engineer even in a service operation and (s)he can be productive very quickly. On the other hand you put an accountant in a manufacturing environment and (s)he will quit in frustration soon.

Fourth, we moved our attentions up Bob Anthony's hierarchy from operational to management controls to finally strategic control. In this progression we also ascended to stratosphere in terms of vocabulary but not in the relevance to practice.

Today, if I were running any enterprise and had to hire a cost accountant I would any day prefer to hire an engineer with a good appreciation of costing rather than an accounting with less than rudimentary appreciation of engineering. 

On banned Ted Talks.

Rupert Sheldrake is a biochemist, cell-biologist, and a plant physiologist. A past don at Cambridge, he is a Darwinist. I would not write him off lightly as some probably would.

True, there is some skepticism in science but probably not as much for its own good these days. And there is a tendency to make fun of anything not in conformity with "accepted" "scientific" theology. Perhaps science has become far too arrogant for its own good? As Sheldrake has observed,

"The idea came to me in a moment of insight and was extremely exciting. It interested some of my colleagues at Clare College – philosophers, linguists, and classicists were quite open-minded. But the idea of mysterious telepathy-type interconnections between organisms and of collective memories within species didn't go down too well with my colleagues in the science labs. Not that they were aggressively hostile; they just made fun of it. Whenever I said something like, "I've just got to go and make a telephone call," they said, "Ha, ha, why bother? Do it by morphic resonance!." (See http://en.wikipedia.org/wiki/Rupert_Sheldrake).

 The problem is not that science has not claimed that it is imperfect, but that it often behaves as if only it already has the answers to any questions that can be asked. That is religion, not science. There was a time when science believed in flat earth or that humans are only a few thousand years old. And those who challenged the existing paradigm were condemned as heretics.

All scientists in history have had to cope with making peace between science and the possibility of phenomena that the existing stock of scientific knowledge is unable to explain. Newton believed in a monotheistic God who created everything. But when he seriously considered dropping out of studies to avoid ordination required for graduation. Fortunately for him, the statute was changed to provide dispensation from that duty. In his tome, Philosophae Naturalis Principia Mathematica, Netwon wrote:

"When I wrote my treatise about our Systeme I had an eye upon such Principles as might work with considering men for the beliefe of a Deity and nothing can rejoyce me more then to find it usefull for that purpose." 

(See http://en.wikipedia.org/wiki/Isaac_Newton's_religious_views).

Scientists such as Richard Dawkins, on the other hand, have made a different bargains for themselves. The main difference is that it was far more difficult in the old days to say something that would be regarded heretical. We should not make it difficult more difficult today for some one to say something that the scientists consider heretical, without compromising on the requirements of evidence (or proof).

I am not surprised that TED banned this talk simply because its allowing it publicity would be like some one publicizing Galileo when the church was against it. TED also has banned many other talks, including one by Nick Hanauer, a billionaire advocating higher taxes for the rich, one by Sarah Silverman for expressing a plan to adopt a retarded terminal baby, and Graham Hancock's talk about the transformative impact of the drug ayahuasca on him.

As long as the talk does not insult  one's intelligence or create social disorder I do not see why TED should ban any talk.

On double-blind and triple-blind refereeing in journals.

Triple-blind refereeing would have been a great idea forty years ago. I am not sure it will work today for the following reason.

Some feedback on one's research well before the paper is sent to the journal is very important to most researchers. Most authors therefore publicise the paper in limited circles, say one's friends or a small social network of   researchers in the same area. Over time, this social network evolves around one or two very influential people (usually either politically active in the area, well connected, or editors/editorial board members). so, irrespective of the double- or triple- blindness of the review the review in reality tends to be far less than blind. Also, by the citations in the paper under review it is not very difficult for the reviewers to guess a very small set of people from which the author(s) must come.

I learnt the above very early in my career (I may have mentioned this in earlier posts). My first year out of PhD program I wrote a paper and included it in the school's list of working papers. I did not know that the school sent copies of working papers to all AACSB schools. A few months later I was horrified to find a citation to the working paper in one of the most prestigious journals in the field. Soon thereafter, I received a message from a wellknown academic in the area that the paper had good ideas and "let's work on it". I did not respond because the paper was essentially complete. A few months later, I sent the paper to another prestigious accounting journal for publication. My bad luck, the paper went to the same lets-work on-it academic. The review essentially said that idea was stale because the working paper (which included results in theorems/lemmata as well as their proofs) was already cited (the other review was a conditional acceptance subject to revision). I was, however, lucky in that the journal editor was open-minded enough to send it to a third reviewer, to break the tie, who accepted it also conditional on minor editorial changes. To date, it is one of my papers that has been cited in very diverse fields (Management Science, accounting, Operations Research, Finance, Space Research, Economics, Game theory,...), but hardly in accounting, even though the topic had to do with accounting.  Most fascinatingly, it was cited by some operations researchers who I do not know but were heroes of mine when I was a doctoral student in Operations Research.

Researchers in lesser known schools will ALWAYS be at a disadvantage because they are usually not in the tightly-knit small social networks whose membership is usually by invitation. This perpetuates the inequalities. These social networks are our equivalent of the one-percenters.  The rest of us peasants are the 47 percenters in their opinion. THE POLE OF ACADEMIC RESEARCH, ESPECIALLY IN ACCOUNTING, IS VERY GREASY, and those who reach the top are usually those who hang on to the coat-tails of those little social networks.

I do not mean the above in a disparaging way. Such networks perform a very important function: mentoring of recent entrants in the field.


I  always tell my doctoral students that the trick is to get into those small social networks as early as they can. Hard as it is to get into those networks, persistence usually pays off. I realise that this is a very cynical view of the world, but then I hate to have my students suffer.

One can hope that the growth of the internet  and the avenues for dissemination of research PRIOR to submission (such as SSRN, citeseer, arxiv.org,...) will provide some solace to the rest of us. On the other hand, much of such good research will get cited once or twice and then forgotten because of the pressures to cite people central to the area of research. The academic equivalent of rich-getting-richer. (In this whole post must apologise to the French Sociologist Vilfredo Pareto, the inventor of power law in the context of income distribution,  for stating what is clearly obvious; the world is mostly an implementation of power laws).

On Accounting and Finance.

It is the better developed theory that, in my humble opinion, differentiates Finance from accounting.

 When I started my doctoral program way back in the early seventies, finance was in its infancy. I remember taking my first doctoral finance seminar where the textbook was "The Theory of Finance" by Fama and Miller. The first part of the book (which is essentially elementary micro-economics with the time variable thrown in) was very beautifully organised, but the second part  where stochasticity in finance is added in, was vague, far too tentative, and thoroughly disorganised; the book essentially fell apart towards the end. At least it felt that way to me since I had arrived with a whole load of courses in probability theory and stochastic processes.  Finance theory then was just being refined, and Fama/Miller text had made a premature entrance. (I think Fama would have done better if only he had listened more carefully to his illustrious dissertation adviser, the late Benoit Mandelbrot).

Then for twenty years I had virtually no interaction with Finance until I was asked to teach a graduate course in Accounting Theory. A Finance colleague asked me to take a look at Luenberger's book on Investment Science (as the title suggests, it deals with only one aspect of finance). I found the book fascinating. Somewhere along the way, Finance had found itself. That can not happen without good theory.

Unfortunately, accounting, in my opinion, has yet to find its moment of epiphany. Until then, we all will be plodding along, pretending that we have a good understanding of our domain.

On Journal reviewers.

This is also an old post on another listserv, but not dated. It is an exchange between me and Professor Paul Williams of North Carolina State University. Steve (Kachelmaier) was the editor of The Accounting Review when this was initially posted, and Bob (Jensen) is the Jesse Jones Professor Emeritus of Trinity University.

______________________________

I have two basic comments.

The first has to do with the competence of accounting reviewers with minimal statistical (and econometrics) training passing judgment on what is essentially econometric work. The second has to do with Vernon Smith cite in Steve's letter. I state these two with no pernicious intent, but in a friendly spirit of intellectual inquiry. In what follows, I'll concentrate on the Vernon Smith cite.

IF I know Vernon personally and can vouch his integrity, then if Vernon says 11:03 I would take it at its face value, heavily discounting possibilities such as his doctoring his watch because he is hungry and we had a 11am lunch appointment, or that he wants to get rid of me for some reason and his 11am appointment with some one else is his alibi. In case of journal submissions with blind reviews, one can not discount such possibilities if Pons-Fleishman situation is to be avoided at all costs.

The point I am making is that with time we all can agree with the US time server as the arbiter, and so avoid calibration issues. On the other hand, with most empirical social sciences, the sampling problem is somewhat like the Turing's Halting problem in computation; it is undecidable. That being the case, in case of most "empirical" work in accounting replication with more, different, or different regime data must be encouraged. Ignorance is no bliss, and we do not know how many Pons-Fleishman situations exist in accounting.

Laws in the social sciences hold only in a probabilistic sense, the reviewers' acceptance decisions are point estimates of such probabilities. In no science do you accept probability numbers based on a single (or two) estimate. If Steve thinks so he must provide arguments. His communitarian argument holds no water in this context. In the social science, truth is socially constructed, but truth values are physically obtained.

Regards,
Jagdish S. Gangolly

Reply from Paul Williams:

Bob and Jagdish,

I pretty much exhausted myself debating with Steve before. Talking to a wall is productive only for someone who is insane and, believing I'm not there yet, I have given up on him. Steve simply doesn't hear you.

Jagdish, your observation about accountants' pretensions to econometric rectitude are well said. In this vein I would suggest that Bob add to the list of references an excellent article by Jon Elster, "Excessive Ambitions," Capitalism and Society, 4(2), 2009, Article 1. The article takes to takes to task the "excessive ambitions" of the social sciences as quantitative sciences. One section is devoted to data analysis. He observes about social science empirical work: "In the absence of substantive knowledge -- whether mathematical or causal -- the mechanical search for correlations can produce nonsense. I suggest that a non-negligible part of empirical social science consists of half-understood statistical theory applied to half- assimilated empirical material (emphasis in the original)."

He goes on to describe a study done by David Freedman, a statistician who selected six research papers from among the American Political Science Review, Quarterly Journal of Economics, and American Sociological Review and analyzed them for statistical errors of all kinds. Needless to say they were loaded with them to the point of being meaningless.

This is reminiscent of our days at Florida State University when Ron Woan (with a masters in stat and 11 years at U of Ill. as a statistics consultant) would conclude every seminar with a devastating deconstruction of the statistical flaws in every paper. The issue goes well beyond simply replication -- what point is there to replication of studies that are nonsense to start with.

This kind of academic community, as Elster concludes, doesn't just produce useless research, but harmful research. In 40 years of "rigorous" empirical accounting research we have not produced anything that meets even minimal standards of "evidence." One comment Elster made that would really piss of Steve: "Let me conclude on this point by exploring a conjecture alluded to earlier: we may learn more about the world by reading medium- prestige journals than by reading high-prestige and low-prestige journals."

Amen to that.

Paul Williams
North Carolina State University

On Deidre McCloskey, John Hicks, Ronald Fisher, W. Gosset, and Karl Pearson.

What a wonderful speaker Deidre McCloskey! Reminded me of JR Hicks who also was a stammerer. For an economist, I was amazed by her deep and remarkable understanding of statistics. 

It was nice to hear about Gossett, perhaps the only human being who got along well with both Karl Pearson and R.A. Fisher, getting along with the latter itself a Herculean feat.

Gosset was helped in the mathematical derivation of small sample theory by Karl Pearson, he did not appreciate its importance, it was left to his nemesis R.A. Fisher. It is remarkable that he could work with these two giants who couldn't stand each other.

In later life Fisher and Gosset parted ways in that Fisher was a proponent of randomization of experiments while Gosset was a proponent of systematic planning of experiments and in fact proved decisively that balanced designs are more precise, powerful and efficient compared with Fisher's randomized experiments (see http://sites.roosevelt.edu/sziliak/files/2012/02/William-S-Gosset-and-Experimental-Statistics-Ziliak-JWE-2011.pdf )

I remember my father (who designed experiments in horticulture for a living) telling me the virtues of balanced designs at the same time my professors in school were extolling the virtues of randomisation.

In Gosset we also find seeds of Bayesian thinking in his writings.

While I have always had a great regard for Fisher (visit to the tree he planted at the Indian Statistical Institute in Calcutta was for me more of a pilgrimage), I think his influence on the development of statistics was less than ideal.

Statistics and Philosophy.

This is an old exchange between me and Professor David Johnstone (Editor of the Australian journal Abacus). I am posting it here because it is still not dated:

Jagdish:

Your call for a dialogue between statistics and philosophy of science is very timely, and extremely important considering the importance that statistics, both in its probabilistic and non-probabilistic incarnations, has gained ever since the computational advances of the past three decades or so. Let me share a few of my conjectures regarding the cause of this schism between statistics and philosophy, and consider a few areas where they can share in mutual reflection. However, reflection in statistics, like in accounting of late and unlike in philosophy, has been on short order for quite a while. And it is always easier to pick the low hanging fruit. Albert Einstein once remarked, ""I have little patience with scientists who take a board of wood, look for the thinnest part and drill a great number of holes where drilling is easy".

1.
Early statisticians were practitioners of the art, most serving as consultants of sorts. Gosset worked for Guiness, GEP Box did most of his early work for Imperial Chemical Industries (ICI), Fisher worked at Rothamsted Experimental Station, Loeve was an actuary at University of Lyon... As practitioners, statisticians almost always had their feet in one of the domains in science: Fisher was a biologist, Gossett was a chemist, Box was a chemist, ... Their research was down to earth, and while statistics was always regarded the turf of mathematicians, their status within mathematics was the same as that of accountants in liberal arts colleges today, slightly above that of athletics. Of course, the individuals with stature were expected to be mathematicians in their own right.
All that changed with the work of Kolmogorov (1933, Moscow State, http://www.socsci.uci.edu/~bskyrms/bio/readings/kolmogorov_theory_of_probability_small.pdf), Loeve (1960, Berkeley), Doob(1953, Illinois), and Dynkin(1963, Moscow State and Cornell). They provided mathematical foundations for earlier work of practitioners, and especially Kolmogorov provided axiomatic foundations for probability theory. In the process, their work unified statistics into a coherent mass of knowledge. (Perhaps there is a lesson here for us accountants). A collateral effect was the schism in the field between the theoreticians and the practitioners (of which we accountants must be wary) that has continued to this date. We can see a parallel between accounting and statistics here too.

2.
Early controversies in statistics had to do with embedding statistical methods in decision theory (Fisher was against, Neyman and Pearson were for it), and whether the foundations for statistics had to be deductive or inductive (frequentists were for the former, Bayesians were for the latter). These debates were not just technical, and had underpinnings in philosophy, especially philosophy of mathematics (after all, the early contributors to the field were mathematicians: Gauss, Fermat, Pascal, Laplace, deMoivre, ...). For example, when the Fisher-Neyman/Pearson debates had ranged, Neyman was invited by the philosopher Jakko Hintikka to write a paper for the journal Synthese ( "Frequentist probability and Frequentist statistics", 1977).

3.
Since the early statisticians were practitioners, their orientation was usually normative: in sample theory, regression, design of experiments,.... The mathematisation of statistics and later work of people like Tukey, raised the prominence of descriptive (especially axiomatic) in the field. However, the recent developments in datamining have swung the balance again in favour of the normative.
4. Foundational issues in statistics have always been philosophical. And treatment of probability has been profoundly philosophical (see for example http://en.wikipedia.org/wiki/Probability_interpretations).

Regards,
Jagdish

 Reply from David Johnstone:

Dear Jagdish, as usual your knowledge and perspectives are great to read.
In reply to your points:

(1) the early development of statistics by Gossett and Fisher was as a means to an end, i.e. to design and interpret experiments that helped to resolve practical issues, like whether fertilizers were effective and different genetic strains of crops were superior. This left results testable in the real world laboratory, by the farmers, so the pressure to get it right rather than just publish was on. Gossett by the way was an old fashioned English scholar who spent as much time fishing and working in his workshop as doing mathematics. This practical bent comes out in his work.

(2) Neman’s effort to make statistics “deductive” was always his weak point, and he went to great lengths to evade this issue. I wrote a paper on Neyman’s interpretations of tests, as in trying to understand him I got frustrated by his inconsistency and evasiveness over his many papers. In more than one place, he wrote that to “accept” the null is to “act as if it is true”, and to reject it is to “act as if it is false”. This is ridiculous in scientific contexts, since to act as if something is decided 100% you would never draw another sample - your work would be done on that hypothesis.

(3) On the issue of normative versus descriptive, as in accounting research, Harold Jeffreys had a great line in his book, “he said that if we observe a child add 2 and 2 to get 5, we don’t change the laws of arithmetic”. He was very anti learning about the world by watching people rather than doing abstract theory. BTW I own his personal copy of his 3rd edition. A few years ago I went to buy this book on Bookfinder, and found it available in a secondhand bookshop in Cambridge. I rand them instantly when I saw that they said whose book it was, and they told me that Mrs Jeffreys had just died and Harold’s books had come in, and that the 1st edition was sold the day before.

(4) I adore your line that “Foundational issues in statistics have always been philosophical”. .... So must they be in accounting, in relation to how to construct income and net assets measures that are sound and meaningful. Note however that just because we accept something needs philosophical footing doesn’t mean that we will find or agree on that footing. I recently received a comment on a paper of mine from an accounting referee. The comment was basically that the effect of information on the cost of capital “could not be revealed by philosophy” (i.e. by probability theory etc.). Rather, this is an empirical issue. Apart from ignoring all the existing theory on this matter in accounting and finance, the comment is symptomatic of the way that “empirical findings” have been elevated to the top shelf, and theory, or worse, “thought pieces”, are not really science. There is so much wrong with this extreme but common view, including of course that every empirical finding stands on a model or a priori view. Indeed, remember that every null hypothesis that was ever rejected might have been rejected because the model (not the hypothesis) was wrong. People naively believe that a bad model or bad experimental design just reduces power (makes it harder to reject the null) but the mathematical fact is that it can go either way, and error in the model or sample design can make rejection of the null almost certain.

Thank you for your interesting thoughts Jagdish,

David