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:

______________________________

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

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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