On investment bankers

Management of risk is a valuable social function.  However, there must be risk to be managed, and

one must have insurable interest in the risk being managed. Also, banking and insurance can not be

co-mingled.

Investment banking performs a marketing function and also an insurance function. In the old days, the two

used to be separate and the companies did not always buy insurance from investment banks (many of us

remember subscriptions receivables). Nowadays, at least in the United States, the two come bundled,

just as IBM bundled hardware and software. And we all know what happened with lease accounting then.

Because the two are DISTINCT functions, it makes sense in financial disclosures for stockholders to know, for any issuance of stock, how much was paid for marketing and how much was paid to insure the issue sold.

As far as I know, Google was the only stock that was sold directly. They did make a mistake in estimating the

price at which the issue would be sold out.

In credit default swaps, the transfer of risk is legitimate, but calling it NOT insurance is not. Also permitting insurance-like contracts when insurable interest does not exist is gambling, pure and simple. 

Similarly, short sales of stock performs a socially beneficial function by providing liquidity, but naked short selling does not. Naked short selling is gambling, pure and simple.

Merely disseminating "fail to execute" orders is not enough.  It is like publishing a roster of gamblers in Las Vegas who failed to pay. In Las Vegas it would probably be easier to  find them in the obituary columns, making the roster superfluous.  But on Wall Street, on the other hand, gamblers who don't  pay can borrow from our government for almost free and pay themselves hefty bonuses.

Don't debtor's prisons, chain gangs, and a hat-less highway garbage detail in the middle of the summer day look an attractive payback  for these swindlers in suits? 

On rock musicians looking back.

Mick Jaeger didn't look back, but Brian May (lead guitarist of Queen) did. Long after the Queen boke up since Freddie Mercury's passing (Queen with Paul Rogers is non-queen, he is like Wayne Newton in a sombrero subbing for Mick Jaeger), Brian May went back to school, completed his PhD in Astrophysics (dissertation on Inter-planetary dust) at the Imperial College, and is currently the Chancellor of Liverpool John Moores University.

There have been others who did not look back, like drummer Roger Taylor (dentistry), bass guitarist John Deacon (engineering),..

A few years ago I went all the way back to Bombay for Rollingstones "forty licks" concert. He was then close to qualifying for social security in Britain, and yet could gallop around the large stage at Brabourne stadium like plucked chicken. Amazing.

On auto safety.

IIHS has set certain benchmarks for "Good" safety based on actuarial assumptions. I am pretty sure they were set based on further assumptions regarding accident probabilities among others.

Both Subaru and Mercedes meet it. Mercedes probably exceeds it a little bit at enormous cost. However, since Mercedes is bought usually by the well-heeled (or Wall Street bonus-mongers), the  higher profit margins for the premium brands jack up the prices still more. The whole thing is not so relevant because the demand for

products bought by the well-heeled is likely to be price-inelastic. I guess the not-so-well-heeled-safety-freaks go for Volvos or Saabs rather than Mercedes. The truly well-heeled, on the other hand would probably sneer at a Mercedes and go for Bentleys or Rolls Royce or a Bugatti (or Lamborghinis or Ferraris if younger).

Mercedes would probably be ashamed if they were required to disclose in their ads by how little they had reduced the probability of losses for the enormous increase in price.

I doubt the Mercedes crowd buys them because they are that safe.  They buy because they can flaunt their wealth at least in their neighbourhood (after all Mercedes ownership is a signal of wealth);  Veblen called it conspicuous consumption. My colleague and good  old friend Bill Danko (he coauthored a popular book "The Millionnaire  next door") was very proud to be the owner of a very old beat up used  Mercedes jalopy. Perhaps not that he could not afford a new one, just  that when he bought it he could not afford a new one. The point he was trying to make in his book was that ordinary people become rich if they are frugal; inheritance is not the only way up.

Free markets give us a wide choice all the way from Bugatti Royale Kellner coupe ($9 million +) to Kia (or should I say Yugo?) for a few thousands.  We all make choices based on our situation. But I doubt safety is the  first concern of the buyer of an expensive car. If safety were the prime factor, Hummer would still be alive.

On Auditing

Mere presence in audit market entails enormous fixed costs (to maintain competence and to cover liabilities). That being the case, I am not sure cutting back on clients is an option; cutting back would amount to digging one's own grave. In fact, the situation leads to a premium on size, which might explain the concentration of large firms in the audit profession and also the flight of smaller firms from auditing.

At some point, there is probably a flight from auditing, and the plausible  formal model might be that of catastrophe theory (a point of singularity at which firms switch out of auditing), or the models that were popular 

in the sixties and seventies in sociology to explain ":white flight" from urban areas in the US or in the US Army. However, I do not know of any such study. Perhaps the reason is the accountics fixation on regression:

such models do not lend themselves to regressions. And dynamic modeling has never been the strong suit of accountics.

Another possibility is the use of the kinds of actuarial-Game theoretic models that Karl Borch pioneered, but his untimely and premature passing deprived us all of his profound wisdom. 

In any case, "understanding" or "knowing" of the accounting phenomena has, to my  knowledge, has never been an objective of accountics research, which has been satisfied with mere  "explaining". That suits it because of its 

pretentions to a "scientific" attitude (Physics-envy).

On American and International Stusents

Having been a student from India once, I think this direct comparison between American and non-American (Indian, Chinese, Brazilian,...) students is patently unfair.

First, most international students have self-selected to be here, and  have assumed incredible risks monetarily to be in an alien environment. (I for one came to this country with the clothes on my back and a debt of a thousand dollars.) They realise that should they fail they  will have to ship back empty-handed to where ever they came from.  As Samuel Johnson once said, nothing concentrates a mind as the  immanence of one's hanging.  Failure, for these people,  is not an option.  For American students, on the other hand, failure can be an option. 

Because of this, international students are ripe for picking up the  Vince Lombardi philosophy.

Second, you can survive as a failure far more comfortably in the United States than you can as a success in many countries. This introduces one more issue. American students often lack the motivation to succeed

well. The differences between the two populations is probably related to motivation  more than anything else.

Third, it is usually only the cream of the crop elsewhere that comes to the  United States for studies. To compare the average American student with the  best from elsewhere is not fair, and does no one any good. When I compare the cream of the crop among American students and the international students, I do not find a great difference. It is foolish to opine on the quality of international students based on their presence during instructor's

office hours.

While I would agree that the international students are better motivated (they don't have a choice), my experience has been less dismal. I have found American students in general more ethical, better disposed to working in

groups (no shirking of individual responsibilities, better at accepting leadership,...). I have spent infinitely more time arguing with international students on grading, cheating, plagiarism, resolving issues of working in groups,

and the like. While some times this is due to cultural differences, usually it is due to blatant disregard for fairness towards fellow students and the lack of a moral compass.

I have found preparation for college of the bottom half of the American students to be abysmal. Having seem two of my children go through the public school systems here, this does not surprise me at all. I think my wife (and our parents) has been far more responsible for the  success of my  children's education that the schools. This is especially so for  studies in science and mathematics, without which critical thinking skills can not be honed.

On the other hand, I have found American students to be far more responsible, disciplined, and fair. They have a broader perspective on life well beyond Lombardi. They also tend to be innovative, and more prone to thinking out of the box.

Karl Pearson and Accounting Research

The great statistician Karl Pearson once took a bunch of skeletons, mixed up the bones randomly to recreate new skeletons. Then he asked anthropologists to tell whether the bones from these mixed-up skeletons were all from the  same persons; ie., that the bones had not been mixed up.

The anthropologists measured the length of the bones and the length of the skeletons they came from and based on the study of those ratios concluded that the mixed up skeletons had not indeed been mixed up.

From this rather bizzarre experiment (bless those skeletons whose identities had been stolen) led him to come up with the idea of  "spurious correlations". It has widely been known that that spurious correlations almost always exist when your variables in regressions are ratios.

The use of ratio variables is rampant in financial accounting so called "archival" research. I don't know if they have considered this aspect. If they have not, their results are probably spurious too.

On Physics envy in Accounting.

In the natural sciences, stripped of the details, most profound ideas can be explained to any one with a high school education. The objective of the  details in such sciences is to ensure the integrity of the statements, and the objective of the experimentation is to ensure the validity of the statements.

I can give two examples:

1.

The great American sociologist George Homans, a long ago, did profound work on  motivation and cohesion in human groups. You do not see a single mathematical symbol in most of his works. Yet the beauty of his generalisations is stunning. Herb Simon, in one of the articles in "Models of Man", derived the same generalisations by studying the stability of a dynamical system described by a system of   differential equations. The lack of mathematics in Homan's own work does not  make his contributions any less profound, and Simon's mathematicising of it  does not add much to what we already knew from Homans.  However, Simon's 

work enables us to rely on the veracity of Homan's conclusions without having to  depend on Homan's credibility as a social scientist.

2.

Arguably one of the greatest biologists of the 20th century, JBS Haldane wrote a very simple but profound book titled "On Being the Right Size", meant to be read by union workers in England with little education (nowadays many college students  probably would have as much problems appreciating it as the then union workers would have had with today's popular music). One sentence says it all (he is trying to describe that  size of an animal usually determines the anatomy):   "Insects, being so small,  do not have oxygen-carrying bloodstreams. What little oxygen their cells require  can be absorbed by simple diffusion of air through their bodies. But being larger 

means an animal must take on complicated oxygen pumping and distributing  systems to reach all the cells."

A modern systems biologist would explain the same with a mathematical model.

In accountics, it is not sure to me what the objectives are, but I suspect they are not the same as in the natural sciences. I think the main problem with accountics research is the pervasiveness of Physics envy. Giving the appearance of being a "science" is more important than  having the scientific spirit. That being the case, use of quantitative methods in general has assumed a theological orientation.

As I see it, the veracity of most accountics generalisations depend almost entirely on the credibility of the authors, and the "system" rather than the mathematisation or experimentation provides it. Since the assertions are rarely, if ever, questioned (the only questioning is by the referee gatekeepers with vested interest in perpetuating

their version of the "truth"), the whole enterprise  resembles a religion more than it does a "science".

The credibility of the entire accounting academia is at stake. We are to the accounting profession what Physicists are to engineering. Just as engineers not paying heed to physicists would indicate lack of relevance (and possibly coherence) of Physics, the accounting profession not paying heed to what ever it is we do is symptomatic of the lack of relevance (and possibly coherence) of what we research. It does no one service for us to pretend that what ever it is that we do is more profound than the rest of the world (particularly the profession) is willing to admit. It only signals our autistic tendencies.