2012 November | Data Science & Psychology

24Nov/12

When is investment banking immoral? A review of Greg Smith’s book, Why I left Goldman Sachs.

On Thanksgiving evening, I started reading Greg Smith's book, Why I left Goldman Sachs late in the afternoon. I finished it around midnight. It's a relatively easy read with a relatively straightforward message: That Wall Street, as exemplified by Goldman Sachs' evolution, has increasingly become a place where we send many of our brightest students to outwit the people who manage our pensions and retirement accounts.

Greg Smith is famous for resigning from Goldman Sachs via an op-ed published in the New York Times, accusing Goldman of evolving from a firm that serves its customers to one that often profits by taking advantage of them. Nothing illegal is documented in the book, but it does show how employees are encouraged to sell ever more complex products to customers in the hope of generating more fees, without consideration of whether these products make their customers' lives better. Who are these customers? They are the people who manage the money in our retirement accounts, pension funds, and the wealth of philanthropic organizations. Like many Americans, they look to investment bankers like Goldman Sachs for advice on how to help their money grow.

There is little dispute about this, but not everyone believes it is morally wrong. The CEO of Goldman Sachs asserts that they have no obligation to tell customers when they sell them something that they believe will lose money. The Wall St. Journal's review of the book essentially says that he should have known that Goldman Sachs was not built on selflessness, but rather on "tawdry commerce" and the "sometimes morally ambiguous business of sales". Bloomberg News seems more interested in tearing him down personally than examining the morality of what he says in the book, asking "Hasn't it always been about making money and isn't it okay to be a bank that makes money?"

At the heart of this, is the question that recent financial reforms were designed to change. Specifically, should investment professionals have a fiduciary responsibility to their clients? More simply, should they be required to put their clients' interests over their own, when making recommendations? I can't say objectively whether it is morally wrong to take advantage of clients lack of knowledge, but I can examine our data from YourMorals.org to see which individuals believe that it is ok to conduct a "negotiation where not everyone completely understands the process" involved (e.g. opaque fees hidden in the fine print of investment products). The below table shows correlations of Schwartz Values Scale scores and demographics with belief that negotiations with information assymetries are wrong, with positive correlations first.

Correlations of information assymetry "wrongness" with values/demographics

Clearly, people disagree about how wrong it is to conduct a negotiation without complete understanding by all parties. People who hold self-transcendent values such as benevolence and universalism are the most likely to believe that such conduct is wrong. People who hold traditional values are also likely to believe that this is wrong. In contrast, younger, educated, more conservative males who tend to value power, of the type that populate most investment banks, are less likely to feel that such information asymmetry is wrong. As such, it is perhaps not surprising that the reaction of many in the business world to Smith's book is a collective "so what?"

Those of us who are mere consumers of financial services, via our 401ks, pensions, and college funds, would do well to understand what is behind this collective yawn. What some in the finance world are telling us is that the primary goal of these financial companies is to make themselves money, not serve clients, and given that the average money manager fails to beat the market, we would all probably be better off simply buying broad, transparent index funds, rather than taking their sales calls. We should urge our city officials, counties, and pension managers to stop trying to beat the market with the advice of ostensibly wise finance professionals, who don't really have their clients interests at heart, lest they suffer the fate of the city of Oakland or Jefferson County, Alabama who both ended up on the wrong side of deals with Goldman Sachs. And if there ends up being less demand for their products, perhaps we can move some of the genius that creates arcane financial products into creating things that people actually need.

- Ravi Iyer

Tagged as: goldman sachs, greg smith, investment bankers, new york times, wall street Comments Off

21Nov/12

On Mitt Romney and The X-Files

Those of you interested in political psychology and data science might enjoy my latest post on the Ranker Data Blog entitled Mitt Romney Should Have Advertised on the X-Files. In it, I explore correlations between liking Mitt Romney and liking various TV Shows on lists on Ranker.com, replicating analyses which the Obama campaign purportedly conducted in the last campaign season, and finding that the X-Files and Mitt Romney have a surprising correlation. From the post:

As you can see, the X-Files appears to be the highest correlated show, by a fair margin. I don’t watch the X-Files, so I wasn’t sure why this correlation exists, but I did a bit of research, and found this article exploring how the X-Files supported a number of conservative themes, such as the persistence of evil, objective truth, and distrust of government (also see here). The article points out that in one episode, right wing militiamen are depicted as being heroic, which never would happen in a more liberal leaning plot. Perhaps if you are a conservative politician seeking to motivate your base, you should consider running ads on reruns of the X-Files, or if you run a television station that shows X-Files reruns, consider contacting your local conservative politicians leveraging this data.

- Ravi Iyer

Tagged as: data science, mitt romney, obama, political psychology, x files Comments Off

18Nov/12

The Gaza Conflict and Being Pro-Peace rather than Anti-War

One of my favorite Mother Theresa quotes is: "I was once asked why I don't participate in anti-war demonstrations. I said that I will never do that, but as soon as you have a pro-peace rally, I'll be there."

The current conflict in Gaza between Hamas and Israel requires the thoughtful liberal to navigate a few seemingly conflicting thoughts. On the one hand, liberals generally believe that peaceful means are more effective than military means at achieving long term success. This often manifests itself in opposition to military action, such as the Iraq war, Vietnam war, etc.. On the other hand, there is no country or government that would tolerate missiles being launched at their large civilian populations and the Israeli response to missiles being launched from Gaza is a response that every nation would take if in the shoes of the Israelis. Defending civilians against attack is just.

The point of this blog post is to point out that you don't have to choose between being pro-peace and remaining anti-war, as these attitudes, while related, are not perfectly correlated. In a paper that is forthcoming in the journal Political Psychology, we found that you can find meaningful differences in what being pro-peace and being anti-war predict. Being pro-peace relates to caring about others, while being anti-war is related to attitudes toward authority, for example. The multi-dimensional nature of peace-war attitudes is reflected in the real world in the above quote by Mother Theresa, and by the assertions of soldiers and politicians everywhere that their ultimate goal is peace. In the current conflict, it is perfectly reasonable to believe that the Israelis have every right to defend themselves against attack (therefore not being anti-war), while also faulting both Hamas and the current conservative Israeli leadership for not pursuing peace more vigorously (therefore being pro-peace).

Indeed, I'm writing this in part as a response to a beautifully written essay by Jessica Apple, a writer who lives in Tel-Aviv, which ends:

And as Israel pummels the Gaza Strip, there is no Israeli political leader saying, as Rabin did, “Enough of blood and tears.” [the leader of the opposition party] has, in fact, supported the government’s actions as just, without questioning whether they are wise.....I do agree that Israel has the right to protect its citizens. But I condemn Israel’s current leaders for failing to recognize that the best defense is peace.

The full essay is well worth reading. I pray for the welfare of all the innocent people caught between forces beyond their control in the region and hope to see peace prevail before it is too late for both sides' welfare.

- Ravi Iyer

Tagged as: anti war demonstrations, gaza, hamas, mother theresa, peace, political psychology, soldiers, war Comments Off

8Nov/12

Bill O’Reilly, Sarah Palin and Paul Krugman need to get out of Maslow’s Basement.

Losing an election is tough and I have immense empathy for those who have a heartfelt vision for their country that was not fulfilled on election day. Most people who care deeply about the election, Democrats and Republicans, do so out of a real desire for the country to do better and it's unfortunate that the results have to disappoint so many well-meaning people.

That being said, there are some conservatives who have implied that those who vote for Obama simply want free stuff, while some liberals imply that billionaires who support Romney do so out of self-interest. Consider this quote from Sarah Palin:

We're not explaining to the rest of America, who thinks that they're going to get a bunch of free stuff from Obama, that you have a choice. You either get free stuff or you get freedom. You cannot have both, and you need to make a choice.

Or consider this quote from Paul Krugman:

billionaires have always loved the doctrines in question, which offer a rationale for policies that serve their interests....And now the same people effectively own a whole political party.

And in reaction to the election results, Bill O'Reilly opined that the reason that Obama gets support is that...

There are 50% of the voting public who want stuff. They want things. And who is going to give them things? President Obama.

What these three quotes have in common is that they all make a common mistake about how we view the motivations of others. Chip and Dan Heath call this "getting out of Maslow's basement", which refers to Maslow's hierarchy of needs depicted below.

Maslow's idea was that motivation can be grouped from lower level needs such as wanting "stuff" to higher order needs like caring about others, fulfilling values, etc. The implication of O'Reilly, Palin, Krugman, and many partisans, is that the other side is motivated by these lower level needs. It is a common mistake, made in many domains to believe that others are motivated by lower level needs. Chip and Dan Heath have shown that we all assume that other people are motivated by lower level needs, but that we ourselves are motivated by higher order needs. The truth is that most everyone is actually motivated by higher order needs. In the below video, they explain one of many studies showing this.

It is easy to let partisanship help you impugn the motives of others. And there is no doubt that some amount of self-interest helps shape our values. However, most people who care enough to vote do so out of higher order considerations. Indeed, nobody stands in an 8 hour line to vote out of self-interest. They really do want to help the poor or promote economic growth and freedom. And if we ever want to fulfill the bipartisanship we desire in the world, we would do well to understand the sincere motivations of others.

- Ravi Iyer

Tagged as: bill o reilly, billionaires, bipartisanship, conservatives, election day, free stuff, liberals, maslow, obama, paul krugman, romney, sarah palin Comments Off

5Nov/12

Early Voting is a Social Influence Tool, so tell everyone when you vote!

As a political junkie, I've been reading the spin on early voting with interest as each side talks about how they are using their ground game to get people to the polls. Some have suggested that early voting doesn't matter as it simply gets those people who would have voted anyway to vote earlier. That may or may not be true, but I believe that such analysis is missing one of the most important aspects of early voting. Specifically, it creates a longer period for social influence to influence voter turnout.

One of the more interesting practical findings in social psychology is the finding that injunctive norms (e.g. telling people that they should vote) often do not work as well descriptive norms (e.g. telling people that everyone else voted). In work made famous by Robert Cialdini, psychologists have found that telling people not to litter works quite badly if they perceive that litter is common. This paradigm has been put to practical use in hotels which often tell you about the towel recycling behavior of other guests, rather than just asking you to recycle your towel. The below graph shows the rate of towel recycling given injunctive vs. descriptive norms.

Does this principle apply to voting? Absolutely! Indeed, in the largest study I've ever seen, involving 61 million Facebook users, the Facebook data team successfully increased voting, verified by actual public voting data, by giving users the opportunity to see which of their friends had voted. However, this occurred over a single day, where users had to login to facebook, report their voting, and have their friends see it in time to affect their behavior. Imagine if social influence could occur over a period of days or weeks. This is the true power of early voting. It creates an environment where voting becomes the norm and who wants to be the person left out? So even if early voting turnout efforts are bringing in people who would have voted anyway, it's likely that their behavior affects others.

Most polls show that the more people who vote, the more likely Obama will win this election, as polls of registered voters tend to show higher support for Obama than polls of likely voters, given that conservatives tend to vote more consistently. Obama wants more people to vote. As such, it makes sense that Obama's campaign would promote early voting as they need to create an environment where the normative thing to do is to vote. Everybody is doing it and who wants to be the one left out. In contrast, Republicans do better in low turnout elections since their supporters tend to be more consistent voters. It is no accident that Democrats consistently want polls to be open longer, while Republicans often resist. As such, it is questionable whether Republican efforts to get conservatives to vote early are useful, especially if the voters are people who would already vote anyway. The effect of an environment where everyone is voting is likely to stimulate voting amongst groups that traditionally vote less often and lean Democratic (younger voters and hispanics).

For people who want to affect the vote, the task is clear. If you are a Republican, it might pay to be more subdued about your voting, and share it only with those who you know agree with you. If you are a Democrat, tell everyone you can about your vote to broaden the electorate, and take advantage of early voting to tell people that you voted over a longer period of time.

- Ravi Iyer

ps. I voted two days ago. It felt good.