Another note on identity theft

I notice that Jeremy Clarkson has had his arse handed to him after ridiculing the uproar that occurred following the HMRC’s loss of CDs containing the personal information of 25 million Britons.

First came his effort in The Sun:

Clarkson published details of his Barclays account in the Sun newspaper, including his account number and sort code. He even told people how to find out his address.

“All you’ll be able to do with them is put money into my account. Not take it out. Honestly, I’ve never known such a palaver about nothing,” he told readers.

Then came his retraction in The Times (owned, like The Sun, by News Corp.):

“I opened my bank statement this morning to find out that someone has set up a direct debit which automatically takes £500 from my account,” he said.

“The bank cannot find out who did this because of the Data Protection Act and they cannot stop it from happening again.

“I was wrong and I have been punished for my mistake.”

“Contrary to what I said at the time, we must go after the idiots who lost the discs and stick cocktail sticks in their eyes until they beg for mercy.”

It’s certainly tempting to laugh at Clarkson and even feel smug about it, but that helps nobody. I attended a lecture last year by Bruce Schneier (this one, to be exact. LSE has released a video of the event here) on the economics of information security and the topic of identity theft (obviously) came up. His take, which I couldn’t agree more with, is that personal information security will not improve until appropriate incentives are put in place. In particular, those responsible for permitting a fraud to occur should be required to bear the full cost of that fraud.

Barclays (Clarkson’s bank) ought to be required, by law, to repay Clarkson his money but not get it back from the charity that it was paid to. You better believe that their security checks would be improved, and fast.

Side note: Yes, it was also Barclays that I was speaking about the last time I wrote about identity theft.

Update:   It would appear that Mr Clarkson is indeed entitled to get his money back.  That doesn’t make my point less valid.  There are plenty of things that someone with your information can do that you can’t get cleaned up, at least not with a huge amount of trouble.  They might try to take out a loan in your name, which affects your credit rating no matter whether it’s successful.  They might try to get a passport with your name and their photo on it.  They might do something that puts your name on the TSA’s no-fly list, meaning that you get detained at any US airport.

New Hampshire and the prediction markets

Plenty of people, Paul Krugman among them, are pointing out that just like the polls (which, on average, had Obama ahead of Clinton by over 8 points), the prediction markets were plainly wrong in forecasting the outcome of the Democratic New Hampshire primary. They’ve got a point.

These are the daily closing prices on the Clinton and Obama contracts to win the New Hampshire primary from InTrade:

dem_nh_clinton.png

dem_nh_obama.png

Up until Iowa, they were fairly steady at ~60% for Clinton and ~40% for Obama, but from the 3rd of January onwards, there was a clear movement towards Obama. On the day before the primary, the markets had Obama 97.8% likely to win. On the day, Clinton won with 39.07% of the vote, while Obama received 36.47%. So why did the market get it wrong?

Paul Krugman contends that the prediction markets were just reflecting the polls and talking heads, presumably because that was all the information there was to be had. This naturally raises the question of why they were wrong (e.g. did we just witness the Bradley effect in action?), but that is not the point here. A prediction market, according to the theory, is meant to be superior to the polls in predicting outcomes because it combines information contained in the polls with information from other sources. So perhaps Krugman is right. But if he is, why did the market go so far towards Obama?

My guesses:

  • Perhaps Krugman is partially right, but the talking heads provided a positive feedback loop. The polls predicted Obama, which the markets saw. The talking heads saw the polls too (perhaps in more detail) and then spoke about it on television, but added effectively no extra information. The markets saw the talking heads and believed it to be extra information in support of the polls.
  • Like any market, the prediction markets are susceptible to bubbles. Perhaps we saw one here in the days between Iowa and New Hampshire.
  • A lack of “true” liquidity. There was plenty of nominal liquidity in these markets leading up to and during the counting, but how much of the trading was arbitrage, how much was momentum (i.e. bubble) trading and how much was “true,” changing-belief-based trading? As the counting occurred, I was watching both the leaked figures on the Drudge Report and the movement on InTrade. It seemed that the prediction market was moving steadily towards Clinton, but nowhere near as quickly as one would have expected. For example, at 9:40pm, with 46% of the vote counted, Clinton was leading 49,719 (40%) to 45,383 (36%), from which one would conclude with extremely high confidence that Clinton would win, but the market was still only putting her at 65%.
  • Perhaps – and I’m by no means certain of this last point – in order for a prediction market to work perfectly, we also need people to set the size of their position in proportion to their confidence in that prediction. So perhaps there were traders who, looking at Drudge or some other source were extremely confident that Clinton would win from quite early in the counting, but since they did not take large enough positions, they did not move the market. In other words, liquidity requirements for a successful prediction market are not just on the number of trades, but on the volume traded.

Update: Justin Wolfers, a long-time researcher in prediction markets, has an article in the WSJ highlighting how surprising the result was given the market predictions.

We were led to this research by an age-old racetrack puzzle economists call the “favorite-long shot bias“: Horse bettors historically have overbet long shots, and they win less often than their odds suggest. Our research suggests that similar biases hold in political prediction markets.

As such, Sen. Clinton’s comeback is even more stunning, as political underdogs have historically won even less often than suggested by their prediction market odds.

Historical comparisons are already being drawn between the New Hampshire primary and the famous 1948 presidential race in which President Harry S. Truman beat Republican challenger Thomas Dewey, despite the infamous “Dewey Defeats Truman” headline in the Chicago Tribune.

Yet the magnitude of the Clinton surprise is arguably even greater. Indeed, historical research by Professors Paul Rhode of the University of Arizona and Koleman Strumpf of Kansas University has shown that in the Truman-Dewey race, prediction markets had seen hope for President Truman despite his dreadful polling numbers, and he was rated an 11% chance of winning the election by election-eve. Thus, Sen. Clinton’s victory on Tuesday was more surprising than President Truman’s in 1948.

Personally, I seem to be thinking of this the other way around. Assuming that prediction markets are generally better than other forms of forecasting, I find it surprising that they got it so wrong on this occasion. Rather than thinking of the result as the equivalent of a 6-sigma event given the prediction market, I wonder what was different this time that so disturbed the market’s ability to predict?

Update 2: Okay, okay a 3-sigma event 🙂  Justin in an email:

For the polls, this was about a 3-sigma event.  For the market, which had Hillary priced at about a 7% chance [JB: Justin is referring to the WSJ market], it is about a 1.7 sigma event.  They aren’t that unusual.  Indeed, they probably happen about 7% of the time

Interesting empirics

I cannot wait to read the paper coming out of this:

Most women work 11 hours a week and … make $25-40 per hour [versus] $7-10 per hour … in the formal sector.  They are violently victimised once a month.

Prostitutes who work with pimps have higher wages and better conditions.

Supply is quite elastic [a 60% shock in demand occurred with only a 30% increase in prices], adjusting on three margins – higher labour supply by existing prostitutes, in-migration by prostitutes from other areas, and ‘temporary prostitutes’ joining the market.

Doing this research in America, where both the provision and the consumption of prostitution is illegal, is a major achievement for Levitt and Venkatesh.  Has anything equivalent ever been done in countries where the law is less restrictive?

iPhone goodness

I got an iPhone for Christmas. It was a bit of a pain to set up, since I was on 64-bit XP and Apple doesn’t support iTunes on it. I ended up with 32-bit Vista Ultimate. I’ve been excited about the iPhone and its competitors for a while, since they manage to combine six gadgets (all of which I’ve owned separately) in a single device:

  • Mobile phone
  • PDA
  • (mini-)Laptop
  • Camera
  • mp3/video player
  • USB stick

To a certain extent, the iPhone’s touchscreen and typically-Apple UI are just icing on the cake.

It’s obviously not perfect (what is?), but I’m pleased to discover that most of what I would like to be improved should be possible on the current generation:

Would need to be in a new generation Could probably happen with the current generation
  • 3G
  • A better camera (if that’s possible, given the space limitations)
  • More memory (it’s only 8GB)
  • GPS support
  • More battery capacity
  • FM receiver
  • Open it up to 3rd-party native applications
  • Merge the SMS and Voicemail apps into the Mail app – I only want to go to one place to see/hear my various messages
  • Implement a pseudo-GPS system by using the location of various mobile phone towers and link it into Google Maps
  • The ability to sync outside of iTunes
  • The ability to sync with Mozilla applications (thunderbird, firefox, etc)
  • The ability to sync iPhone notes with anything on the PC
  • The ability to sync wirelessly (I can’t believe that I need to plug it in to sync!)
  • Make the contact list accessible directly from the main screen
  • Allow the contact list to be used in the calendar
  • Include groups in the contact list (for sms or email)
  • The ability to record video
  • The ability to use an external keyboard/mouse/monitor (maybe through Bluetooth – does it have enough bandwidth?)
  • Voice recognition (the on-screen keyboard is good for what it is, but supplementing it would be nice)
  • Entirely new applications:
    • Lists (To do, to buy, etc)
    • Dictionary/Thesaurus
    • Instant Messaging (msn msngr, google talk, aim, etc)
    • Some form of VoIP when in an 802.11 area
    • Some sort of money-management
    • MS Office and PDF readers (if not editors)

I know that some of my list are available already for jailbroken iPhones, but I’m hesitant to do that.  I’m going to hold out for a while and see if the rumours about an SDK being released in February are true.

Moist robots (of a sort)

Scott Adams has a thing where he considers humans (well, all animals, I guess) to be “moist robots,” in that we have no free will.  I tend not to think about it too much, but here are some recent bits of research that strike me as interesting:

Andrew vs. Andrew (continued)

Following on from yesterday, Andrew Norton has his second piece up [A.N., A.L.].  He continues on the early topic of teaching civics, concluding with:

In my view, preserving public education to teach civics is a non-solution to a non-problem.

I’d love to see a longitudinal study looking at what people covered in school and measures of their criminality, understanding of and participation in democratic society one, five and ten years after leaving school.  Until then, this aspect of the debate will continue to be rhetorical.

A.N. then moves on to the topic of financing, acknowledging A.L.’s point that there are economies of scale but arguing that they could be achieved through school associations or chains.  He suggests that the government still be involved, subsidising schools on a per-student basis inversely weighted to the students’ socio-economic backgrounds:

[W]e could fund all schools on a similar basis to private schools now, according to parental SES background. That would lead to reduced rather than greater government expenditure, with tax cuts helping parents finance higher private outlays. Schools servicing the most disadvantaged areas would get the most money, providing what was necessary to make private schools viable. Schools in the most affluent areas could be taken completely out of the public funding system; this if nothing else about my proposal would please the AEU. 

This seems a reasonable and persuasive point to me.  However, since it would amount to the government paying for the schooling of the poor, it seems implausible to assume that they would not want a say in how the money was spent.  It would be, in effect, an Australian education equivalent of Railtrack/Network Rail in the UK – a nominally independent organisation that nevertheless operates with a government-backed guarantee of funding to achieve government-stipulated requirements.  This may well represent an improvement over the status quo (and I suspect it would be, from a financing point of view), but it is not full privitisation.

I was never particularly concerned with financing except insofar as it affects selection.  This sort of scheme, which does keep the government involved, may help ensure that every child gets accepted somewhere, but my concerns about student complimentarities and the need for national education standards remain.

Worth following …

Andrew Leigh and Andrew Norton (you can find a brief introduction to each of them here) are having a “bloggish debate” on whether public schools ought to be privatised. You can follow the entire discussion at either of their blogs. We thus-far have an initial comment from both. The first came from Andrew Norton [A.N., A.L.]:

… The government owns most schools, employs most teachers, tells them what to teach through state-set curricula, and examines students to make sure they have it right-even kids escaping to private schools can’t avoid these last two aspects of state-run education … Across the political spectrum, activists want to use public education to influence young minds. In his book Dumbing Down, Kevin Donnelly documents how left-wing academics and teachers shape curricula to fit their political agenda. In government, the Liberal Party proposed a national history curriculum, which was widely seen as another front in the so-called ‘culture wars’. Rather than fostering social unity, as some of its supporters claim, state-controlled education is a source of division and nastiness. Instead of allowing different groups to devise their own curriculum, and letting parents choose between them, we fight over a common curriculum …

In response, Andrew Leigh argued [A.N., A.L.]:

… indoctrination isn’t all bad. I’d like to live in an Australia where children shared a basic understanding of democratic values, and understood our geography and our history. I’m more confident that public schools will achieve this than I am about private schools … you’re either arguing (1) for the private school funding to be raised to the same level as public school funding, or (2) for the government to get out of the schooling game entirely. Fortunately, we have an interesting natural experiment of reform (1). In 1981, the Chilean military government passed a law (or whatever dictatorships do to put things into effect) that gave the same per-child funding to non-government and government schools. Fifteen years later, 62% of kids were still in government schools … Public education is worth preserving because it helps engender shared knowledge and values; because a public system guarantees access for all children; and because its economies of scale will often make the public sector more efficient than the private sector.

I love reading both Andrews on education. They’re clearly both incredibly smart and thinking incredibly hard on a topic to which most people simply apply a few platitudes and rules-of-thumb. A few of my thoughts, which I’d love to see them discuss at length:

Selection. Private schools are selective, meaning that only the smartest (or wealthiest, or most religious) students are granted access. If the entire system were privatised, what school would accept the academically-below-average, non-religious poor?

Conformity risk. On the other hand, the one-size-fits-all approach so often seen in public education is an imposition of conformity and can lead to the supression of individual talents.

Student complementarities. The success of a student in a subject is arguably positively influenced by the success of their classmates. Even if complementarities do not exist in student ability, they may still exist in student behaviour. Separating the most- and least-able (or most- and least-disruptive) students will benefit those in the advanced grouping and disadvantage those in the lower group. If present, this effect will be greatest for students close to the cut-off in both directions, meaning that there will be a sharp, essentially discreet difference in group performance.

(Dis)Economies of scale and profitability. As mentioned briefly by Andrew Leigh, schools experience economies of scale in minimising costs. However, there are also diseconomies of scale in maximising student performance once classes get too large. This means that private schools would not set-up shop in areas of low population density and that public schools focused on getting the maximum quantity of education for the minimum cost often sacrifice quality in areas of high population density.

Standards and externalities. Government involvement helps ensure that a common, minimum set of standards are met by all students. Employers and universities need to be sure that school-leavers have certain key skills and be able to compare candidates from different schools. I’m happy to assume that the market would produce a generally-trustable measure of the first of these requirements, but not the second. Witness the lack of interstate university attendance in Australia where there is poor comparability of students across states, compared to the high student mobility in the U.S. where the S.A.T. serves as a single, national standard. The S.A.T. is not perfect, but the comparability it offers increases competition in both directions between student and university.

In addition, society as a whole may wish for a third set of standards that are not direct prerequisites for employment or university, such as a minimum understanding of history or civil society. This final point rests on the positive externality of such education. A country’s institutional strength – arguably a cornerstone of growth – may rest on a commonality of feelings of civic duty, for example.

Teacher quality and incentives. I doubt there will be much disagreement between the two Andrews on this one. If they mention it at all, I suspect both will support some form of incentive pay to teachers on the basis of student performance. Personally, I would argue that to the extent that student complementarities exist, at least some of any incentive payment ought to go to the school as a whole. I also wonder if the measure of success ought to be broader than on-the-day performance on a standardised test and perhaps attempt to focus on the students’ outcomes. For example, one year after leaving school, look at whether students are employed or in higher education and if they are in the latter, look at the cut-off for the course they chose.

Full disclosure: I attended a state school for years 1 to 7 and a (small) private school for years 8 to 12. My mother has worked at that same private school for close to 18 years.

Continued tomorrow …