In Praise of Uncertainty or: Should we stop worrying and learn to love uncertainty?

Born ignorant, we start off by pursuing knowledge with the false promise that it leads to certainty. We grow into adulthood with the illusion of knowledge, but midway we settle for an unsettling state of doubt. Further down the road, we mature into a humbling recognition of our ignorance, and finally while stepping into senility, we face yet another tsunami of unpleasant unknown unknowns awaiting us as mortal beings.

But, should we pity the human race for his inescapable haplessness in his uncertain journey? Or should we stop worrying about uncertainty and learn to love it?

Looking back at 33 years of my life, I have realized that whenever I was at the height of my uncertainty curve, I experienced an extraordinary flow in my life. Whenever I wanted to change jobs, places of residence, or fields of study, I was most stressed, but at the same time, most productive, excited, and hopeful. In contrast, when I felt even an infinitesimal grain of certainty in my life, though for brief moments, those days were replaced with unproductive and agonizingly depressing moments.

Though it seems unsettling to be in a state of limbo, the alternative (i.e., certainty) is at best an illusion, on average a depressing melancholy, and at worst a perilous state of mind ripe for intolerance. 

The latter property of certainty comes from an illusion of certainty embedded not in the dynamics of the outside world, but of our inside beliefs. Who can deny the fact that the worst atrocities in human history have been committed by staunch followers of ideas promising certainty in the veracity of ideologies and infallibility of leaders?

Inquietude of uncertainty and doubt, though disagreeable, is to be preferred to the dullness and quietude of certainty. Let’s stop pursuing certainty, for it is degenerating.

A Tale of Two Cities: Why Unequal Attention Is Being Paid to Baghdad and Paris?

A question is raised in the aftermaths of the Paris massacre: why do Paris attacks and similar events in the western world provoke higher levels of hype, while equally comparable attacks in Baghdad and Beirut go unheeded?

The answer seems to be straightforward. Some countries have the soft power to have many people on board supporting them when events like these occur. The soft power is not something with which a country is born; it should be procured through ages of perseverance in creating progressive political and cultural values. This is what makes people more ‘interested’ in the destiny of one country than that of the other.

I am sure most people, who express their solidarity with Parisians, have spent some time in Paris or Parisian cultural products have penetrated their hearts and impacted their minds one way or another. Unfortunately, this is not the case for Baghdad or other isolated cities and countries where comparable events occur. How many people around the world have ever heard of the names of the cities in the Middle East where unspeakable atrocities are being committed?

The equality argument is also raised for paying equal attention to similar events in different parts of the world. Of course, legally speaking, everybody is born equal, but this is not the case from a political or economic standpoint. In politics, save voting rights, equality is almost non-existent. And as we know, in economic life, we are all born unequal. (I am but describing.)

In international law and politics, which is only superficially coated with the idea of equality of nations, there are circumstances under which a country may temporarily lose its right to be treated equally. If a country is a rogue state, it should not expect other countries to treat it equally.

With so many self-imposed sanctions against themselves, which make them more and more isolated and their contribution to human civilization meager and negligible, most Middle Eastern countries and their citizens are far from getting equal attention of the world for comparable events.

It is up to a nation to make itself unequal upwards or downwards.

PS: The concept of attention economics might also be helpful in understanding the unequal attention paid to the events of the same nature. This Econtalk episode can also shed light on the issue. 

Political Economy Lessons from Childhood Stories

One of my favorite childhodood anecdotes, which the passage of time could not wash away from my mind, concerns the story of a young preacher of an ideological creed and an old lay passerby at the dawn of an ideological movement.

The story goes that a new convert to an emerging ideology was passionately preaching about the leader of the ideology in an old town, describing how perfect the world would have looked like had his leader’s ideology prevailed, how beautiful life would have become and how justice would have ruled the land had the leader been in charge…

The passerby who happened to hear those words stopped and asked the preacher:

–  "Son, does your leader have a belly or not?"

–  "Yes." Answered the preacher.

–  "Then, he is no different.” Said the passerby and strolled away indifferently…

So insightful, timeless, and universal are the lessons of our childhood parables.

For more on the insights of the story, listen to this EconTalk episode with Bruce Bueno de Mesquita on his book "the Logic of Political Survival". 

Lingua Franca and the Glory of Civilizations

Years ago, I was discussing the miseries of living in an underdeveloped country with a philosopher-to-be friend of mine. For some reasons, we both were mad at the circumstances under which we were living. In between his furious words he quoted a deeply moving hemistich that always resonates with me. Today, I came across that poem by coincidence and could not resist reading it to the end. The poem is penned in Persian by one of the greatest poets of all time, Saadi. It is ineluctable and very unfortunate that its deep insights will be lost in my poor translation.

Neither to a lover nor a country give your heart, 

Boundless is the planet, and countless its crowd.

Having read the poem, which passionately encourages geographic mobility, I wondered what the situation of the civilized world was at the time with respect to borders, intercultural exchanges, and tolerance towards other nations or tribes.

More importantly, I was interested in knowing how on earth at a time with extremely limited means of mobility and limited opportunities for intercultural dialogue, the poet kept encouraging the readers to travel and settle in other places. Having this in the back of my mind, I came to read a passage in the Story of Civilization. 

It is a great passage that shows how the dominance and monopoly of one language (in this case Arabic as the lingua franca of the Muslim world) facilitated mobility, cultural exchange, and mutual understanding, pierced through numerous cultural and linguistic boundaries, and perhaps contributed to the glory of the Islamic civilization at the time. I invite you to enjoy the passage. 

“Every scholar who desired a high standing at home had to hear the master scholars of Mecca, Baghdad, Damascus, and Cairo. This international of letters was made easier by the fact that throughout Islam- through whatever diversity of peoples- the language of learning and literature was Arabic; Latin had no wider realm. When a visitor entered a Moslem city he took it for granted that he could hear a scholarly lecture at the principal mosque at almost any hour of the day…. In a thousand mosques from Cordova to Samarkand scholars were as numerous as pillars, and made the cloisters tremble with their eloquence; the roads of the realm were disturbed by innumerable geographers, historians, and theologians seeking knowledge and wisdom; the courts of a hundred princes resounded with poetry and philosophical debate; and no man dared be a millionaire without supporting literature or art. The old cultures of the conquered were eagerly absorbed by the quick-witted Arabs; and the conquerors showed such tolerance that of the poets, scientists, and philosophers who now made Arabic the most learned and literary tongue in the world only a small minority were of Arab blood.... We gratefully omit their names, and salute their achievement.”

On Methodology in Law

The other days, I was talking to an American Professor of law. He said that during his academic life, he has failed to find a serious legal work in (contract, corporate, and financial) law written by a European legal scholar. In his opinion, in 1930s American legal scholarship stopped doing what European legal scholars are currently doing. And I could not but agree with him. 

Legal scholarship badly suffers from the lack of method(ology). When I compare the seminars I am attending in economics and finance with the ones I am attending in law, the latter seems to me the unintelligible utterances coming from clouded minds. Of course, economics and finance are the most progressive disciplines of social sciences, perhaps because many of their subject matters lend themselves to scientific or quasi-scientific methods. This, unfortunately, is not always the case in law, and expecting the legal scholarship to accommodate such methodologies would be too demanding.

To our regret, not only did the traditional legal scholarship failed to be inspired by the methodologies used in other disciplines such as economics and finance, but also it failed to develop a methodology of its own. Worst of all, some European legal scholars grew deeply pessimistic towards law and economics that tries to employ the methodologies used in economics to analyze legal phenomena. However, despite their deep skepticism towards law and economics, when they are asked for better alternative methods for analyzing legal issues, they seem to be miserably clueless.

A discipline without a methodology is arcane, boring, and, if I may say so, nonsense. As Yogi Berra once said, “If you don't know where you are going, you might wind up someplace else.”

Against Warmongering Rhetoric

With the Middle-East in turmoil, the Iran-Saudi rivalry at its peak, rampant manipulated national emotions and zealotry at their historical heights, and the exchange of threats on both Iranian and Saudi sides, all pieces of an impending war puzzle seem to be in place. But as most commentators would suggest, the probability of an all-out war is far-fetched, and Iranian and Saudi military threats are but strategic ruses for gaining an upper hand at the negotiating table over many matters of geopolitical importance.

Though history keeps repeatedly reminding us that many wars started just to gain a strategic advantage at negotiating tables, for the moment, let’s not be very much concerned about the politics of all this. What is disconcerting for me is the rise of hate/war mongering rhetoric among the relatively (and sometimes highly) educated people after the Mina incidents in which many Iranian pilgrims died.

Highly dysfunctional and opaque method of governance in Saudi Arabia is indeed a drag on the Saudi government to effectively and transparently attend to the concerns of all stakeholders of the incident and communicate its messages clearly. Needless to say, no dictatorship is immune to such dysfunctionality and it should not be taken personal. This is a point that needs not be explained as it is evident.

But what is not very clear is that we have to be especially careful where there is a misunderstanding between two undemocratic, non-transparent, and non-meritocratic governments. In open democracies, premature hard-line sentiments to such contentious incidents wither away in the process of open consensus building via institutions that replace sentiments and emotions with reasoned institutional responses. But when an undemocratic government lacking a decentralized deliberative system for decision making faces such an incident, no such mechanisms are in place and the probability of emotionally-driven and wrong reactions with potentially enormous catastrophic consequences is indeed very high.

Not only do those grave consequences originate from the lack of domestic bottom-up consensus building mechanisms, but also they may stem from the absence of proper channels of communication between the two undemocratic, dysfunctional rivals.

It is highly probable that the Mina incident was caused by a simple error. If so, legal mechanisms provide for redress. So far, I have not seen any indication in the media suggesting that there will be a legal or judicial follow-up for the incident. Instead, we see highly irresponsible harsh language and military threats in abundance even prior to any investigation on the causes of the incident being conducted. If anything, what we can learn from our eight-year war with Iraq is that war is and should always be the option of last resort.

Of course, politicians, military officials, and diplomats might have many reasons to use this type of language (mostly for strategic reasons), but ordinary citizens should avoid following suit. What might be right for a nation might not be right for an individual. Let me rephrase the great historian and storyteller of the 20^th century, Will Durant. Prejudice is fatal to an individual, but indispensable to a nation. 

The long term result of the propagation of such threatening language among citizens against other nations will be an epidemic of bigotry, racism, and xenophobia. 

My advice, if I may, to my compatriots is to let the politics and diplomacy take its course. It is indeed imperative not to let the political rivalries lower our moral standards and civic education as citizens, and drag us down into hatemongering. We are already paying politicians handsomely to take care of the corrupt and corrupting political issues in order for us to keep our distance from the toxic touch of politics. So, let the politicians do the dirty job for you.

The politics of teaching: or how not to write a course syllabus

As a novice in teaching a course independently, I was supposed to teach European Banking Law for master students starting from this semester. Unfortunately, two days prior to the first session, I was informed that the number of the students who signed up for the course was not sufficient for the class to convene. I was also informed that this was the first time that the number of students has not reached the required level for this course.

I was wondering what caused this. Given that none of the students knew me, and that I am new to the University, I ruled out the possibility of the fewer sign-ups based on the quality of teaching or my personality. (Such a shameless self-serving argument!)

Today, while browsing the course description sections of other courses in the University’s website, I found out that most introductory remarks were confined to a few sentences regarding the objectives of the courses being offered. On the contrary, on my course’s webpage, there was a detailed syllabus outlining the reading materials, rules on class meetings, attendance, assignments, topics for presentations and papers, final examination, grading, how students should prepare themselves for a Socratic method, and all carrots and sticks for students to pass the course. 

The result? 

Students found the course too demanding and were panicked when they compared the course and its workload with similar courses, especially those courses having more academic unit assigned to them than mine, and simply walked away. 

Any solution? 

1. Preparing the syllabus and modules for any course, it is better to constantly remind oneself of the Wall Street Rule. 

2. The best strategy would be revealing very limited amount of information prior to the add/drop deadline, and leaving the full disclose of your expectations from students to the post add/drop deadline period. Since after the deadline for add/drop, the relationship becomes asset specific (namely, students who have signed up for the course will recognize that they cannot redeploy their time for another course), students will be locked in the relationship and have to be happy with what they have got. 

The lesson:

Greater transparency, especially when it is untimely, can be more of a curse than blessing. 

The Fallen Leaves: A Must Read

When my heart becomes implacable, callous, and unbending by immersing in the harsh world of laws, regulations, money, banking, and finance, I try to placate it by reading Will and Ariel Durnat's works. This time I came across one of Will's greatest works, Fallen Leaves: Last Words on Life, Love, War, and God, which is the distilled wisdom of an almost centenarian who spent his life studying human behavior and civilizations. 

The style of this work reminded me of the Essays of Francis Bacon, which I read almost a decade ago, and still I feel its long lasting impact in my mind. Both of these works have at least two features in common, i.e., they are among the authors' latest works, and are meant to be a very condensed synopsis of their views about a very broad range of issues which has preoccupied the minds of self-conscious human beings since the dawn of human civilization.

The moment the entire edifice of French intellectualism shattered before my eyes

Yesterday I had a chance to visit the Café de Flore and Les Deux Magots in Paris. Prior to my visit, I was enthusiastic about seeing these two Cafés, mostly because of their fame for being a rendezvous for many French intellectuals. But having seen them from outside, I came to disdain them and even did not bother having a coffee inside. Passing by the Café de Flore, I had my eyes on its well-off clients sitting on its small chairs and mingling with their friends in their branded à la mode clothes and luxury accessories while a beggar who could hardly walk was passing by. It took quite a while for the handicapped beggar to pass by the Café. The guys sitting in the sidewalk café were looking quite apathetically at him while sipping their coffee and smoking their cigarettes. At that moment, I started soliloquizing that perhaps they are now debating about equality and fraternity as their forefathers passionately did while closing their indifferent eyes to the miserable beggars and passersby of the nineteenth and twentieth century Paris.

On the Greek crisis and the blame game: creditors vs. taxpayers

One of the arguments that I constantly come across in the debate about the Greek crisis is the argument that the Greek creditors are partly to be blamed for the Greek crisis and thus they should accept a haircut on their loans to Greek government. But it seems to me that this argument is completely unfounded.

The basic argument is that the Greek creditors have been careless in lending money to Greece. But no one bothers to mention why they were so. In this short note I will try to explain who was careless, and if carelessness is the basis for the imposition of haircuts, who should be punished for carelessness.

Prior to the introduction of the Euro, each European country used to issue bonds in the international debt/bond markets. The bond yields were determined by the law of supply and demand. The riskier a government, the higher the yield of its bonds. Accordingly, a less-risky government could borrow with lower interest rates. With the introduction of the Euro, the interest rates converged within the Eurozone and the gap between bonds yields of countries like Greece and Germany were considerably narrowed. 

But why was that the case? Part of this can be associated with the regulations that prescribed the risk weights to sovereign exposures. Although Basel capital requirements framework does not prescribe zero risk weights to banks’ exposure to sovereign risk, the European Capital Requirements framework, even though adopted after the financial and sovereign debt crises, i.e., Capital Requirements Regulation (CRR/Regulation (EU) No 575/2013),  does so. Article 114(4) of the CRR posits that “exposures to Member States’ central governments and central banks denominated and funded in the domestic currency of that central government and central bank shall be assigned a risk weight of 0%”. Moreover, regulations grant additional benefits to financial institutions if they increase their exposure to sovereign debt. For example, the sovereign debt is exempted from the exposure limits to which financial institutions are normally subject. 

While with all these subsidies granted to sovereign debt, EU Member States, in a self-serving manner, tried to free themselves from market forces, it seems paradoxical to blame creditors of sovereigns for being careless in lending to governments. Because when regulators say that investing in something is (at least from the standpoint of regulators) risk free, why blame creditors for listening to regulators’ advice? Indeed, when creditors wanted to grant a loan to Greece or buy Greek bonds they were relying on this regulatory subsidies to some extent, hence market forces failed to price Greek bonds accurately.

At this point, it is important to highlight that regulators are directly or indirectly elected by taxpayers. So, why not blame voters for not electing better representatives and regulatory authorities to avoid such a big regulatory failure? 

My final take is that instead of (or in addition to) blaming creditors, the EU voters/taxpayers should also be blamed and some of the burden of the Greek debt should be shouldered by them for their reckless voting behaviour and not being sufficiently vigilant in having their representatives under constant scrutiny.

PS1: The Greek taxpayers are also to be blamed for not scrutinizing their government behavior. Instead of investing the borrowed money in worthwhile projects, statistical evidence shows that a significant chunk of the loans to Greek government was spent for consumption purposes.

PS2: To the extend that creditors and taxpayers are the same, the taxpayers should be blamed twice. 

On the inverse relationship between age and excitement

That which is new is exciting, and the passage of time erodes its excitement; hence, an inverse relationship between the age of an idea and the amount of excitement it propagates. The same pseudo-natural law mainly applies to ideologies dragging men into fanaticism. As you might have observed, most fanatics are not aged, nor are those who have a credible history of ideological creed. Lesson?! He who newly converts to an ideology is to be most feared. Again, let's borrow from Will Durant: "Tradition is the voice of time, and time is the medium of selection; a cautious mind will respect their verdict, for only youth knows better than twenty centuries."

Smelling a rat in the Greek Deal

One of the strings attached to the Greek Deal is the establishament of a fund or a trust based in Athens and managed by Greece which will consist of Greek public assets that are to be privatized through this fund (also called privatization fund). %50 of the proceeds of privatizations will be used for the repayment of the recapitalization of banks. For me, this seems to be an outright redistribution of wealth from the public to the shareholders and perhaps the creditors of Greek recapitalized banks.

Of course one might argue that the Greek government will be the owner or shareholder of those banks. In this case, again we will have at least two problems. First, it is self-defeating to have a “privatization fund” and again craft a mechanism that enables the Greek government to become a (perhaps majority) shareholder or owner of Greek banks, unless we believe that the public ownership of banks is different from public ownership of other industries!!! Second, even in the case that the Greek government would benefit from owning those banks or being their shareholder, at least in the short run, other existing shareholders and creditors of Greek banks will benefit disproportionately from this deal compared to the alleged benefits to the public. Let’s hope that in the process of sketching the nitty-gritties of the Deal, this redistributive aspect of the deal will be addressed.

Cultural implications of finance

Today I was thinking of the problems that can inhibit the evolution of social cooperation and why some societies could manage to remove the barriers to social collaboration while others are still struggling. In my view, openness in a society can open the door to more collaboration. One such social cooperation that can yield immense benefits to society manifest itself in people’s propensity to reveal and discuss their wealth. With an example, I want to explain how finance can contribute to the culture of openness and cooperation in a society.

If you need to get a loan form a bank, you will need to have collateral or securities to secure your loan. In a society with less developed financial system in which the availability of financial collateral is lower, it is more likely that borrowers would rely on the credit of another member of that society to get loans. For example, in Iran when you apply for a loan and you do not have collateral such as a house or a car, the bank requires you to find someone with relatively high credit rating (such as a government employee) to secure your loan. If the borrower defaults, the lender will have recourse to the guarantor’s (government employee’s) salary or assets (this is called surety or loan guarantee).

In this setting, lenders will depend on wealthy people to get loans and the well-to-do tend to hide their wealth for the fear that if they show off, a potential borrower will ask them to be the guarantor of his loan. On the contrary, in a country with higher availability of collateral, it is more likely for people to exhibit their wealth, because it is less likely that potential borrowers would ask them to be a guarantor by putting their credit (personal liability) as the security for those loans.

A financial system that allows for more monetization, securitizations, and then collateralization of economic values can address this problem. As we know, even in some countries the lender is allowed to put the collateral that he has acquired from the borrower as collateral for another loan that he wants to get from a third party; a practice called rehypothecation. It is telling how all these financial innovations and especially rehypothecation can contribute to the availability of credit in a society.

Hiding wealth can also be observed in societies in which the financial system is not sufficiently developed to offer investment vehicles to savers. An interesting example comes from Tyler Cowen who finds that in rural Guerrero State in Mexico there is a -%70 return on saving. Meaning that when people save and their family, friends or other relatives come to know about it, they come and borrow from the savers, because it is assumed that such savings are in the form of cash. In addition, the rate of default on such borrowings is very high. Therefore, there is no incentive to save in such a community. This is also a setting that will encourage members of the society to hide their wealth. And of course, hidden wealth, if not a road to perdition, is by no means the road to prosperity. 

In praise of poverty: or a short enquiry into the misery of being born into riches

Watching the playful First World Country (FWC) kids subconsciously reminds me of the dire situation of the kids in the Third World Countries (TWCs). I usually envy the kids born in the FWCs and I am sure many of my TWC fellows share my feelings. Perhaps, the source of that feeling is the initial endowment that children of FWCs possess.

But today, I paused for a minute and thought that I might have been wrong all my life. Perhaps it is not that great to be born and raised in a FWC. Why? I will attempt to explain my doubts using the marginal utility theory.

Regarding basic necessities of life, if you do not possess any item which is necessary for your livelihood, by acquiring that item, its marginal utility will be equal to its total utility. However, as you get additional items, starting at some point, although the total utility increases, their marginal utility (and hence the total utility) grows less rapidly or decreases (diminishing marginal utility).

As we know, what matters in decision making about producing or acquiring something is, to a large degree, the marginal utility, not the total utility. When you are born into riches, you take the initial endowment for granted, and you will not enjoy the total amount of the goods and services at your disposal. In other words, the total utility that you derive from the initial endowment nears zero.

Now, with that brief introduction in mind, let’s assume that the tipping point at which the marginal utility becomes zero is $5000 of earning per month. Now, compare a kid born in a TWC endowed with $50 per month (monthly amounts that his parents can spend on him) with a kid born into a family in which the initial endowment is $4000.

Although the total utility that the FWC kid derives from $50 is not comparable with the total utility of the kid blessed with $4000, there will be a huge opportunity for marginal improvements for the TWC kid spread across all dimensions of his life that can still bring him utility ($4950). In contrast, the utility-bearing income for the FWC kid is limited to $1000. In other words, the poor kid has a long way to go until the saturation moment or the tipping point at which the marginal utility starts decreasing. So, if happiness comes from marginal utilities derived from the potentials embedded in life, the TWC kid will potentially be happier than the kid born into riches.

Moreover, the likelihood that that FWC kid might increase his monthly income from $4000 to $5000 is slimmer than the likelihood of the poor kid increasing his from $50 to $5000, because of the headwind problems that we all face when we cross certain lines in income, technological advancements, and even in civility.

From this point of view, the poorer you are, the better off you potentially are, if and only if the society in which you live provides you with the basic infrastructure for climbing up the ladder. Based on this analysis, from social optimality standpoint, gains from investing in improving socio-economic mobility are much higher than I initially perceived.