Friday, December 31, 2010

Save Big by Saving Small

With the New Year upon us, the number of media stories on financial planning is exceeded only by the number on weight-loss. Most of us don't need sweeping changes to our finances. However, identifying and avoiding small-dollar losses can add up over the course of a year. Here are some small ways to save big.

Compare weight not size. For food items, large containers often cost more than small ones. But, frequently the actual amount of food in the big container is the same or only slightly more than the smaller one-usually not enough more to justify the higher price. Compare the price per pound-in small print-when you shop, not the large-print price per container.

Buy only the amount of food that you need. Bulk purchases to "save money" can actually cost more when items are thrown out after spoiling. When you shop, ignore the suggested number of items to purchase. Signs created by retailers, such as "2 for $5," or "4 for $10," are for their convenience, not yours. In most instances a purchase of a lesser number of items will be automatically pro-rated at the register. If that doesn't happen, buy from a different store.

Consider the total cost of a purchase rather than just the price. Long distance drives to chase sale prices can cost more for gas than you save on the purchase. Visit ComputeGasSavings to determine how far you should drive for a lower price. Even chasing down low-price gas can get expensive. At $3 per gallon and climbing, driving long distances, or idling your car in long lines to save a few cents per gallon on gas, can cost more than the savings.

Start a savings fund for home and vehicle repairs. Because few people budget for these recurring expenses, most are forced to pay with credit. Paying cash for needed repairs is much cheaper than accumulating credit card interest. Look over your repair receipts for the past couple of years to get a feel for how much you spend. It could easily be $1200 to $1800, over the course of year. That averages to $100 to $150 per month. Start setting aside $100 per month now for repairs so that you are financially prepared for these "emergencies."

Ask your insurance agent how much you would save by increasing your deductibles. Over the long run it might be cheaper to pay out-of-pocket for life's little mishaps than to pay extra year-after-year for a low deductible. Would you pay for a small repair (less than $500) on your own rather than report it to your insurance company and risk a rate increase? If the answer to that question is yes, your deductible should be $500, not the standard $250 that comes with most policies.

Avoid Extended Warranties. Almost all electronic devices and appliances become obsolete before they break down. Lots of people have stories to tell about an extended warranty on a new purchase that proved valuable. But, these same people forget about the dozens of problem-free devices that they have bought through the years. A 10 to 20% extra surcharge on each item for an extended warranty added up to far more than the cost of that one repair. If you make it a rule to always decline extended warranties, you will save more than enough money in the long run to pay for the few repairs that you actually need.

Increase your retirement contribution the next time you receive a raise. Put half of the additional income into your retirement account. You will save on taxes, increase your future retirement income, and still see more money in your paycheck.

In fact, if you examine some of the small ways to save money that I've mentioned, it's possible that you could find $100 per month of unnecessary expenses. That is the equivalent of a raise that could be set aside and invested for the future.

Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy

Friday, November 19, 2010

Distorting Science: BP's Buy Out

An investigation by the Mobile Press-Register revealed that BP has offered lucrative contracts to scientists engaged in research on the Gulf of Mexico oil spill. According to one source, BP attempted to hire the entire marine sciences department at an Alabama university. The Press-Register reported that the contract "prohibits the scientists from publishing their research, sharing it with other scientists or speaking about the data that they collect for at least the next three years."

I find this a disturbing development in the ongoing oil spill catastrophe because it will allow BP to pretend that it is doing science, when it is not. Employing scientists for private purposes is not a new practice. Nor is the act of keeping data and results proprietary. Many scientists work for private companies and must uphold the terms of the contract agreed to by both parties. Open sharing of information is often not desirable because companies that invest in research should be the first to benefit from the results.

However, conclusions drawn from proprietary data are not necessarily scientifically valid. BP's contract is a deliberate attempt to control the publication of data on the effects of the Gulf oil spill, while at the same time invoking scientific authority for the conclusions obtained from the research. This is not how the scientific method works, and to pretend otherwise is dangerous.

The act of employing scientists to take data, publish results, and interpret findings, does not necessarily mean that valid scientific conclusions will result. Scientists are fallible human beings, prone to error and motivated, in part, by their own beliefs, prejudices, self-interests, and parochialisms. In other words, the work of science is hampered by the same human foibles that plague all human endeavors.

But in the past few centuries science has advanced at a remarkable rate because its method has a self-correcting mechanism built in. Scientists throughout the world usually work independently and openly share ideas and results. Independence and openness are two features of the scientific method that are little appreciated, but essential to scientific advancement. By reviewing and checking each other's work, scientists uncover errors and biases. Over time evidence accumulates to support valid results and interpretations. Ideas that are wrong get culled and eventually become relegated to the history books.

Independence and openness are qualities not typically valued by businesses, or for that matter governments and churches. In fact, these institutions tend to regard open sharing of information and independent questioning of established precepts as existential threats. But, these institutions often invoke scientific authority to buttress their own self-serving claims.

But, you cannot have it both ways. Scientific "authority" derives from a method that self-corrects because of a tradition of independent researchers openly sharing information. You cannot take away this part of the method and still claim that you are doing science.

Science is a method for interrogating nature. While people might answer questions incorrectly, nature never does. In fact nature never makes mistakes in the human sense of that word. Natural laws are obeyed at all times, and the natural laws are blind to human concerns.

To date, science has been a remarkably successful human endeavor, but we should not take for granted the continued advancement of science. Especially while the benefactors of science attack it. The recent phenomenon of people choosing scientific beliefs that are consistent with their choice of church, or career, or political party is deeply troubling. Obviously nature has no affiliation with any churches, corporations, or governments.

But, more and more, we see organizations of various types cherry-picking data to advance their own agendas. BP will be very careful in regards to the proprietary data it releases, in the same way that pharmaceutical companies are very careful about the results of drug studies that they release. Creationist/intelligent design advocates are quick to point out any problems with evolution theory, while ignoring reams of supporting evidence. In the United States, belief in global warming now falls along party lines, a situation that could not possibly occur if people were independently evaluating the evidence.

In fact, it would be remarkably coincidental if natural phenomena just happened to perfectly align with the economic self-interests of a particular group. Such a coincidence is highly unlikely. In the aftermath of the space shuttle Challenger disaster, the physicist Richard Feynman noted that political pressures contributed to the disastrous decision to launch that day. He warned: "Reality must take precedence over public relations because nature cannot be fooled." It is a warning we should all keep in mind.

Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy

Friday, October 1, 2010

Atheism, Creationism, and Tautologies

Renowned physicist Stephen Hawking was back in the news this month as co-author of a new book titled: The Grand Design. He and collaborator Leonard Mlodinow set out to answer three central questions in science: Why is there something rather than nothing? Why do we exist? Why this particular set of laws and not some other? That's an ambitious agenda for a single volume, but the newsworthiness of the book was its assertion that no creator was necessary for the universe. Hawking writes that "the universe can and will create itself from nothing."

The publicity surrounding that assertion reminded me of a famous quote from the nineteenth century French mathematician Pierre-Simon Laplace who also wrote a book on the laws of the universe. He presented the book to the emperor Napoleon who said to him: "M. Laplace, they tell me you have written this large book on the system of the universe, and have never even mentioned its Creator."

Laplace answered: "I had no need of that hypothesis."

When Napoleon told Joseph-Louis Lagrange, another renowned mathematician of the time, what Laplace said, Lagrange replied: "Ah, it is a fine hypothesis; it explains many things."

After reading The Grand Design, I can't help but think that nothing has changed in the two centuries since this back-and-forth between Napoleon and the mathematicians. Explaining the universe without God is about as futile as explaining the universe with God. To assert that the universe creates itself from nothing, Hawking and Mlodinow appear to lapse into the same kind of tautology that creationists use to defend their beliefs.

A tautology is a statement that is true by definition and therefore provides no real explanation or insight. The Christian understanding of God, in the words of the Nicene Creed, is that God is the "creator of all that there is." This statement alone provides no insight on the mechanisms or motivations for creation.

Scientists have sought to understand the mechanisms for creation, and in doing so have amassed enormous amounts of evidence that the Earth and its inhabitants did not simply come into being over a one-week time span 6000 years ago as creationists believe based on their literal interpretation of the book of Genesis. But, a creationist will argue that none of this evidence matters because God, as the omnipotent creator of all that there is, could just as well have created the "appearance" of an older Earth and evolutionary processes. This is a tautology because the creationist position is unassailable. All evidence that does not support the creationist's views can be dismissed as part of God's creation.

In Ken Miller's book, Finding Darwin's God: A Scientist's Search for Common Ground Between God and Evolution, he likens the belief that the universe was created with "the appearance of age," to a belief in God as a charlatan. Miller is a committed Christian who believes in God, not in spite of evolution, but because of evolution. In Miller's view, the process of evolution is awe-inspiring. In response to creationists, Miller writes that a God that has negated science by "rigging the universe with fiction and deception" is not a plausible divine being. To Miller, embracing the God of creationists is to "reject science and worship deception itself."

But, the model of a universe devoid of God presented in The Grand Design falls into a tautological trap akin to creationism. The "M-theory" Hawking and Mlodinow advocate allows for the existence of innumerable universes each with different laws of physics. To explain why our universe is so remarkable, they resort to a decades-old idea known as the "anthropic principle." The essential idea is that of the multitude of universes that can exist, only a tiny fraction of them have physical laws that allow us to evolve. Therefore our existence as observers means that our particular universe must appear to us as special in extraordinary ways.

Whether the alternative universes exist in parallel or sequentially is not important because other universes are inaccessible. The universe is by definition "all that there is." And this is the tautology that Hawking and Mlodinow fall into: To say that anything that could possibly happen actually does happen in alternative universes, is an unassailable position. For example, it is a tautology to say that I write this blog entry or I do not write this blog entry. To say that I write this blog entry in one universe and do not write this blog entry in another universe, explains nothing. Saying that both events happen but in different universes is wordplay, not physics.

Hawking and Mlodinow cite the implausible values for the fundamental constants in physics as evidence for their anthropic argument. It is a great mystery in physics as to what determines the values for the fundamental constants. The basic forces in nature and the elementary particles that form all matter, possess intrinsic properties that to date have no theoretical explanation. The electron, which is a fundamental particle that determines how atoms interact chemically, has an intrinsic mass, electric charge, magnetic moment, and angular momentum. These values are measurable, and essentially define the particle because electrons have no discernable size or internal structure.

What is especially striking is that all electrons are identical. Nature does not make defective electrons. Apparently every electron that there ever was, or ever will be, has the exact same physical properties. Electrons are identical to the point of being indistinguishable from each other. It is impossible to ever label or tag an electron, and the fact that no single electron can ever be distinguished from all the others in the universe, has profound consequences when formulating the physical laws that govern electrons.

The precise values for the physical attributes of an electron are among the fundamental constants in nature that can only be measured. No theory accounts for their values, but it appears that these values must be set very close to what they actually are in order for our species to have evolved. Because the "M-theory" that Hawking and Mlodinow advocate allows for many possible universes, each with different fundamental constants, they contend that all these universes exist and we just happen to be the observers in a universe with fundamental constants that allow us to observe.

In other words, M-theory doesn't explain the values of the fundamental constants. It just says that if you roll the die an infinite number of times, a universe with our fundamental constants will eventually appear. That is not a theory in the scientific sense of the word because it doesn't predict anything about the actual universe we observe.

Physicists have long hoped that a unified theory of all the forces in nature (Theory of Everything) will predict the values for the fundamental constants. In other words, the mathematics would predict the existence of particles, such as electrons, and the mathematical solutions would provide numerical results for the electron's physical attributes that would agree with what we know about electrons.

Such a theory remains elusive so let me make my own tautological statement. A future Theory of Everything will either predict the values for the fundamental constants or it will not. If it does, physicists will find the theory extraordinarily elegant, and theologians will say that God intended our existence by establishing physical laws at the moment of creation that allowed us to evolve. If the theory does not predict the values for the fundamental constants, physicists will keep puzzling on the issue and theologians will say that God intended our existence by choosing values for the fundamental constants that allowed us to evolve.

Either way scientists and theologians will agree that God is a hypothesis that cannot be tested. There comes a point in theology where you just have to believe that the universe has a higher purpose and meaning, even if that meaning is not readily discernable. There comes a point in physics where you have to say: "that is just the way things are" because explanations through causation have to stop at some point.

My own view is that humans might not be evolved enough to comprehend a Theory of Everything. There is no reason to believe that the human brain is the pinnacle of evolution because there is no reason to believe that the evolution of intelligence will not continue long into the future. On an evolutionary time scale the human species, Homo sapiens, has not been around all that long. Modern humans have only existed about 100,000 years, which is an insignificant amount time compared to the hundreds of millions of years that evolutionary processes have shaped species on the planet. What might brain structures and intelligence look like 100 million years from now?

As I write this paragraph my dog lies patiently at my feet waiting for me to get up and do something of interest to her, such as work in the garden where she can enthusiastically contribute by chasing the various critters that inhabit our yard. My endless fascination with pixilated patterns of light on a computer screen has no meaning to her. I sometimes say to her that if she could do calculus, or edit and proof my writing, she could do work that would be of real use to me. She listens to me attentively, as she does everything I say, wags her tail, and maintains her vigil.

Of course, I could talk to my dog all day about advanced calculus, unified theories of physics and their theological implications, and she would listen attentively and understand nothing. We know that this is not the fault of the dog. A dog does not possess the brain structures to process the concepts needed for language, mathematics, or theology. Nor does a dog have the life span humans require to learn advanced concepts in all these subjects.

But those facts about dogs leave open the possibility that far into the future, another species, with a more advanced brain structure, might have similar things to say about humans. Will they say that the species, Homo sapiens of the Holocene epoch, figured out many important concepts in physics, but lacked the brain structure needed to understand the math required for the Theory of Everything?

A central tenet of Christianity is that God created humans in God's image. As a result the human striving to understand the natural world (God's creation) is a quest to know God. It also follows that how humans treat other humans is a reflection of our relationship with God.

But, all around I see humans creating God in the image of humans. Much of the evil done in the name of God, that atheists cite to disparage theists, arises not from believing in God, but from anthropomorphizing God. Humans have created innumerable images of God that for most part depict God as acting and thinking like humans. But, the sheer scale and grandeur of the universe is evidence that a creator God is unimaginably extravagant and inventive. I would be careful about concluding that humans are the endpoint in the creative process.

Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy

Wednesday, September 1, 2010

When Markets Fail

I just finished reading Broke, USA: From Pawnshops to Poverty, Inc. How the Working Poor Became Big Business by Gary Rivlin. It is a disturbing read about what Rivlin calls the "poverty industry" in the United States. Poverty is in fact a lucrative business opportunity for the many entrepreneurs that Rivlin profiles. This is a discovery not lost on major banks that now have large investments in companies that provide sub-prime loans of all types. I knew from doing research on my own book--The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy--the counterintuitive result that collectively the working poor represent an enormous source of wealth for those who know how to tap into it. Rivlin's reporting explains how the systematic stripping of resources from communities on the financial edge is accomplished.

In my book, I liken some of these payday loans, sub-prime mortgages and credit card products to old-fashioned "company stores." But, as I read Broke, USA, I was reminded of another analogy raised in the book by Stacy Mitchell-- Big-Box Swindle: The True Cost of Mega-Retailers and the Fight for America's Independent Businesses--colonialism. Mitchell reports on the systematic destruction of local economies and businesses by mega-retailers such as Wal-Mart, Home Depot, and Target. The rationale for allowing mega-retailers entrance into a community is the market demand for their products. But, often after the destruction of local businesses and jobs, there is no longer enough wealth left in the community to support these large retailers. The corporations move on, abandon their stores, and leave a shuttered main street as well. To Mitchell, this is not the free market at work. Rather, it is exploitation akin to colonialism, in which a large power imbalance allows a distant corporation to appropriate wealth for its own enrichment at the expense of a local community.

But, the question I kept wondering about was: Why doesn't the market for loans work for poor people? Much of Rivlin's reporting was about political battles fought in state legislatures, not about businesses trying to out-compete other businesses with a better product. One of Rivlin's protagonists, Martin Eakes is founder of the Center for Responsible Lending (CRL), a company that specializes in providing reasonably priced mortgages to high-risk, low-income homebuyers. Eakes argues that CRL shows that it is possible to lend at reasonable rates to "sub-prime" borrowers and make money. He contends that the usurious, triple-digit annual interest rates, routinely charged by sub-prime lenders are not necessary, and should be banned.

However, in Rivlin's narrative, Eakes spends more time joined with community activists lobbying for bills to protect consumers against predatory lending, than expanding the CRL business model to compete nationwide against the sub-prime lenders by offering a lower-priced product. It is this paradox that gnawed at me while I read the book. It was only by the end that I realized the reason the market fails for sub-prime borrowers, and why government intervention is necessary.

The argument from the sub-prime lending industry is that interest rate caps take away consumer choice. No one forces people to take-out payday loans, pawn possessions, or sign documents for sub-prime home equity loans. Because these choices are freely made, the borrowers must see some value in the loan product. If the demand for sub-prime loans didn't exist, neither would the sub-prime lenders.

I tend to have a bias in favor of these kinds of arguments. I believe that consenting adults should be free to make decisions with their money for or against products. I have also observed that in any event, markets are extremely resilient and difficult to stamp out. One only needs to look at the markets for vices--such as drugs, gambling, and prostitution--to see the futility of trying to eliminate the supply of a product or service when there clearly exists a demand.

As a result, I tend to believe that the best way to effect change is through the market. Educating consumers on how to act in their best interests is my preferred approach. My writing, in books like the Two Headed Quarter, is intended to teach consumers how to make the best choices, not to proscribe choices. Admittedly, my bias is influenced by my own societal role as an educator.

However, I also know that markets cannot solve all problems. We would not have roads, airports, the Internet, universal phone and electrical service, without the intervention of the government acting for the common good. I also know that markets can and do fail. I was never naive like Alan Greenspan, who seems to have believed that the self-correcting tendencies of markets would eventually right all wrongs. (This belief came from a man whose job was to artificially manipulate the mortgage market by raising and lowering interest rates.) As we have recently seen, market failures can be spectacular and so threatening to the financial order, that the most committed "free market" advocates will abandon their principles and grovel before Congress when their luxury lifestyles are at stake.

But, I realized by the end of the book that the problem is deeper than lack of education. For a market to work the participants must trust each other. They must act in good faith. It would be impossible to conduct business of any kind if no trust existed between the buyers and sellers. The simplest economic interactions-grocery shopping, car repair, hair styling, eating in a restaurant-could not happen. Think about the implied contract when you order food off a menu, drop your car off for an oil change, or get your hair cut. You trust in an honest delivery of the service, and the provider trusts that you will pay.

During the financial crisis of 2008, banks could not trust other banks to repay loans, and the entire system for extending credit on a daily basis to cover short-term obligations froze. Without government assurances the banking system might have collapsed, not because of a shortage of money, but because of a shortage of trust.

Many of the lending practices profiled in Broke, USA violate trust. The lenders are not acting in good faith when they sell loans to people who cannot possibly repay the money, sell unnecessary and overpriced mortgage insurance, provide less favorable loan terms when the borrower qualifies for better terms, and then sell the toxic products to investors representing them as a safe securities. It is disingenuous for the lenders to rationalize these actions by saying that they were only acting in their best financial interests, and that the borrowers and investors should have taken more care to act in their best interests because that is how free markets work.

No, free markets will not work if greed is the only motive driving them. There is a famous quote from Adam Smith that is frequently invoked to justify greed. He wrote:

"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."

--Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations

But, self-interest in the community setting that Smith describes is more than just maximizing income. It's also about sustaining the relationships necessary for a community to exist in the first place. The butcher, the brewer, and the baker, will not be in business for very long if greed is their only motive. They must trust in and look out for each other, or else none of them will have their needs met. Their self-interest is not just money; it includes a need for each other.

Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy

Sunday, August 1, 2010

Avoiding the Expectations Trap: A Tribute to Dick Norberg

My scientific mentor, Richard (Dick) Norberg, died this spring. He provided my training as a scientist and supervised my doctoral thesis. Dick was a professor of physics at Washington University in Saint Louis for more than 50 years, and a pioneer in the field of magnetic resonance. Long before magnetic resonance (MR) became part of the medical imaging technique known as MRI, he made key discoveries and obtained insights that led to our modern understanding of the phenomena.

I worked with Dick for three years in his laboratory at Washington University. Learning to become a scientist is nothing like school would lead you to believe. Science, as it is practiced by scientists, is more of a craft than a method. Graduate training in science is akin to an apprenticeship in which an aspiring scientist learns the trade from a master craftsman. Each master has his or her own style and approach. I am often confused when my children ask me for help with their science homework because I am unfamiliar with the "scientific method" their classes teach. For an excellent article on how actual scientists conduct science see: "How Science Works." It is on a Website that provides resources for K-12 teachers to correct many misconceptions about the process of doing science.

Dick loved doing physics and remained enthusiastic and engaged until the very end of his life. I loved having him as a teacher. He expressed his usually strong opinions in ways that stayed with you forever. I can still hear his voice when I recall the many words of wisdom he imparted. Some examples of his observations and advice:

"Any academic department with the word 'science' in its name is not."

I recalled that statement with a chuckle the year after I left Washington University to do postdoctoral research at the University of Georgia. On one of my daily walks from the bus stop past the school of home economics I noticed that a new sign had gone up in front of the building that said: "School of Consumer Sciences."

"When you write a paper, always separate the data and put it first. What you say about the data might turn out to be wrong later on. But, if you did the experiment correctly the data will be true forever."

This is actually a profound insight on the nature of scientific progress that many people fail to understand, and high school science classes fail to teach. People are always quick to point out that scientific theories change and that many ideas scientists of the past believed turned out to be wrong. The implication is that nothing about science is permanent. But, nature does not change. An experiment poses a question directly to nature and the answer that comes back will always be true. All future scientific theories will still have to explain today's scientific facts.

But, the most important advice I received from Dick Norberg was on the day I left. I had completed and defended my doctoral thesis, finished up with the movers, and packed my car for the drive to my new city and job. I stopped at his office to thank him and say goodbye. His parting words were:

"Whatever you do in life, do what you enjoy. Don't do what others expect. Your wife, your parents, your children, your friends, will all have expectations. Don't give into them. Do what you most enjoy."

As time has gone on, my appreciation of this advice has grown. As a teacher for the past 16 years, I've seen many students sabotaged by expectations.

I've seen students in majors for which they have no real interest or aptitude, but their parents refuse to fund their college education unless they study something "practical." The result is students in engineering programs even though they cannot do the math and have no interest in building anything. There are also students muddling through business degrees who would be much better served in the long run with a liberal arts degree. It is actually more practical to have good grades in history major than bad grades in a business major.

I've seen students who are not mature enough to be in college but go because it is the expected next step after high school. The result is that they are wasting their time and their parent's money. Partying all night and sleeping all day can be done at a much lower cost at home than in college, and the results achieved will be the same.

I've seen exceptionally smart students who should become scientists, but their parents expect them to become medical doctors because of the prestige it will bring to the family. The result is if you ask these students why they are so passionate about medicine that they intend to devote their life to its practice, they can only express a nebulous desire to "help people." Of course, I can think of many professions that "help people" and are unrelated to medicine. If you intend to become a medical doctor you should have a real interest in medicine.

I've seen students juggle the demands of double and even triple majors so that they can pursue their interests and satisfy family expectations. The result is a great deal of stress from pursuing credentials that have little meaning in the long run. Employers care more that you have a degree with decent grades than all the majors and minors that you acquired along the way.

My own three children are all artists. I have two in college and one in high school. They are now aware enough to observe friends doing what's expected. My daughter said to me one day: "I'm so happy that you and mom support me. You don't discourage my interest in theater and force me do something else. Many of my friend's parents aren't like that."

I said: "You have to do what you enjoy the most and see where your interests and talents take you. You'll figure out how to earn a living. You can't spend your life doing what others expect."

I thought about Dick Norberg when I said that. Dick loved to teach and loved doing physics. I was one of 47 doctoral students he taught in his more than half-century as a physics professor. Had he wanted, he could have held more prestigious administrative positions at the university. But those kinds of positions would have kept him away from research and teaching.

I now realize that as a teacher he wasn't just speaking to me that day. He was speaking to my children and my students, and in the future their children and students. Teachers have the ability to speak to the future. That is what he enjoyed.

Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy

Sunday, July 4, 2010

The BP Oil Spill: Why Slow Is Much Faster

As I read an article in the online Wall Street Journal about the equipment failures leading to the disastrous oil spill in the Gulf of Mexico, I am reminded of a lesson that I teach my laboratory students. It is this: The fastest, cheapest way to get something done is to proceed slowly. Check and recheck each step before proceeding to the next. Don't rush and don't make assumptions. It is counterintuitive advice to give students, who like everyone else, are in a hurry. But, as BP is finding out, assumptions can be costly, time consuming, and deadly.

The Wall Street Journal investigation is the most complete account to date in the media of what went wrong on the Deepwater Horizon. It is a story of rushed procedures and faulty assumptions that appear motivated by schedule and budget considerations. For example:

  • BP cut short a procedure designed to detect gas in the well and remove it before it becomes a problem.
  • BP skipped a quality test of the cement around the pipe (despite a warning from the cement contractor).
  • BP installed fewer centering devices than recommended (6 instead of 21).

The article also reported that on the day (April 20) the Deepwater Horizon exploded and sank, a disagreement broke on the rig over the procedures to be followed. A BP official had a "skirmish" with Transocean officials over how to remove drilling mud. BP prevailed and several hours later 11 people were dead and oil was spewing into the Gulf.

It appears that all involved knew corners were being cut, but a consensus emerged that the process would "most likely work." The cementing contractor Halliburton said that it followed BP's instructions, and that while some "were not consistent with industry best practices," they were "within acceptable industry standards."

But, the problem with complex equipment and procedures is that "most likely" can easily become "very unlikely" when everything has to function. Simply adhering to "acceptable standards" is no guarantee that everything will work.

This is lesson my students usually have to learn the hard way, even though it can be proved mathematically. Suppose you have a 90% confidence in your ability to make electrical connections. You think that if you wire your project without conducting tests, it will have a 90% chance of working. But, if you have 10 connections and each one must work, it is unlikely your project will succeed. The reason is that probabilities for simultaneous events multiply. If two events with a 90% chance of success must occur together, the likelihood of the combined events happening is (0.9) x (0.9), or 0.81, which is 81%. If 10 simultaneous events must occur, the chance becomes (0.9) multiplied by itself 10 times (0.9)10, or 0.35, which is a 35% chance of success.

A relative high confidence of 90% for a single can connection can be a deceiving number if all of them have to work. Worse still, when it doesn't work, you won't know why. It is difficult and time consuming to track down errors. The only solution is to spend extra time during assembly to test each connection when you make it, before proceeding to the next one.

I see this problem all the time when I teach. Students will follow the assembly instructions but do not perform the tests as they go along. They assume everything is correctly assembled. At the end they will have a beautiful piece of equipment that doesn't work. It is brought to me to figure out why and the students watch in dismay as I dismantle it piece by piece to search for the problem. Sometimes it is a mistake or misunderstanding on the first step, and that forces the students to begin all over again. They learn that time-consuming testing actually saves time.

It's not only students that struggle with this lesson. A friend once asked me for help wiring an external keyboard he purchased for a handheld device. He had followed the instructions, but after making all the connections it didn't work. Frustrated and confused he didn't know what to do next. He took it apart, put it back in the box, and called me.

He came to my office where I spread the parts out on my desk and followed the enclosed wiring instructions. But, after making each connection, I tested it with an electrical meter while twisting and pulling to make sure it was secure. I did this for every connection, because I made no assumptions about reliability based on how it looked or the high probability that almost all the connections I make are secure. When I finished, I turned the device on and it worked.

My friend said: "But, I wired it the same way you did. Why didn't it work?"

"You didn't do the same thing I did. You didn't test each connection when you made it. When it didn't work, you had no good way of finding a single bad connection, which is all that is needed for it to fail. I made sure each connection worked before I continued to the next one."

For highly complex equipment, such as on oil drilling platform, a 99.9% success rate for each step might not be acceptable. Consider a procedure that involves 10 steps with a 99.9 % chance of succeeding. The number 0.99910 is equal to .99, or 99%. A 1% chance of failure sounds safe, but the fact is 1% events happen frequently, about 1% of the time to be exact. If an event with a 1% frequency results in deaths, injuries, environmental and economic devastation, and possible bankrupting of the company, the risk is unacceptably large.

But, what is most disturbing is that even if the executives at BP making decisions understood the mathematics of risk it might not have made any difference. The root of cause the Gulf oil spill is the same as the root cause of the financial meltdown two years earlier. The executives take dangerous risks because they realize enormous personal gain when they succeed, while others will pay for the losses when they fail.

Imagine if Tony Hayward, BP's CEO, faced personal financial ruin from an oil spill. What if he had to contemplate having no yacht, no house, no assets, no job, and complete loss of livelihood? After all, those are the circumstances facing thousands of people on the Gulf coast as a result of the oil spill. What if Tony Hayward had to personally operate the equipment on the Deepwater Horizon so that its failure would end his life as it did eleven others? Do you think he would run his company differently? I bet if his life and livelihood were on the line he would make sure careful testing is done to insure safety for all concerned.

Unfortunately, the most likely outcome of this disaster is that nothing will change. There will be calls for tougher regulation, but, just like the financial overhaul working its way through Congress, change will be cosmetic. Opponents of more financial regulation use the same rhetoric as opponents of more oil industry regulation. They denounce increased regulation as an attack on "free markets."

But for "free markets" to work the agents must have a personal stake in the outcomes. Real free markets are composed of the thousand of small business owners and their workers who have a personal financial stake in their successes and failures. It's a sham to say that the executives of banks and oil companies are agents in a free market when they can only reap profits, while everyone else pays for their losses.

Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy

Saturday, February 27, 2010

Financial Literacy: Maryland's Education Proposal

The Baltimore Sun recently published an op-ed piece by Maryland Comptroller Peter Franchot, supporting proposed legislation in the Maryland General Assembly to require all high school students to complete a stand-alone course on financial literacy before graduation. Franchot argues that educating our children in the basics of financial literacy will help avert future economic downturns. As is typical of many people in the government, he blames the recent economic crisis on bad choices made by consumers. Mr. Franchot writes:

"Thus, in far too many instances, we entered into financial commitments that we couldn't afford, with terms and conditions that we didn't truly understand, in order to buy things that we really didn't need. If more Marylanders had the benefit of sound financial literacy education, fewer of our friends and family members would be facing the loss of homes and life savings today."

I think teaching financial literacy to high school students is a good idea. But, the problems with the financial system go far deeper than a new high school course will fix.

First there is the problem with "stand alone" courses. To understand personal finance, students need to understand more about math, especially arithmetic, than they currently do. Many consumers made bad decisions on loans because they did not understand the basic math behind interest and payment calculations. My own belief is that personal finance education should be woven into current math courses. It would make math more interesting, and therefore relevant. Too many students, and adults view math as a "stand-alone" subject with no connection to their daily lives. If consumers learned just how many dollars their lack of mathematical knowledge costs them in the marketplace, they would see that math is an important subject.

Second there is widespread corporate-government collusion to deceive consumers and then blame them for falling victim to the deception.

I gave a talk on the U. S. mortgage crisis at an international conference on science in society at Cambridge University in the United Kingdom this past summer. In academic jargon the paper I presented was titled: "Quantitative Reasoning Applied to Modern Advertising." The term "quantitative reasoning" just means applying arithmetic to real-world problems. It is a way of thinking that is second nature to scientists, but unknown to most people outside of science.

I argued that if consumers learned some of these quantitative reasoning methods, they could greatly improve their day-to-day financial decision-making. I concluded that the best way to effect economic change is through the market. I said that people selling mortgages act according to their financial interests. In response, consumers need to educate themselves to make choices that are in their best financial interests.

After my presentation, an Australian economist, in a private conversation, disagreed with my conclusion. He said that home pricing, and mortgages are too complex for the average person to understand. It is incumbent on the government to regulate the market. He said that Australian government did not allow the kind of toxic mortgage products that brought down financial institutions in the US and UK, and wiped out millions of homebuyers. As a result, Australia did not have a mortgage crisis.

I admitted that my American bias influenced my conclusion. I told him that in the United States, government and corporate corruption is so institutionalized, that meaningful regulations to safeguard the financial well being of average Americans would never be implemented. From my viewpoint, education is the only realistic way American consumers have to protect themselves.

But, my viewpoint is not meant to excuse corrupt behavior. If you leave your house unlocked and are robbed, you made a bad choice. But, a crime was still committed. If you agreed to a mortgage that you didn't understand, you made a bad choice. But, the lender should have made sure that you understood the mortgage. Instead, lenders created mortgages designed not to be understood.

That is why I get so angry when I see government officials like Mr. Franchot blaming uneducated consumers for the financial crisis. Education is needed, but it will only go so far in fixing our financial problems. It will not replace trust. All parties to a contract must act in good faith for our financial system to work.

Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy

Thursday, February 11, 2010

The Big Snow: Fooled by Variance

No need to visit the gym this week, even if it were possible. I've had plenty of exercise shoveling more snow than I have ever seen at one time in my entire life. More than 4 feet of snow fell in the Baltimore region in just 5 days. As someone who grew up in Albany, New York, and attended schools in Rochester, New York and Madison, Wisconsin, a heavy snowstorm is not a novel event for me. I do not panic the moment flakes start swirling in the air, as many Baltimore-area drivers do. I often question the judgment of school officials, who close the entire system down when an inch or two of the white powder appears. But, 4 feet is an impressive amount of snow by almost any standard. I would not be able to drive anywhere even if I wanted to. Forward motion of my automobile is not physically possible under these conditions.

As snowfall totals go, this event has shattered records. That has kept the media and government people busy tabulating and interpreting numbers. The tabulations are of interest, but the interpretations are mostly silly. Nassim Taleb's wrote a brilliant book on investing titled Fooled by Randomness
. With apologies to Taleb, I've titled this post "Fooled by Variance," which is a condition afflicting a great many of the public statements about the storm.

Variance is a measure of the typical deviation of a measurement from its average value. The usual definition is that it is the range encompassing 95% of the measured values. For example, if we use our rulers to measure human stature instead of snow depth, we would find that the average height of an adult male in the United States is 69 inches. Of course, finding males taller or shorter than 69 inches is common. However, 95% of adult males have a height within 6 inches of the average-between 63 and 75 inches. That range is the variance. However, extreme cases outside of the variance still occur-male heights as short as 30 inches, and as tall as 100 inches have been measured.

In the past week media reports about the storm have referred to it as "a once in a lifetime event," "unprecedented," and "a hundred-year storm." In other words, the storm intensity was far outside the expected variance. But is that claim true? In the 16 years that I've lived in the Baltimore area, this is the third time that I've been snowed-in for an entire week. The week of January 7, 1996 delivered a similar one-two punch with 22.5 inches falling on January 7 and 8, followed by another storm a few days later with more than an additional foot. The blizzard of February 15-18, 2003, with 28.2 inches, remains the record holder for a single storm event. We will never know if the February 5-6, 2010 storm would have topped that number, because the observer, at the official airport weather station, did not follow the proper procedure in recording snowfall measurements.

The established procedure, for determining snow accumulation, is to wipe the snowboard clean every six hours, and then total all of the six-hour measurements. If you wait until the storm ends to measure snow depth, the number will be smaller because the snow will compact under its own weight. If you total more frequent measurements-say every hour-the number will be higher because of reduced compacting. Of course, there is nothing magical about totaling six-hour measurements. It is just an agreed upon protocol to insure that the snowfall amounts were measured under the same conditions, so that a comparison makes sense. But, it also shows that these numbers, and the "records" based on them, are to a certain degree arbitrary.

The 1996, 2003, and 2010 events were all massive paralyzing storms that in each case shut down the city for an entire week. There is not much difference between these three events, which would suggest that the natural occurrence of these kinds of storms is more frequent than "once in a hundred years" or even "once in a lifetime." Not that we would have anyway of knowing the actual intensity of a "hundred-year storm." Snowfall record keeping in Baltimore began in 1883-127 years ago-so we are many centuries away from having enough data to analyze for "hundred-year" or even "once-in-a-lifetime" events.

So should Baltimore be more prepared for large snow events? An article in the Baltimore Sun reports on the amusement of the northern cities. They brag that their streets are clear and their businesses and schools open. But, I lived for five years in one of the snowiest cities in the United States-Rochester, New York-with an average annual snowfall of 92 inches-about 7.5 feet. Actually, 4 feet of snow in 5 days would shutdown Rochester too. The high annual snowfall in Rochester results from lake effect flurries that blanket the city with light snow almost everyday during the winter. My freshman year at the University of Rochester it snowed for 60 consecutive days. It never snowed enough at one time to close the school, but over the course of the entire winter it resulted in an impressive snowfall total. Lake effect flurries mean that snow removal is an ongoing activity during the winter in Rochester. It is not an "event" like it is in Baltimore.

Apparently Rochester has a high average annual snowfall but not much variance. In contrast, Baltimore has a much smaller average annual snowfall-only 18 inches-but a large variance. It is rare, but it does happen that in Baltimore a single storm will dump more than an average annual snowfall. In Rochester it is nearly impossible for a single storm to deliver more than the average annual snowfall. Which means that it makes no sense to have the snow removal capability of Rochester. It would be an under utilized resource, and still not save us in extreme weather events, when the real problem is where to put all the snow that is plowed.

Although, if the climate changes, and monster snowstorms become frequent, then investing in more snow removal equipment would make sense. But a single storm event does not define a climate-a fact that commentators at Fox News are oblivious to. These global warming deniers were quick to claim that the storm "proved" that climate change theories are wrong. It is scary enough when science is politicized. After all, the laws of nature are oblivious to party affiliations. But the inane reasoning of Fox News is laugh out loud funny, a point made in a hilarious spoof on the Daily Show on how to misinterpret data. What is not funny is that Fox News commentators have such a high-profile platform to promote ignorance.

So what can we conclude about this event? The scientific answer is not much. Annual snowfall totals have a great deal of variance, especially in cities such as Baltimore where the annual average is a small number. In those cases, annual snowfall totals will not even form a normal distribution about a mean, because snow accumulations have no upper limit, but a lower limit of zero that cannot be breached. That means that the "average" annual snowfall isn't all that meaningful a number. It is the variance that we should be concerned about.

Tuesday, January 26, 2010

Cash for Gold Scams: Exploiting Desperation and Ignorance

With the price of gold soaring, while the economy falters, selling little-used gold jewelry has become an attractive means for raising extra cash. In early December of 2009, gold hit a peak of over $1200 per troy ounce, about 3 times the just over $400 per troy ounce it sold for 5 years earlier. As a result the melt value of gold necklaces, rings, and bracelets, has become a valuable asset for many jewelry owners.

That fact has also been noticed by gold dealers, who do a brisk business these days buying up unwanted jewelry in order to extract, and resell the gold content. Commercial TV, and the Internet are awash with ads offering cash for gold. Unfortunately, many of these "cash for gold" operations are scamming their customers. It is easy to fool people, because many jewelry owners have no idea how to estimate the worth of what they own.

The Today Show on Friday January 22, reported that heavily advertised online sites, such as, only pay between 11% to 29% of the value of the gold. The reporter interviewed Ben Popken from the consumer watchdog site that did a study on Internet cash-for-gold offers. According to Popken a pawnshop would pay far more for your gold jewelry than many of these Internet sites. You can see a video of the Today Show report and interview with Ben.

The advice is to always get more than one offer for any gold jewelry that you sell. But, it is actually not that hard to appraise your own gold, and determine if an offer is reasonable or not. I've even created a Web calculator to assist in doing your own appraisal. All you need is a kitchen or postal scale that determines weights in ounces (oz). Place your gold chain on the scale to determine the weight.

Next you need to know the purity, which is expressed in carats. If you have the original packaging, the purity is usually on the label. The most common gold alloy used in jewelry is 14 carat (although 10 carat and 18 carat are also widely used). Pure gold is 24 carat, which means that a 14-carat chain has (14/24) or 0.58333 gold content.

The spot price of gold varies by the day. Updates can be found at many financial and precious metal Websites, such as Today the price is about $1100 per troy ounce. A troy ounce is slightly more than a postal, or food ounce, it is 1.09714 ounce to be exact. That means an ounce measured on a postal scale is (1/1.09714) or 0.91146071 troy ounce.

Those are all the numbers you need to appraise the gold content of your jewelry. Suppose your 14-carat gold chain tips your food scale at 1.5 ounce. You own (14/24) x 1.5, or 0.875 ounce of gold. That is 0.875 x 0.91146071, or 0.7975 troy ounce. The dollar value today would be $1100 x 0.7975, or $877.

Obviously no dealer will offer you that much for your gold chain. The dealer needs to cover costs of overhead, purifying the gold, and reselling it. The dealer will not be in business without a markup. But, if you are offered $250 for the chain, an amount that might seem like a lot, you are getting ripped off. The dealer's services are not worth that much of a difference between the spot price and the offer. A local pawnshop might offer 75% of the value, or $658.

If you want to estimate the value of your gold, get out your food scale and use this calculator.