MIT Conference to Discuss Low Vol Investing

Next Friday, March 9, there's going to be an MIT Sloan Investment Management Conference, over in Cambridge MA. It's pretty cheap (~$100), and you can register here. Makes me a little jealous of people who live near Megacities like Boston, New York City, or Chicago, where all the Bloomberg terminals exist, because such things are so much more frequent. I'll be a discussant there on Low Volatility Strategies, and I'm hoping for some vigorous disagreement between various factions in the way that families often fight more than strangers.

Generating Deep Thoughts

I was reading a lot by David Rock, who seems to have some pretty neat insights on the mind. Anyway, I was struck by this insight on generating 'aha!' moments:

variables that improve the ability to detect weak associations may improve insight solving. In short, insights tend to involve connections between small numbers of neurons....Just as it is hard to hear a quiet cell phone at a loud party, it is difficult to notice signals that have less energy than the general energy level already present in the brain. Hence, we tend to notice insights when our overall activity level in the brain is low. This happens when we’re not putting in a lot of mental effort, when we’re focusing on something repetitive

Which reminded me of one of my favorite Nietzsche quotes:

All truly great thoughts are conceived by walking.

Goldman Programmer Breaks Free

So, this Russian immigrant left his first and only finance job after a couple of years to work at another firm for 3 times the pay--and around $1 million-- a pretty clear case of stealing intellectual property (he was busted taking many lines of code). Yet interestingly, Goldman Sachs somehow got they guy convicted criminally, under the Economic Espionage Act, highlighting they have the best relations with all levels of our government. Aleynikov was freed on appeal last week.

Goldman is actually pretty reasonable most times. After all, many of their ex-employees go off to start successful funds, so it's not like they are paranoid, litigious bastards whose ex-employees don't get such opportunities. What this guy did was wrong, but this clearly was prosecutorial overreach: he was serving an 8-year sentence in Fort Dix. One thing I learned in litigation is that when a powerful guy wants you stopped, he will throw the kitchen sink at you to see what sticks. This is when intention drives tactics, because with federal or state law, intellectual property or confidentiality agreement, criminal vs. civil law, it doesn't matter, the company will use what works best, and some pretext will sound defensible to those without a dog in the fight (most everyone). But I really hope the people behind the initial legal decisions go to a special circle of hell because justice is about proportion, not right/wrong, and this was highly disproportionate.

Religion in Politics

All this discussion about Santorum's religious beliefs reminded me of a remark in a famous speech on existentialism by the German-American philosopher Walter Kaufmann back in 1960. In "Kierkegaard and the Crisis in Religion" he makes this point (around 51:00):

[People today think] that one ought to have some faith in some organized religion, but let me be blunt, not take it seriously......I don't think the people of the United States today would stand for a Presidential candidate who would not be affiliated with some kind of religion...but if Mr. Kennedy said, I take my Roman Catholicism seriously, he would be through, and if Mr. Nixon were really a Quaker, he'd be through...what they want is a Quaker who is no Quaker and a Roman Catholic who is no Roman Catholic.

So, while we act like the body politic is changing all the time, really not much has changed over the past 50 years in that dimension. The masses love hypocrites more than anyone who flat-out states they are atheists or actually believe in some organized religion.

Conservatism as Orgasm

Alison Gopnik studies babies, and finds them active little theorists, academics with no responsibilities and lots of time for inquiry. She titled a paper Explanation as Orgasm, noting our pleasure from explanations is like an orgasm, in that it must have some kind of innate reward to get us to do it. Children need to learn about the causal structure of the world, so there must be something hard wired to get them all to seek theories to explain the world, otherwise it wouldn't be common.

Gopnik quotes Hobbes:

there is a lust of the mind, that, by a preserverance of delight in the continual and indefatibable generation of knowledge, exceeds the short vehemence of carnal pleasure.

I do get a large amount of intrinsic pleasure in learning new theories that I think are true and important. Perhaps my delight in figuring things out is not some appreciation I have developed, like learning to appreciate a Jackson Pollack or Bach cantata, but rather something instinctual, like appreciating landscape paintings or great guitar riffs.

Gopnik does not really mention what this biological payoff might be, but clearly it is not much like the cocktail of brain chemicals released during an orgasm, including norepinephrine, serotonin, oxytocin, vasopressin, nitric oxide, and prolactin. The benefit of 'explanation' is a lot different, but no less physical (and thus the analogy retains).

Consider the payoff one gets from an 'aha!' moment, those instances when some pattern is recognized that explains the data. For example, note when you see the dalmatian in the picture here, you get an 'aha!' moment. They have many ways to test for 'aha!' moments, such as asking you what word goes with pine, crab, and sauce (hint: it's a fruit). Researcher have found that 0.3 seconds before the subjects indicated solutions achieved through sudden insight, there was a burst of neural activity of high-frequency (gamma band) activity. Such simplifications of reality, explaining more with less, is intuitively pleasing because it releases a burden on our brains, we now need hold and arrange fewer facts to see the same phenomena.

That's all fine, but it suggests a darker flip side. If we abandon an ideology that currently explains many things in our mind--global warming, Freemason conspiracy--then many facts explained by this old ideology are now free floating, unexplained. Letting those go must be as unpleasant as learning a new theory is pleasant, one is the other in reverse. The assumptions we adopt are largely affected by birth milieu, accidental in some sense and so obviously inferior in many respects relative to what an omniscient being would assume, so we have a lot of baggage.

Say we notice that one of our ideologies (we have more than one, as one might believe in libertarianism and String Theory), is definitively inferior in certain cases, and a better theory exists. In that case, it is costly to change, as you would unleash a flood of bad high-frequency brain waves upon scrambling your neat theoretical web that nicely holds many of your observations together. Thus, you reject the new theory and accept the anomaly in hope that an innocuous solution can be found, like the relativistic adjustments for really small or fast objects in the Newtonian paradigm.

This could explain why science progresses one funeral at a time (ie, thus not political conservatism as orgasm, but the same conservatism that has kept Noam Chomsky and Ron Paul having the same radically opposite beliefs for decades).

Feynman noted that people tend to fool themselves a lot:

The first principle is that you must not fool yourself--and you are the easiest person to fool. So you have to be very careful about that. After you've not fooled yourself, it's easy not to fool other scientists.

We stick to old theories not merely to succeed in our current parochial coalition, but because it is innately unpleasant to replace ideologies that currently seem to explain a lot of facts. Young people have lots of neurons but not many connections, so they don't generate so much cognitive dissonance adopting new theories, as their existing set of theories is pretty limited. Young people can learn a lot because they aren't contradicting much, so it's rather pain free. In contrast, an adult who learns something profound loses some innocence, and has to then rethink deeper assumptions.

Low Vol Commodity Timing Strategy

Perez, Fuertes, and Miffre present a paper highlighting that lower volatility is associated with higher returns in general. Looking at he 1992-2011 period, the commodity futures with low volatility outperformed those with high volatility by 4.6%. The effects appears independent of momentum and contango/backwardization effects.

I doubt this finding is truly a good investment strategy because while really highly volatile assets have low, often negative returns, they have such high volatility they should simply be shunned: a 0.1 Sharpe strategy is a bad long AND short. Nonetheless, a good prejudice for any investor should be that highly volatile assets and times are not good times to be long.

This is now the stylized fact of asset markets: higher risk implies lower returns. As a first approximation, it is true. There has been incessant criticism of the efficient markets hypothesis, and Black-Scholes option formula, but I find these theories pretty successful in their non-caricaturized versions. However, the risk-return theory underlying the CAPM, and its spawn the Arbitrage Pricing Theory or the Stochastic Discount Theory, is not just totally vacuous, it seems to usually have a sign error! It is not correct as an approximation. In contrast, Black-Scholes gives decent Greeks given an implied volatility, and consistent with the efficient markets hypothesis, it is hard to outperform passive indices.

These researchers have so imbibed the academic Kool-aid they state the the academic financial equivalent of 'furthermore, I think Carthage must be destroyed', with this aside:

This serves to extend the evidence of Ang et al. ...that the explanation for the observed profitability of idiosyncratic volatility strategies may lie in a yet-to-be- specified macroeconomic or financial factor.

That is, as risk must explain persistent returns, the only theory that makes sense to these savants is that that there's some risk factor that is like the stock market but actually inversely correlated with it (and thus, positively correlated with the relative returns of low-volatility equities and commodities). It must be subtle enough to escape notice of thousands of research academics for 50 years, and powerful enough to affect equities and commodities cross-sectionally. The thought that such a solution is possible highlights you simply can't falsify a framework like modern asset pricing theory. Further, there's so much strained hope in this view of the world that it puts delusional lottery ticket buyers to shame.

Thinking Metaphorically

Over at Edge.org, a couple scientists (Benjamin K. Bergen and Simone Schnall) mentioned that metaphors are a very powerful explanation of how humans think.

The idea is that you don't just talk about understanding as seeing, you think about understanding as seeing; morality is thought of as cleanliness, affection as warmth, winners are thought of as being in front of others. The abstract is explained via the concrete, something we know, such as seeing, feeling warmth, clean, catching, escaping.

This is why everything is 'like' something else, and why 'its like...' is a great way to explain a new idea. We have a small set of basic things our brains know, assumptions, and these are then the basis for building our more complex thoughts. I think this is important in understanding the problem of consciousness, in that we have certain thoughts are not inferred or reasoned, but rather hard wired. For example, we infer consciousness in others not via first-year philosophy courses, but rather mirror neurons that fire as if we were smiling, etc.

Understanding the origin of our intuitions is helpful in understanding the concepts they relate to. Schnall talks about how we derive meaning fundamentally from analogies with our sense of our bodies. After all, the brain's main job is controlling its body, as over 50% of its neurons are within the cerebellum, the part of the brain that controls our motor activities. So, we all have a very deep, profound understanding of 'hard', 'up', and other sensations. Cognitive operations have arisen to solve certain adaptive challenges of the physical environment, and so embodied metaphors are the building blocks of perception, cognition, and action. People think metaphorically.

de Botton on Religion

I'm rather baffled by the strong atheism espoused by Dawkins and Hitchens, for reasons well put by English writer Alain de Botton:

Instead, he connects his father's militant atheism to the affliction that he reckons made Dawkins and Christopher Hitchens so caustic in their bestselling attacks on religion. "I've got a generational theory about this. Particularly if you're a man over 55 or so, perhaps something bad happened to you at the hands of religion – you came across a corrupt priest, you were bored at school, your parents forced it down your throat. Few of the younger generation feel that way. By the time I came around – I'm 42 – religion was a joke.

My parents never really took religion seriously, and neither did many of my friends did growing up. So, I just don't get all worked up about how oppressive religion is in the West because it has always been too easy to opt out. Nonetheless, Hitchens gave a last interview to Dawkins and said to be more strident, and get his collagues to close ranks. Dawkins, meanwhile, was conspiring with Stephen Jay Gould before his death to not debate critics of evolution. It's a defensiveness I simply can't empathize with.

How to Detect Blather

Macroeconomists dislike criticism like anyone else, and especially hate the idea that their opinions are no better than anyone else. So, I especially liked this little quip from one of the most insecure economists blogging today, Brad DeLong, who was invited to speak on macro at some poli-sci class:

Professor Intro:Brad’s a great guy, we go way back ...he blogs...here’s Brad

J.Bradford DeLong: I do remember being horrified once when I was introduced by the Vice President of the Federal Reserve Bank of Kansas City, not as an economic historian or macroeconomist or the sometime Deputy Assistant Secretary of the Treasury for Economic Policy, but as the weblogger.

So I’m going to start by putting up what I’m calling equation 11 up on the board, simply to demonstrate I am a real economist and to say this equation 11 is going to be the centerpiece of Lawrence H. Summers and J. Bradford DeLong’s Fiscal Policy in a Depressed Economy, which is going to be presented at the Brookings institutiton on Friday March 23, and then published in the Spring issue of the Brookings papers on Economic Activity.

Intro: You are a serious scholar and a serious policymaker which I did omit...I apologize

Here's the equation 11 DeLong refers to, which contains 7 variables, a couple of which are straightforward (tax rate, the real growth rate), the rest could all be somewhere within the (-inf,inf) space that lets macro debates happen. Further, he's talking about rates of change, so there's an unspecified time dimension and these parameters are time-varying, having different short and long-term levels and the definition of 'long term' also probably varies over the business cycle.

He didn't actually discuss what the equation is, or how it adds to the debate, just that he, his credentials, Larry Summers and their initials, will be speaking at an Important Institution which will then publish research that contains as a centerpiece, an equation. In short, equation 11 is being used to prove his profundity in the most disingenuous way, because equations by themselves do not mean anything. That is, it's not like this equation has ever been empirically tested, let alone validated, and the history of economics is littered with empirically vacuous equations. Further, it's not like it is going into a refereed publication.

Many mediocre minds are impressed by famous colleagues, graduate degrees, Harvard, or equations. Those people aren't worth impressing. While such signals are correlated with good ideas, they are neither necessary nor sufficient for a good idea. When someone emphasizes these signals, however, that should lower their credibility among thoughtful people because it suggests bad faith, a preference towards pretentious irrelevancies.

I've seen this a lot, hiding behind equations. It often works because one does not want to sit down, understand what all the variables mean and how they are measured, etc. I just don't feel impressed at all by such equations because my Bayesian prior is they merely have a bad idea in equation form, so I don't give them the benefit of the doubt even when I'm lazy and have not enough time to evaluate their math.

A Market Timing Rule that Works

One of the most interesting things about finance is that while the past seems predictable, in practice it is very difficult to outperform passive indices using simple rules. Ivo Welch and Amit Goyal showed that a bunch of signals, such as the dividend-earnings ratio, may work with hindsight, but in real-time do not generate an ability to better one's equity returns over the business cycle. The best intuition for this bias is that if we take a set of data generated by a simple time series and plot the stock price vs. future return for that stock, there would be a strong negative correlation between price and future return for our sample, though in real time we know the mere stock price does not predict stock returns. This paradoxical result is why many are certain the markets are irrational or at least susceptible to myriad improvements via if-then logic, because they have never tried the rules they are certain exist (and why E-Trade and Ameritrade market as if giving rubes a lot of information about trends and ratios leads fairly straightforwardly to better returns--as opposed to merely more brokerage commissions).

Nonetheless, many give the advice that one should allocate more of their wealth, proportionally, to cash as one gets older, a basic rule would be your age in years as a percent should be your bond allocation (eg, 29% for a 29 year old). While this advice is common, most academics find such recommendations misleading, as Robert C. Merton and Paul A. Samuelson have written numerous articles over the years arguing these are based on a misunderstanding about long-term data that just happened to work out well over the past 120 years in the USA.

I'm not addressing that argument, that one should allocate differently based on one's investment horizon or level of human capital, rather, I'm focusing on the implication from the predictability of volatility. Consider the simple 10 day moving average implicit in the following variance forecast

EMAvar(t+1)=(1-λ)*ret(t)^2+λ*EMAvar(t)

With a λ=0.9, that's about a 10-day exponential decay moving average. Now, with daily observations from the market return data from Ken French's website (which has daily returns back to 1963), we get highly significant predictability. This fact underlies the usefulness of GARCH modeling of financial time series, and why Robert Engle won a Nobel prize for it. Volatility is eminently predictable:



In contrast, returns are not highly correlated with the volatility forecast (here data were bucketed into 20 groups sorted by the variance forecast):

There's a weak correlation with arithmetic return for volatility forecast, and extremely weak for the geometric return. The simple implication is that you might be able increase your Sharpe by avoiding the really highly volatile times that offer no corresponding return premium. The key, as highlighted in Welch and Goyal, is whether this is one of those patterns that disappears in real time, in that 'high' and 'low' in the above graph is only revealed after seeing what happens; a useful rule looks at 'point in time' data that is not forward-looking, and this is were most rules fail.

Consider the following rule:

• Invest 100% in equities if Ema(Variance)<[1.5*2 year rolling average of the Ema(variance)]
• Invest 100% in T-bills otherwise
• Only change allocation if you haven't changed it over the past month

Note the criteria is solely backward looking, just noting that if the variance estimate is too high. The final point just keeps it from doing some quick changes that would be impractical for a large portfolio, and in practice didn't change the results much. This generates the following results:

Data from 1965-2011

So, the Timing Rule generates a significant increase in the Sharpe ratio, from 0.25 to 0.43. With 33% of the volatility removed, it is comparable to 'minimum variance portfolios'. That is, those approaches also can also reduce your volatility relative to passive strategies by 30-40%, without sacrificing total return (usually increasing it a couple percent). The max drawdown moves from 55% to 47%, which isn't a lot, but the timing strategy missed a comparable loss in 2009, so more importantly the frequency of these 50%ish drawdowns was cut from 2 to 1.

This strategy generated a 68% average 'long' position over the time period, and so I compared it to a static 68%/32% equity/bond portfolio. Here one sees that as having really no change on the Sharpe, though it reduces the portfolio volatility by quite a bit.

Volatility timing reduces your portfolio volatility by one-third without sacrificing total return, unlike a static blended portfolio where the excess return is reduced pari passu.

Some might say: 'this is great, but what if everyone did this?' Well, if everyone priced in conditional market volatility (what was called 'risk' back in the 1960s), there would be a dynamic risk premium as standard theory presumes. That is, theoretically,

Asset Demand=k*E(ret)/variance

Here k is some constant, and this is a standard result (see here). Asset demand should be inversely proportional to expected return variance, unless expected returns move in concert. Expected returns do not move in concert with variance, but until they do you would be well served by following the normative implications of Modern Portfolio Theory, which may not explain how the world works, but does generate some useful tools for approaching your investment portfolio.

The take-away is this: purge your portfolios of the most volatile components, across time and assets, and you will slightly increase your return and lower your volatility significantly. It works precisely because it doesn't offer you something so attractive that, even if everyone believed it worked, most people would not use it. In Sharpe space, it's a much larger improvement than from switching from active to passive mutual funds (itself a good idea).

An implication of the above is that with the VIX at 18 compared to its two year average of 23, now is the time to get back into equities.

The Universal Benefits of Competition

One of the most important reasons why market outcomes dominate government ones is competition: government often rules out competition by law, or subsidizes production in such a way that alternatives are not truly competing. Yet firms that compete for customers minimize costs, maximize efficiencies, and innovate, much more than governmental organizations.

In Anna Dornhaus's lecture I did not mention her wonderful example from the animal world on competition. 'Cleaner fish' get rid of parasites on 'client fish.' The cleaner gets to eat the parasites, the client fish likes having fewer parasites. Sometimes, however, the cleaner fish take a bite out of client fish for some extra protein, and this hurts the client fish.

When client fish have a large territory, they have a choice of cleaner fish, and choose the cleaner fish that don’t bite as much. Client fish watch the fish in front of them getting cleaned (they often approach the cleaner fish in a queue). If the client fish being cleaned is jumping around in front of them, they know there is a lot of biting going on.

The equilibrium results are as follows:

1) Harmless and predatory fish are treated differently by the cleaner fish. For example, the cleaner fish do not bite predatory moray eels, and in fact are more prone to massage such clients!
2) Client fish with small territories and no choice of cleaner fish are treated much worse than those client fish with choices, as those cleaner fish tend to bite much less when they compete for customers.

That's a nice example of how universal the concept of competition, and incentives in general, is. We are nicer, better, less short-sighted, when we have to compete. Insulate yourself from the market, and you can easily rationalize biting your customers.

Charles Murray Reiterates Willpower

I really liked Tierney and Baumeister's book Willpower. Their argument is that willpower is a very useful skill, one that like a muscle tires when used, but can be strengthened through repetition. We should all practice daily acts of self-control to become more productive.

Charles Murray's latest book Coming Apart addresses the same theme, noting that society is splitting up into classes based on their abilities, which are highly driven by bourgeois values. Over the past 50 years, the working class have lost their industriousness, honesty, religion, and respect for marriage, and he presents a bunch of data to bolster this argument (eg, less than 5% of college educated white women have children out of wedlock, but 40% of white women without college do). This book is a straightforward extension of the main arguments in his two prior best sellers, where in Losing Ground he argued that the Welfare State is destructive to productivity and ethical development, and in The Bell Curve that society is sorting itself into a meritocratic class structure. By focusing on white people and that portion of individual skill amenable to environment--willpower--he tries to avoid issues of genetics and racial politics that were a large part of The Bell Curve commentary.

Murray argues the well-off should set a better example by not apologizing for their squareness, but rather, by advocating their lifestyle and scorning those who fail to live up to it—we need more of what is usually called 'blaming the victim'. Murray singles out the modern welfare state as the key instigator for our moral squalor, but I rather think our lack of faith in bourgeois values in general was the first mover here. Surely enlarging the dole increases the size of its patronage pool, but I still think policy is more symptomatic than causal.

Consider that in the 19th century novelists popularized the idea that cultural constraints or expectations were often arbitrary and led to seemingly needless shame and psychological problems (eg, The Scarlet Letter, The Brother's Karamazov, Jane Eyre). A slew of social scientists picked up the vibe, especially Freud or the Frankfurt School (Adorno, Horkheimer, Marcuse), and the Marxists. For example, in Freud's view sexual urges were viewed as having a powerful biological basis, while traits such as responsibility, dependability, orderliness, guilt, and the delay of gratification, are imposed by a repressive, pathology-inducing society, often a mere 'transference' from some guilt-trip inspired by traumatic potty-training or one's desire to have sex with one's mother. A bourgeois conscience became a hang-up that prevents you from realizing your authentic self (note the importance of 'self-actualization' in mid 20th century books like The Invisible Man). It never occurred to them that having no constraints or conscience has worse problems.

The subversive agenda of these writers was to pathologize traditional Western norms such as those celebrated by Puritans, Quakers, and Calvinists. Such norms were rarely perfectly achieved but nonetheless seen as unambiguously good, and so aspirational. It's useful for anyone but especially children to have clear goals as to what is the 'good life', and an important point to remember in this arena is that we should not let the perfect be the enemy of the good, especially in comparison with the untried.

After the Frankfurt school infested America, the beatnik idea that we should all 'tune in, turn on, and drop out' was a logical extension, supposedly an incredibly profound insight on how 'to be' (as usual, expertise was confounded common sense, as any family with an addict will tell you such a drug-induced stupor is the opposite of ennobling). Traditional parent-child relations, though popular on TV at the time, were being sullied in the academy as involving the suppression of human nature, and so the cause of domination and authoritarianism, which led to the Hitler (really, read The Authoritarian Personality). A healthy individual, meanwhile, does whatever he feels, which should involve rejecting their parent's strictures.

The end result was not total consciousness and keen insights about truth and beauty, but rather, nihilism and depression. The 'Greatest Generation' built things like Hoover dam and created a country of unprecedented prosperity and universal education; then, as if to prove that failure is endogenous, raised the greatest generation of naive, self-absorbed whiners in the History of Man.

My parents graduated college when such progressive ideas were intellectually dominant. They considered discipline, such as that required by drilling exercises, to be deeply destructive, and education was simply about figuring out how to release the genius that exists in all of us (this probably explains a little of why I liked Willpower so much, because I see very clearly how these principles would have been helpful for my upbringing). This naive zeitgeist reached its intellectual apogee, unfortunately, right about when and where I was born (1960's California) and turned that beautiful Eden into a failed state, a suicide New Yorker intellectuals might not notice from the gated community that is Manhattan (median home price a cool $1.4MM).

Scribes have always been jealous of the wealthy and powerful, thinking that an elite set of navel-gazing intellectuals such as themselves would be more efficient, as if they wouldn't turn into illiberal tyrants in short order (see what became of young intellectuals Trotsky, Mao, Ho Chi Min, and Mugabe). They convince themselves prior attempts along these lines were co-opted, but that's purely self-serving confabulation. Unfortunately, these same people dominate the media and academia by their very nature (wordsmiths), so it will be hard for modern mores to change because people wise enough to see it's wrong will tend to simply succeed off the grid, without reconciling their success theoretically in a treatise.

Currently there existis a dominant coalition of the lumpen-proletariat and their patronizing, indulgent, but highly status-oriented advocates who aspire to lead the new reverse dominance hierarchy. The leaders will argue that we should expropriate if not imprison the rich and their like because 1) mass redistribution will always win a referendum and 2) such a process needs leaders, and who better than those most articulate and faithful to the hive?

Subsequent to the anti-nuclear family claptrap within modern literature and sociology departments, psychologists have found that children will accept high levels of parental controls, but only if the relationship with the parents is positive. The key is having moral authority that comes from demonstrated competence and consistency. So too will the lower classes accept judgment from the upper classes if they think such observations come from those who believe what they say and say something true and important. Currently, they simply hear about how great it is to be a victim, how noble it is to be poor, powerless, or discriminated; to be wronged is the ultimate in righteousness. This simply isn't true and the poor know it. Suffering does have meaning when it cannot be controlled, and in such times a stoic attitude is truly heroic, often taken out of a higher duty to one's neighbors and family. But simply suffering low status because one does not have a job, stopped paying their mortgage, is in jail, or did not learn a trade, is usually the result of simple sloth and shortsightedness, and all their friends and family know it.

Alas, successful people are ashamed to assert they have better genetics, values, and habits--even though they quietly believe it to be true--and so are content to let the media and intellectuals push the delusional idea that success is like when Paris Hilton had sex on a digital camera and built a career out of it: luck, connections, and chutzpah, but no discipline, ingenuity, and perseverence. With such examples it becomes defensible to suggest most of the rich are like that--mere lucky hacks in the game of life. The flip side is that those who are unsuccessful are suffering for no fault of their own.

Thus, every day we see people championing the pathetic in journalistic essays: a scared mother of four on food stamps, or her selfless Community Activist advocate. No one champions the simple strivers, those who take care of themselves and in the process alleviate society of one more charity case, and along the way create wealth via 'gains from trade' implicit in market transactions. A simple prosperous mensch who does not hypocritically claim he primarily works for others is off the radar, implicitly insulting to any intellectual making considerably less than him.

The kind of change Murray is talking about will not happen until productive, successful people again feel pride in their distinguishing learned characteristics, including the willingness to shame people who do not have them. Consider that at the height of America's growth, the most popular form of fiction lionized were Horatio Alger stories, which lionized initiative and material prosperity. On the bright side, the ideas of Freud, Marxists, the Frankfurt school, and their destructive spawn are on the decline, mainly because they were never sciences they aspired to be, rather, intellectual fads once plausible but no longer (eg, no trendy writer is going impress his readers by giving his subjects Freudian complexes the way Norman Mailer did). Children of beatnik-influenced parents like me are not doubling down on the manifest failures in that philosophy. On the other side, failed big governments like Argentina, Brazil, and India highlight that countries are not like companies, they do not have to transform to survive when they go bankrupt. I wish people would valorize bourgeois virtues, but I don't see a catalyst around the corner, especially with 1/6 of Americans getting some kind of welfare.