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Personal view: some advice to climate scientists on ethics from a finance professor

Theo Vermaelen |

Climate scientists from the Climate Research Unit (CRU) at the University of East Anglia have come under fire for alleged data manipulation following the release of thousands of emails and documents. As a result of ‘Climategate’, some of the climatologists involved have stepped aside or are under investigation by their university.

Why did the ‘Medieval Warming Period’ disappear?

Most observers agree that the most damaging email is the one sent by Phil Jones, head of the CRU, in 1999, to three of his colleagues:

“I’ve just completed Mike’s Nature trick of adding in the real temps to each series for the last 20 years (from 1981 onwards) and from 1961 for Keith’s to hide the decline.”

What ‘decline’ are the scientists apparently trying to hide? A detailed discussion can be found in an article written by Marc Sheppard. I will only provide a brief summary of the arguments for those who have not being paying attention. His article may be useful in continental Europe where the whole controversy is barely discussed in the mainstream press in spite (or perhaps because) of the Copenhagen conference.

The leading authority on climate change is the IPCC, the Intergovernmental Panel on Climate Change. It provides policy recommendations to government officials. In its first climate change assessment report in 1990, the IPCC published a graph (Figure 1) which showed average global temperature changes during the last millennium. The graph shows a large increase in temperature from 900 to 1300, called the Medieval Warming Period (MWP). This period was followed by the Little Ice Age until 1850, when the current warming period began. Obviously, if temperatures were higher in the MWP than today, global warming is not “man-made”, i.e., it cannot be the result of economic activity but rather a result of external forces we can’t control.

Figure 1: Temperature changes since 900 AD (Source: IPCC 1990 Figure 7c)

In 2001, the IPCC assessment report shows a very different graph (Figure 2) without a MWP but with a gradual decline in temperatures from 1000 to 1850, followed by a strong increase in temperatures, especially in the second half of the 20th century. The graph is based on two papers by Mann et al. (1999), Jones et al. (1999) and Briffa (2000). The graph that fits actual temperatures best from 1900 to 1980 (Mann et al. (1999)) is then shown in Figure 3 (below), which is the figure that is published in the IPCC 2001 Summary for Policy Makers. This graph (also called Mann’s “hockey stick”) has become the poster child of the man-made global warming movement and is regularly published in newspapers (e.g. the International Herald Tribune, December 8, 2009, p6).

Figure 2: Average Northern Hemisphere temperature anomalies: results from individual studies. (Source IPCC, WG1, Figure 2.21)


So why did the MWP disappear? Because actual measurement of temperatures with thermometers only started in 1850, all temperature data for prior years have to be estimated by proxies such as a lake sediments, ice cores, boreholes and tree rings. These proxies are then combined in complex computer programs. Occasionally proxies are based on tree rings only. For example Keith’s Briffa’s proxy is based on tree ring Polar Ural data.

All three graphs in figure 2 show a strong correlation between the proxies used in the papers and the actual temperatures from 1900 until 1960, which is not surprising as it appears from the source files (revealed together with the e-mails) that proxies that did not fit well with actual temperatures were purposely ignored. The problem is that these proxies are not really correlated with temperatures outside this estimation period. For example, while real temperatures rose after 1960, Keith Briffa’s proxy shows a decline in temperature. The same decline must have happened with the Mann and Jones papers after 1980, which now makes it clear what Jones meant in his e-mail. The “trick” consists of “hiding the decline” by replacing the proxy with the real temperatures after 1961 for Briffa’s paper, and after 1980 for the Jones and Mann papers. That explains the puzzling fact that in all figures the reconstructed data stop in 1980 and are replaced by instrumental data. Moreover, although instrumental data are available from 1850 to 1900, these data are not used in figure 3. One possible reason is that, as with the post-1980 data, the pre-1900 data don’t match with the reconstructed data.

Figure 3: Average Northern Hemisphere temperature anomalies: pooled results (Source IPCC, WG1, Figure 2.20)

But this of course means that the proxies in the reconstructed data are wrong, as the quality of a proxy depends on its ability to forecast outside the estimation period. This makes the whole pre-1850 period analysis irrelevant. In other words, the research does not prove that there was no MWP, which is the necessary condition for claiming that warming is driven by human activity. This is why it is not surprising that the scientists are being blamed for having manipulated the data to hide the MWP.

Lessons from finance

I strongly recommend the “best practices” of finance academics to the climate science community:

Data should be made publicly available at a reasonable cost

While climate scientists try to explain temperatures, finance professors try to explain stock prices. In the early sixties, the University of Chicago set up the Centre for Research in Security Prices to collect historical data on stock prices and other financial information. This information is made available to all academic institutions for a fee. Climate researchers should do the same. Moreover, as they use proxies for temperatures in the pre-1850 period, they should disclose how and why these proxies were chosen and how they are combined in computer algorithms. This is an important issue, as the one of the most common sources for estimating pre-1850 temperatures is tree rings. But considering that the number of trees is infinite, it seems to me that you can always find a tree that gets you the desired result. This is, I believe, the basic difference with finance: we don’t try to estimate stock prices if there is no organised stock exchange with verifiable records. This significantly reduces the potential for cherry-picking and data manipulation.

Data should be respected, theories not

The quality of a theory depends on its ability to explain the facts. So when the facts don’t fit the theory, the theory should be changed, not the facts.

For example, one of the leading Nobel Prize-winning financial models is the Capital Asset Pricing Model (CAPM). When it was first tested using data prior to 1970, it was found to be roughly consistent with the facts and became for a while the holy grail of finance. However, as time went by, anomalies were discovered, the model was rejected and alternatives were proposed. Some of these alternatives were proposed by the same researchers who provided the original empirical support for the CAPM. So there is nothing embarrassing about changing your mind after seeing new evidence.

This way of operating is quite different from the climate scientist practices revealed in an e-mail exchange of October 2009. In particular, one of the scientists says:

“The fact is we can’t account for the lack of warming at the moment and it is a travesty that we can’t”

He was referring to the fact that, since the prediction of increased global warming in 1998, global temperatures have actually declined. The e-mail was a result of the fact that Paul Hudson, the BBC’s reporter on climate change, had pointed this out. Rather than calling this a ‘travesty’ the scientists should have welcomed this as an interesting development and a call for remodelling. Perhaps we are at the beginning of a period of global cooling, as some scientists suggest. So let’s hold on to the SUV for the moment.

Don’t create institutions that decide whether an academic debate is closed

The academic finance area does not have an institution such as the IPCC that assesses periodically whether a specific theory should be accepted as absolute truth. In January 2001 the IPCC stated that “there is new and stronger evidence that most of the warming observed over the last 50 years is attributable to human activities.” All main national and international science academies subsequently endorsed this opinion. For finance academics such unanimity is unusual. Academic debates in finance rarely are declared “closed.” For example, one of the debates in finance that has gone on for as long as I can remember, and will never be settled, is whether the stock market is informationally efficient. It would be unthinkable that, once in a while, there would be an official organisation declaring the state of the Efficient Market Hypothesis, and deciding which papers are relevant and which ones are not. The danger is that such organisations would be dominated by academics who want to push their particular point of view and declare the academic debate closed.

Evidence consistent with such behaviour at the IPCC can be readily inferred from the fact that none of authors of the 2001 report questioned figure 3. Indeed, I find it most disturbing that none of the scientists (or policy makers, or other science academies and scientific societies that have endorsed the IPCC 2001 opinion) insisted on seeing the reconstructed data from 1980-2000, to check whether the proxies were relevant. It is as if I would use stock price data from 1900 to 1980 to design a trading rule, publish it in 2001 and then the referee would not ask me to check whether the rule works from 1981 to 2000! The only explanation for the lack of curiosity of scientists and policy makers must be that they liked the “hockey stick” picture which showed that warming in the 20th century was unprecedented. So, if climate scientists want to regain credibility, I recommend that they close down the IPCC. Alternatively, the IPCC should transform itself in a lobby group for man-made global warming, but should not pretend to be an objective assessor of climate change research.

Don’t become captive to a political movement or an industry

Although many of us are funded by financial institutions, we don’t refrain from criticising those who feed us. For example, there are numerous papers advocating the Efficient Market Hypothesis, which claims that active portfolio managers create no value and that the optimal investment strategy is to invest in an index fund. Others have shown that acquisitions destroy value for bidders, often blaming the success fees of investment bankers as well as the use of earnings multiples in valuation. This critique has not prevented finance professors from being endowed with chairs financed by asset management firms and investment banks. The reason, I believe, is that whatever we say or write does not have a major impact on the real world. Indeed, there are numerous successful active portfolio managers and bankers still use multiples when valuing companies.

Climate scientists, on the other hand, are being taken very seriously by politicians, environmentalists and business people. For example, alternative energy producers can only survive thanks to government subsidies, regulation and taxes on their competitors in the ‘non-alternative’ energy sector. These government policies will only be implemented if the public is convinced that global warming is a man-made serious problem. Hence, climate scientists may be more reluctant to revise their theories if so many people’s fortunes depend on the acceptance of these theories. So this should perhaps be another message: don’t take yourself too seriously so that others won’t take you too seriously either.


Theo Vermaelen is Professor of Finance at INSEAD. The views expressed here are his own.

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