For the last twenty years I’ve known that I get injured less, when running, if I run in the thinnest racing flats, even though I’m not a racer. The only thing less harmful is running without shoes at all, on grass or beaches.

Now, I’m happy to see, the latest issue of Nature (http://www.nature.com/nature/journal/v463/n7280/covers/) confirms that running barefoot and landing (the natural way) on your forefoot, on any surface, even the road to hell, produces less shock than running in the most rationally padded stabilized shoes and thenlanding on your heel (the necessary !natural way to land when you have built-up heels and rigid soles).

Maybe I should try throwing away my spectacles (glasses to you) too, I thought, and then I realized that I did read an article the other day that said that giving near-sighted kids bifocals that only corrects their distance vision and not their close-up vision seems to make their nearsightedness progress less rapidly. (http://www.suntimes.com/lifestyles/2005228,CST-NWS-kidbifocals22.article)

It makes sense -- by giving them a bifocal you're fixing only what absolutely needs fixing, their distance vision, but still allowing them to see the way they usually do close up.

The Great Wall

The commander-in-chief—so you’ve heard—has begun a mission to fix the system, directly from his office, for us, the citizens in all the states. He ordered his chief of staff, his aides and his secretaries to come to the oval room and attend a meeting, a meeting so important that only they were informed of it. They listened to his plan for eliminating war, bringing healthcare to everyone, ensuring a good education for all children, smoothing the grosser inequalities in pay, fixing the financial system, harnessing corporations, removing conflicts of interest, returning to a volunteer army of citizens, building infrastructure. Then he sent them off to write bills and take them to the people. They head out at once, tireless, making their way through the visiting crowds and reporters, intending to speak to congressman and senators, governors and state legislators, town halls and citizens. If any of them run into resistance, they point to the flag on their lapel pin. They move forward easily, appointments set up with the powerful first and the citizens later. But the number of people they must persuade is so huge; their dwelling places are infinite. If the commander liked action more than words, if the capitol were an open field, if the lobbyists weren’t being sent to harass and dissuade them, if money weren’t power, if officials weren’t worried about their next election and the jobs they might get if they were voted out of office, if they weren’t appearing on talk shows, then soon all the commander-in-chief’s men and women would be moving for the common good. But instead, how futile are the efforts. The aides are still dealing with the inhabitants of the capital, lunching and being lunched, seeking and denying power. Never will they win their way out of the capitol. And if they did, they would have to battle past meetings with lobbyists and ceo’s, thousands upon thousands, filled to bursting with food and liquor. And if they finally reached the outskirts of the capital city—but that can never, never happen— the capital city, the centre of the world, is still there in front of them, piled high and full of sediment. No one pushes his way through here, certainly not someone with a mission from a talkative man. But you sit at your screen and dream of that mission when the channels go silent.

(adapted from The Great Wall of China, Franz Kafka)

A real letter I received a few days ago.

____________

Dear Professor Derman,

I graduated from Columbia last May. I took your seminar on FE important papers during my senior year and enjoyed it very much. I went to work at ***** doing things that have pretty much no relation to the things I learned in school. I am however still very interested in quantitative finance and it is something I like to read about and think about fairly often.

I am also very interested in economics in a more general sense. I am one of those people that still thinks people are rational and markets work. I know these are ideas that have fallen severely out of fashion, but it is the only thing that ever made any sense to me from a theoretical/analytical point of view. I don't mean to say that I don't believe in the experiments carried out by the behavioral economists, but I am yet to be convinced that these things can have any real effects in the aggregate. Having worked in at least one part of the financial industry for a little while, I can say that the approach to valuation and overall decision making seems pretty rational over here. I really don't think that we give higher valuations to a company on a given day simply because we just paid a high price for our lunch (That one was called anchoring, right?).

Lately I have been having certain doubts about some of the first principles on which so much of what I studied in school is built and I thought perhaps I would share them with you and you would have some interesting insight or comment.

Basically it boils down to the following: in most areas of economics, when I think of the first principles, it is a collection of assumptions that all make logical sense. Many of the variables are not directly observable, but we know the general form and it is something one would have a hard time refuting. For example, while I can't easily observe the demand curve for apples, i can safely say that it has to be "downward sloping"--If apples are more expensive I will buy less apples. That is simple and about as true as we can expect anything in the realm of human behavior to be.

My issue comes when I try to think of first principles, or just the "form of first principles" in the area of quantitative finance. We have the law of no arbitrage and the efficient market hypothesis (both of which I think make a lot of logical sense, which I like), but those two alone don't really get you anywhere. We need some assumption for how asset prices evolve. And that is where I think things get murky. There is no logical explanation that gets us to Brownian motion or anything of the like. I can see an explanation for assuming some sort of evolution that is a "martingale", which can logically follow from the efficient market hypothesis (in fact, its almost like saying the same thing), but any assumption we make as far as the form of the distribution seems to come out of thin air. Sure, we can inform the guess with past data, but that does not seem theoretically rigorous. So I look at the entire paradigm of the mean-variance (or risk-return) approach to investing and I am left thinking: risk is not even well defined. Markowitz (or Bachelier) woke up one morning and said "these returns look normally distributed" and we started defining risk in terms of standard deviations, but that's just one random (pun not intended) guess!

And it feels like from then on it just gets worse. Will Sharpe came up with his Capital Asset Pricing Model (which we use at **** all the time, in its most simplistic form) and now it is part of the dogma that asset returns are linearly related to market returns. What is the logical basis to assume a linear relationship here? He could have just as easily assumed a cubic relationship (which will almost by definition fit past data better) and done the same work. His math would have probably gotten messier, but it is hard to find any merits to the linear assumption other than the fact that it is simple. I am all for simplicity, and perhaps if I asked Sharpe he'd tell me that was just a reasonable first approximation, but that is certainly not the way in which people use it now (maybe they are not so rational after all?).

Well, I think this e-mail is well past the point of "long enough". Maybe this is just me longing for the more intellectually challenging days of school, but as I said earlier, I have been struggling with these questions. I would greatly appreciate a response.

Best,

....

A few months ago I accidentally dug up my old Newton circa 1997, and was amazed at (a) how tightly integrated and well designed the software and user interface was and (b) how good the handwriting recognition was. Someone had thought carefully about what you might want to do with the thing, and then built it to do that. It was the size of a VHS cassette, but made phenomenal use of the available hardware. And there was so much you could do with the stylus -- entering an appointment took one stroke, not finger taps through many confirmatory menus.

I can only hope that the forthcoming Apple tablet will allow for handwriting recognition. There seem to be rumors along those lines.

You can find a pretty accurate video of the handwriting recognition at the four-minute-mark on the video at http://www.youtube.com/watch?v=64QuJdJmCbA&feature=player_embedded#

I can vouch for the fact that my twelve-year-old model still recognizes my cursive.

… … Steve Jobs.

(Prompted by rumors of the Apple iSlate/iPad, about which more later. And by low level software bugs^* on the Google Droid.)

I have always been and still am a big Apple fan.

I can't say much for Microsoft and Bill Gates -- they have brought technology to the masses, but it's messy inelegant stuff. Who really wants to know that much about video cards, chips and C: drives? Life is too short.

And Google, when you think about it, had one good idea, their search algorithm. And now they live by advertising. They're a middleman. They get paid for placing ads as they take you to other people's content, other people who aren't getting paid for the content. Nothing to be that proud of, though standing up to the Chinese Capitocommunists is.

Bankers, too, are middlemen, mysteriously paid for things you can't put a name or clear function to.

But Apple, that's another story. Many good ideas. Mostly brought to fruition through technical innovation and management. Yes, I know they copied a lot of it from Xerox Parc.

Steve Jobs and Apple have produced things people want, things you can name, things people are willing to pay for with their own bucks. They changed the way things are done, and are paid for what they bring to the table.

They're cooks, not waiters.

More jobs.

_________________

* that result in frequent black-out freezes followed by pop-up UNIX-flavored messages like "Sorry! The application Email (process com.android.email) has stopped unexpectedly. Please try again. Force close".