No kidding, I received an abstract of this paper in an email newsletter recently:

Effect of wind on stock market returns: evidence from European markets

……………

Applied Financial Economics, 2009, vol. 19, issue 11, pages 893-904

Abstract: Environmental psychology studies have found evidence that wind speed has a strong influence on mood and comfort. This study investigated the relationship between wind speed and daily stock market returns across 18 European countries from 1994 to 2004. A significant and pervasive wind effect was found on stock returns. This finding was supported by psychological literature claiming that mood affects judgement and decision-making in situations involving uncertainty and risk, and coincides with the argument of misattribution. This investigation also found strong seasonality effect and temperature effect in European stock markets. Specifically, the influence of wind on stock returns is demonstrated to be more significant than that of sunlight, indicating that wind might exert a stronger impact on mood than sunshine and hence be a better proxy for mood than sunshine. Above all, our findings contradict the rational asset-pricing hypothesis and contribute to the behavioural finance literature.

Date: 2009

http://econpapers.repec.org/article/tafapfiec/v_3a19_3ay_3a2009_3ai_3a11_3ap_3a893-904.htm

_________

Immensely clever, incredibly stupid, or a joke? A fact or an illusion? A proof that the entire universe is one big coherent system? Some parts of financial 'theory' always remind me of nutrition theory.

Coming soon maybe:

Effect of stock market returns on wind: evidence from natural gas traders on Kansas City Board of Trade

Everyone is kicking the poor EMH now that it's down, some of them quite eloquently and hard. But I'm always on the side of the poor underdog.

I wasn't around, thank God, when the EMH became popular. I've never found much real use for CAPM in what I do, which is mostly what Summers in one of his better moments called ketchup economics, the economics of relative value rather than absolute value. Unfortunately, absolute value theories don't work very well in economics. I learned finance bottom up, and found options theory much more useful, though much less ambitious, than CAPM and mean-variance.

But the EMH, if you don't take it too literally and get carried away about axiomatically defining strong, weak and other kinds of efficiency as though you were dealing with axiomatic quantum field theory, does recognize one true thing: that it's #$&^ing difficult or well-nigh impossible to systematically predict what's going to happen. You may think you know you're in a bubble, but you still can't tell whether things are going up or down the next day. The EMH was a kind of jiu-jitsu response on the part of economists to turn weakness into strength. "I can't figure out how things work, so I'll make that a principle."

It reminds me a bit of the anthropic principle: "I can't explain why the fine structure constant is 1/137 so I'll just say that if it weren't I wouldn't be here."

Money Desire Pleasure Pain

_____________

For Spinoza there is only one world and one substance and no separate creator and creation. It is pointless to speculate about other possibilities. But people do.

• Paulson on Bailout

  Many more Americans would be without their homes, their jobs, their businesses, their savings and their way of life," he said in written testimony prepared for a hearing Thursday. While losses have been staggering, "that suffering would have been far more profound and disturbing" had the government not intervened, he will tell the House Oversight and Government Reform Committee.

  Who knows?

• Saved by Being Late

  NY Daily News: Italian tourists arrive late for helicopter ride; mother and son grateful to be alive.

  Tourist Paola Casali was delighted Saturday with her cranky 13-year-old son: He saved their lives. The native of Rome and the teen held pricey tickets for a helicopter tour above Manhattan. Casali's enthusiasm for the trip wasn't shared by the boy, and they arrived late for her planned takeoff.

  And who knows? Would they have been killed if they had arrived on time? Had they boarded the helicopter, would they perhaps have taken off 1/10 a second later and would everyone have been saved?

In the August 4 NY Times I referenced there was an

Eli Peli in: http://www.nytimes.com/2009/08/04/science/04prof.html?ref=science

and a

Flora Mora in http://www.nytimes.com/2009/08/04/business/04frustrate.html?ref=business

But wait, there's more!

Thanks to Ernie Shoemaker for pointing out to me that the photograph of Flora Mora and her Two Clients had a caption that read

"A Liberty Travel agent, Flora Mora, left, helps Christina Farina and Bettina Aizzi book a flight to Rome."

Print newspapers, as everyone knows, are having a hard time, and you can see the New York Times getting sadly thinner each week.

But I can't figure out whether the people they found to feature in today's stories

Eli Peli in: http://www.nytimes.com/2009/08/04/science/04prof.html?ref=science

and

Flora Mora in http://www.nytimes.com/2009/08/04/business/04frustrate.html?ref=business

are an attempt to extend their science and business audience to children as well as adults, or are the a more subtle message about the predicament the publishers of the newspaper find themselves in?

A couple of days ago, on a whim, I downloaded David Byrnes's 1986 movie True Stories from iTunes. I remember seeing it just about when I started working on Wall Street, and liked the soundtrack, which included a Talking Heads song and video called Wild Wild Life, and had the verse

"Check out mr. businessman
Oh, ho ho
He bought some wild, wild life
On the way to the stock exchange
Oh, ho ho
He got some wild, wild life"

It sounded more exciting than working as a scientist or engineer.

I recommend the movie. It's even better than I remembered. It's about a small nondescript gung-ho American town in Texas and the mundane lives its inhabitants live -- the mall, the big electronics firm that dominates the town, the people, their lack of a big city or European sensibility. But Byrne, and I don't think he means it ironically, looks closely at the intersecting whimsical stories of some of the people, and the way they take their small aspirations seriously, and get redeemed in the smallest and most trivial of ways. I haven't seen a Fellini movie for years, but it reminds me a bit of an American version of it, not in lushness, but in intent.

You might think he is being ironic at their expense, but I don't think so. He takes them kindly but seriously. It's sad and funny and kind. A clever look at America in 1986 and now, and terrific music that is better if you can listen to the words. John Goodman and Swoosie Kurtz and the late Spalding Gray are good. And a charmingly realistic performance by someone I never heard of, Roebuck 'Pops' Staples, as a Haitian voodoo enchanter and trickster who brings love to people by incantation (see picture above).

In the culminating Talking Heads song, "People Like Us", John Goodman sings that
"Theres something special bout people like us
People like us
(who will answer the telephone)
".

I was pondering this because I have been dealing with people who don't write their own emails and are unable to look at their own calendar to make their own appointments, something that always surprises me. It reminded me of my days in big-business America when I would be called by someone's secretary to be told "Xxxx wants to speak to you" and then told to hold until the secretary's boss came on the line. People who don't answer the telephone and don't dial it either. I understand the need for it, very reluctantly, but I think it's overdone.

The world swimming championships, falling records and buoyant streamlined swimsuits in the Foro Italico (sounds nicely gladiatorial) illustrates that standards are hard to maintain.

Records in athletics fall because of: better training; improvements in the human mind and body; drugs; and advances in equipment.

There's not much you can do to prevent better training. There used to be amateurs who did something else as their main occupation but those days are gone. Roger Bannister was a medical student who ran and stole time from his studies in order to train. That's no longer the case. People can devote all their time to training and there's no way to limit it.

Drug-free improvements in mind and body are also hard to avoid; diets are better in many countries, people are taller now than in the past, they have less childhood diseases, etc.

Drugs are a slippery slope. What is a food and what is a drug? What helps to ameliorate an idiosyncratic illness (Ventolin for bronchial spasms) vs what is adding something no one has naturally (steroids for muscle growth). Steroids no but antihistamines? Coffee?

Equipment is tricky too. Pole vault changed with the advent of fiber-glass spring loaded poles, and the right to land on foam rather than sawdust. Dick Fosbury could invent the Fosbury Flop in high jump and leap over the bar backwards and land on his back only when foam replaced sawdust. It's a different game. Rubberized tracks improve records. So do swimming pools with wave-damping sides. Tennis outlawed spaghetti rackets. It's all so inconsistent.

But swimming is one sport, even more so than running, that could be pretty pure. Just water and a body. Regulate suits to be minimal and of a standard material, so you can compare old records to new ones. Regulate swimming pools and their sides too. Men in the tiniest of spandex Speedos and maybe women too. Why not? Have one sport about which there is no equipment confusion. Even so there will be trickiness -- a while back someone invented the idea of swimming underwater for the first length of the backstroke and now everyone does it.

Time for the SEC to regulate this business too. Allow no one to live closer than thirty minutes from an olympic-size pool.

Isaiah Berlin wrote a famous essay called "The Hedgehog and the Fox" based on the Greek aphorism "The fox knows many things, but the hedgehog knows one big thing". Berlin's essay then classified writers as hedgehogs/deep or foxes/tricky. 

Freeman Dyson wrote an article a few years ago in which he classified mathematicians as frogs or birds. He is not referring to English slang for Frenchman and young women. Frogs like grubbing around in the details with no overarching view of the field (but that's OK by Dyson, who declares himself a frog) and birds like flying on high and contributing to the scope of the field.

I have been skimming the latest issue of the Economist on the crisis in economics, and from a grumpy point of view you could argue that the trouble is that in the mathematical side of economics the birds are interesting but wrong and the frogs correct but their details don't make for a discipline.

The Brownian-motion-continuous-hedging-no-arbitrage birds have a beautiful schema that they see as fly on high, but it isn't quite right. In the Economist Scholes explains that it's the model users and the data that are the problem, not the models. I don't  totally disagree but that doesn't altogether help.

The behavioral finance frogs find interesting insects, and have great stories to tell but they can't explain the whole world beneath the heavens.

The alternative guys stress biological analogies and want to be birds but so far it seems to be all analogy and storytelling.   

(On the scientific side, I heard an interesting preliminary talk at the Quant Congress by Lisa Borland on the econophysics/phase-transition approach to contagion.)

The Economist mentions Andy Lo's idea of creating a National Financial Safety Board, like the National Transportation Safety Board that investigates airline accidents. It sounds like a good idea and can't do much harm, but I suspect it is based on a flawed view of economic systems as engineered and therefore easy to systematically diagnose and pinpoint,  rather than as a part of  society, politics and power in which the historical truth is hard to discover. (The International Safety Board to investigate the causes of World War I is still deliberating.)

Maybe everyone just expects too much from economics. It's not rocket science. It's more a question of what defines sensible and decent behavior, and then devising incentives to get people to behave accordingly.

____

Meanwhile, in Sunday's New York Times, Tom Wolfe writes about NASA's lack of vision during the past 40 years after the moon landing:

"What NASA needs now is the power of the Word. On Darwin’s tongue, the Word created a revolutionary and now well-nigh universal conception of the nature of human beings, or, rather, human beasts. On Freud’s tongue, the Word means that at this very moment there are probably several million orgasms occurring that would not have occurred had Freud never lived. Even the fact that he is proved to be a quack has not diminished the power of his Word."

According to Wolfe, the Word for NASA should be to build that bridge to the stars.

When you set out to be a scientist, if you're idealistic,  the Word is the nature of the universe. When you become a doctor, if you're idealistic, the Word is empathy & helping people. All achievable.

What are the motivations of an idealistic financial economist? What is a reasonable and achievable Word for the field?

If there's one general lesson you learn from options theory that transcends its uncertain details, it's that every good thing has its downside. Positive curvature is accompanied by rapid time decay. Everything in moderation, therefore.

Liquidity is not an unmitigated good, and the world recognizes this practically in most things by creating friction and viscosity to slow us down. Without friction nothing would happen and no one would exist.

You can have friction in time. People used to get engaged before they got married, wait for a marriage license, pass blood tests, etc. Same in reverse. If you join a gym you have a few days to change your mind. Wall Street partnerships and their illiquidity made firms think long term.

You can have friction in space. Coop apts outlaw or tax apartment flipping for the benefit of the long-term residents. Some stock markets have circuit breakers to slow things down. In some countries stock buying and selling requires a stamp tax. Glass-Steagall imposed barriers on mixing lending with trading.

Too much friction may be bad, but a little friction is a good thing.

Statistical arbitrage claims to be a liquidity provider and therefore good for you. It's not so entirely self-evident to me. And if it does provide liquidity, is it the kind of liquidity you want if you're a long-term resident of the market?

People have to extrapolate to reach conclusions. Lack of estrogen is linked to osteoporosis so you should take supplements. A little liquidity is good therefore more is better. Not so obviously obvious. Lowering friction sounds good but maybe it's a slippery slope.

1. Everyone is getting very excited about the alleged theft of Goldman algorithmic trading code. The truth is, as far as I can judge, that there is quite an appreciable level of transfer of algorithms and ideas between proprietary trading groups, and that this kind of thing happens much more often than people let on. People on all sides of the Street tend to embrace people who come to their firm from other firms with ideas (not code) and bitterly resent those who leave, unless they're the ones leaving. The whole US economy and market is not going to collapse because of this, or it would have already. Or maybe that's why it did …

2. Someone principled and old-fashioned briefly bemoaned to me last week the fact that such a large fraction of daily stock trading volume was being run by hedge funds and investment banks doing algorithmic trading. Wasn't investment supposed to be governed by the aim of directing scarce resources to productive use in the economy?

I wanted to make the standard argument that all this algorithmic trading led to greater efficiency and execution and a more rapid approach to fair value, but I didn't. Instead I simply said that there is no turning back the clock, and we agreed on that.

Still, the recent Reuters headline "AQR Launches Momentum Funds for Retail Clients" made me think again about the way in which the icing on the cake has a tendency to become the biggest part of it.

I am flying to area code 212
To stab a Concorde into you,
To plunge a sword into the gangrene.
This is a poem about a sword of kerosene.

This is my 21st century in hell.
I stab the sword into the smell.
I am the sword of sunrise flying into area code 212
To flense the people in the buildings, and the buildings, into dew.

This is a poem by a man called Fred Seidel whom I never heard of prior to this. I came across it in an article in the New York Review of Books and transcribed it. He captures the glamor of 212 as a symbol of New York, and the fascination of destroying it. It's interesting how much more powerful it is with one level of indirection: "I am flying to area code 212" rather than "I am flying to Manhattan".

When I first came to New York City all of it was 212 and you needed no area code to dial within it.

New York used to have telephone exchanges too, not just area codes: The John O'Hara novel Butterfield 8 was named after BU-8, the prefix you rotary-dialed a long time ago for the first three digits of fashionable Upper East Side telephone numbers.

I used to notice people wearing T shirts that said ACK, and discovered it was the FAA code for Nantucket airport. People will do anything to feel special, that's the way it is.

The Istanbul area code is 212, apparently because the people who designed the Turkish phone system modeled it after the USA. Ankara, surprisingly, is 312 rather than 202.

I notice that 212 is isomorphic to SOS on the telephone keyboard, both of them palindromes. Symmetrized (see picture) it looks like a heart split in two.

"So many riders in the Tour de France have been tossed out because of drugs, the overall leader is now a delivery guy from Empire Szechuan," joked David Letterman in 2007.

Anyone who lives on the Upper West Side of Manhattan knows what it's like to walk across Broadway when the sign says WALK and then narrowly escape being hit by a delivery guy coming through on a bicycle. Or riding the wrong way down a one-way street.

There's a simple explanation. The delivery guys have been given the right at any time to regard themselves as either cyclists or a pedestrians. When the traffic light is green, they regard themselves as vehicles and ride. When the light is red they define themselves as a pedestrian who just happens to have wheels. They can choose whatever is advantageous at any time. Who can blame them? Life is short and they need the money.

I am reminded of this when I read rumors that some of the investment banks want to give up their bank holding company status now that their funding crisis is over.

1. Call me old(-fashioned) but I would like to find a philosophically sound position that justifies my intuitive feeling that the world isn't entitled to the details of Steve Jobs' (Jobs's??) health. Ever since the Sixties there has been a feeling of greater entitlement on the part of the public and the press to know about your personal life under the argument that it affects your public life, and therefore they shouldn't be separable.

I agree that they interact, but I think they should be kept as separate as possible. If you are a political hypocrite who preaches conventional moral behavior but doesn't practice it, I like to think that's relevant, but I could be persuaded otherwise. But I feel in my heart that the world of investors has no right to know Steve Jobs' sexual orientation or what he took sick leave for. If they need to know that, then maybe they also need to know the state of his personal relationships in general, and whether his family gave him a hard time last night, since these things certainly those affect his capacity to do his job.

2. I subscribe to breakingviews.com which I like because they keep you up to date without too much newspaper reading and because they take a somewhat moral approach to economics.

Here's something recent I agree with:

"Banks may have suffered inadequate pain. With green shoots sprouting around the world and mega-bonuses for bankers on their way back, there’s a risk that the industry may be returning to normality too quickly. There’s even a chance that governments won’t be radical enough about reforming the financial system, the UK Financial Services Authority’s Lord Turner has warned.

The general public will be outraged if bankers go back to the trough again, so soon after bringing the global economy to its knees. But it’s naïve to expect financiers to act as moral creatures. They are behaving perfectly rationally in pursuing their own self-interest – taking full advantage of the cheap money and support operations that governments have provided to them.

Given that an appeal to some higher interest won’t work, there are really only two ways of regulating bankers’ behaviour. The first is to make them suffer pain if they make bad decisions. Some of that has happened. Bankers in the City of London and on Wall Street were clobbered pretty badly in 2008. But most of them survived. Without the authorities’ aid, there would have been a near total wipe-out.

The second option is to regulate. And there is definitely quite a bit of regulation in the works. But enthusiasm for this detailed, slightly mind- numbing task could wane as memory of the crisis fades. The banks will also soon get their mojos back and start lobbying the politicians. Turner thinks there is a “real danger” that the authorities won’t seize the opportunity to fix the system provided by the crisis. Hopefully, he is wrong – because otherwise it won’t be too long before the industry runs amok, again."

I went to the doctor one day last week after a few weeks of feeling ill. My doctor is a very nice man. HIs nurse put me in an examining room and measured my weight, temperature and pulse. Then 20 minutes later or so he came along and looked into my throat and nose and listened to my chest. Then he gave me an antibiotic. They had my insurance card on file and so I left without paying anything.

A few days later I received an email link to the billing at my health insurance company.

He billed $140 for "office visit".

He billed $135 "lab services".

He billed $480 for "office surgery".

I was initially appalled at a total of $755 for a fairly routine visit, grateful as I was for the help. I was especially appalled at the billing for an "office visit" since it seemed to be double counting with the rest of the treatment.

Then I looked more closely at what the insurance company had paid out, and felt better.

They disallowed the office visit, saying quite correctly that this service was included in other procedures performed on the same date of service.

They allowed $40.17 for the lab services, which I take to be the nurse's treatment.

They allowed $208.72 for the office surgery, which I assume is what the doctor did to me.

The total they allowed was $248.89 and they paid 80% of that, which came to $199.12. I may be responsible for the mismatch, $49.77.

The end result is an arguably unsurprising charge for a routine visit to a doctor of your choice in Manhattan. I don't understand why he had to bill $755 to get paid a third of that. And I wonder if he would have billed me the same amount if I didn't have insurance.

..... ..... ..... ..... There are weird barely visible things happening in New York, weirder than the banks returning their money to the administration or the demonstrations in Iran.

Walking on the West Side this morning, I saw on Broadway the bus illustrated in the upper part of the photograph above. The nyc-atheists.org are having their say.

But then I made my way over to the East Side and there, outside the building I was heading to, was the truck shown in the bottom part of the picture.

God works in mysterious ways. His followers are forbidden from writing his name accurately for fear of committing blasphemy, but he doesn't have to pay for advertising.

I will keep you posted as I learn more.

I went to the World Science Festival to hear several talks about Time, psychological and physical. This led me to a question:

If the time axis in classical physics is of cardinality Aleph 1, that of the continuum, which is noncountably infinite. then what is the cardinality of the number of memories you can have? Are they countable or uncountable?

It feels like for any given memory, you can always go "one decimal place further" or one level more granular in the details of the memory, and therefore there is no way to order them, and so they must be uncountably infinite.

But maybe this is an illusion and if I try it I will hit rock bottom in granularity, even though associations will keep coming.

I used to be a fountain pen fetishist, craving pretentiously named (Dostoeyevsky, Mozart, Oscar Wilde, …) limited editions of Mont Blancs that always ended up leaking into my breast pocket when I leaned more than 3 degrees away from the vertical. I could never understand why Mont Blancs looked so good but worked so bad. I had a Pelikan that you could throw in the air and juggle with and it wouldn't leak. But not Mont Blancs. They live to leak.

I would resist fountain pen temptation for many months, sometimes years, and then eventually give in in order to stop the torture. Sometimes I bought cheaper Lamys that looked very modern, sometimes a faux 1930s Parker, sometimes, just once actually, a (disappointing) vintage bakelite Conway Stewart like the first pen I ever had when I was in high school, which I wish I could find. Once in South Africa at university I owned a Sheaffer PFM (Pen for Men, indeed), a masculine instrument with a not entirely unexpected snorkel filling system that rose up out of the back of the nib and ejected ink (it's true). A few years ago I found it in disuse and nostalgically sent it to Sheaffer for repair, and they kindly emailed me back to say they couldn't repair it,and gave me a lousy cheapo modern trashy Sheaffer as compensation. Like Sheaffer, so GM, an early warning -- can't even repair their own products. Eventually I got it repaired at the Fountain Pen Hospital in New York, who did a great job.

In the end, all the pens were disappointing. By dint of great willpower and the exercise of inborn character, not to mention professional help from Graf von Faber Castell and his wife the elegant Gräfin Namiki, I eventually overcame this addiction. Now I write only on computers, except for making lists of things to do.

Nevertheless, relapses are always possible, and you have to be on your guard. I am in Frankfurt for a day, and in the lobby of my hotel is a glass display box that contains a beautiful black pen with an unpretentious and really modest silver top. Plain and elegant, modern and classic, simultaneously, what more could you want except a nice feel and no leaking? I went over to the store on Rathenau Platz nearby that sells it to take a look. The hotel concierge who directed me to Rathenau Platz didn't know that Rathenau was a Weimar Minister who was assassinated in the 20s -- something I learned from my son -- and when I informed her she said "Sorry, I don't know much history."

The elderly German gentleman in the pen store who served me very graciously interrupted a conversation with five other German gentlemen who all wore suits and ties, as does almost everyone in downtown Frankfurt. I can understand some German and they were coming by to chat, which is to say that the store was empty, another recessionary sign. But he was gracious indeed, and he let me try out Fs and EFs to my heart's content, unafraid to actually fill them with ink the way they fear to in American stores.

While I was writing my name over and over again in various thicknesses on the 40 lb tester paper, I sudenly looked up and at the man and saw that he was running the tip of his index finger over the upper side of his left lip and looking directly at me. I took this to mean that I had gotten some ink on my face from the pen, and, as though he were my mirror image, rubbed my own finger on the corresponding spot on my face and looked at him quizzically. (We had a sort of unspoken agreement to speak as little as possible in either English or German.) He looked back at me, and then ran his finger across his lip again, a little lower. Thinking I had missed the spot of ink, I then did the same. He then moved his finger along the corresponding path. I repeated it. Etc. Finally, I said to him: "Do I have something on my face?" "Oh nein," he answered, "I thought you were pointing out to me that I had something on mine."

I started out this blog intending to say something very positive about local volatility models and calibration, which I have been thinking about for a while, but given the energy I have put into fountain pens, I will postpone that to a future day.

I am in Aruba, the A in the ABC Dutch Antilles, B for Bonaire, C for Curacao. What a relief not to be able to get the NYT and the WSJ, not to hear about the S&P.

Everyone speaks Papiamento, the local Portuguese/Spanish mishmash patois. It was apparently brought here by Ladino-speaking Jews from Portugal hundreds of years ago, who took it to the Cape Verde Islands too. I like it: the words are simple and when you see it written somewhere you can figure out what it means, mostly, from the Latin roots. It looks like a natural kind of Esperanto. Bon bini is their nice and simple tourist version of bienvenido.

All around the hotel I'm in are people carrying bags that say Bupa Aruba. Bupa sounds like a Papiamento word. Could it be a Ladino word for a Portuguese Jewish grandmother, I thought, and were these people carrying the bags part of some grandparents' convention? But then a man in a tweed jacket with leather elbow patches asked me if I was with Bupa, and I thought Bupa might be the British University Professors Association. It wasn't. I thought it could be the Brazilian Aruban Papiamento Union --yes, I know that make Bapu, not Bupa, but surely you know that AIDS is SIDA in France and it's still the same thing.

Anyhow, I was wrong. Bupa, it turns out, is the British United Provident Association, some sort of healthcare thing. Convention-al.

I'm usually not crazy about animals, but this hotel has some amazingly intelligent parrots in the garden. They can do hellos in male and female voices. It also has four of what Papiamento speakers call Patu Pretu, or Pato Preto in some parts of ABC, and if you want to know what that is look at my photograph above, taken with my cellphone camera. This pato preto has a white-tipped beak and a white underside to its wing. Patu" or "Pato" is technically a duck, but nevertheless, I was told, the photo is of a pato preto. It's a little weird to run into a metaphor.

I have been thinking about models and metaphors. People, even people who curse models, try to understand their world with metaphors, explaining one part of it they don't understand by analogy with another part they think they do. But not everything is a metaphor, and metaphors are limited. If you step on a sharp shell while running on the beach and exclaim "ow!", that's not a metaphor. If you struggle to climb out of a low place to a high place against gravity and pant and your chest heaves, that's not one either. If you have some trouble in life and you say you feel low, that is one.

A memorable metaphorical story about a patu pretu is Thomas Mann's 1952 novella called the English version of Patu Pretu. It is much less well known than "Death in Venice", but very good.

I don't want a fancy stereo. I don't want a Tivo. I don't even want a Kindle (very much). The only consumer fetish I have is for laptops to write on and smartphones that help me maintain the sense of being organized -- all other technology leaves me fairly cold. So, for several months now, maybe longer, I've been fighting the compulsion to buy a Macbook Air, Apple's lightest portable laptop.

Do I need one? Not that badly. I have a two-year old Powerbook that works just fine.

Will it make my life simpler? Yes -- it would be nice to carry 3 lbs rather than 6 lbs when I move around. 1.0 lbs would be even better, but I am cool and won't go PC.

Will I have to spend two days making sure all my data and programs (Matlab, Mathematica, FrameMaker, Parallel Systems, etc) port over and run? Yes, and the time would be better spent on other more productive activities.

Will I have to carry around a small USB drive if I go away for a while and want to take all the contents of my normal desktop with me? Yes, because the Air has a small hard drive. I will also need a SuperDrive to read/write DVDs.

Nevertheless, I want one … but it's wrong. People shouldn't buy things they don't really need.

However, faculty in my dept get some money to spend each year on hardware and software to do their research. And that money will just sit there if I don't spend it. It will be cash hoarded rather than cash spent. And if you listen to the administration, you know that that's bad.The paradox of thrift …

So, I am going to do what's good for the country and get the Air. If you have someone else's money you can use to stimulate the economy, I suggest you do it too.

Last week I spent a day at the Perimeter Institute in Waterloo, Ontario. It's a sort of institute for advanced study devoted to theoretical physics, and they had a meeting on The Economic Crisis and its Implications for The Science of Economics (sic).

One thing occurred to me in connection with trying to create a workable economic theory. Everyone is motivated by analogies: economics as physics, economics as collective phenomena with phase transitions (cellular automota, agent-based theories, which sounds sensible) economics as a gauge theory with a local invariance group (which sounds beautiful but maybe overambitious), economics as evolution, economics as biology, economics as computational neurology.

But if you look at new theories that burst on the world successfully -- Darwin on the origin of species, Adam Smith on labor and value and organization, Freud on the subconscious, Marx on capital -- they weren't driven by analogies. They looked at the world with fresh eyes and made up an explanation for what they saw. Not everything is a metaphor.

I know many people who grew up in Soviet Bloc satellites after World War II and they told me cute stories about how you had to bribe people all the time for service. If you went to a doctor you took him a chicken from your chicken coop in your back yard, or some home-made jam or home-grown vegetables.

I used to mock their corruption. Then I recall a friend once said to me many years ago: "We just had just petty corruption; here you have corruption so big you can't see it." I didn't pay too much attention.

Now of course the Soviet Union has big corruption as well as little corruption, with political leaders getting business advantages, and the ANC in South Africa has made many of their leaders rich too. But when I read the papers here nowadays, with stories of open bribe-taking to get business, and congressmen and senators getting sweetheart deals, and more subtle advantages based on what seems to be crony capitalism, I'm inclined to believe my friend. There are many little big men around here too.

Every morning I wake up and look at Yahoo Finance and then open the front door and pick up the NY Times and the Wall Street Journal. And then sometimes I get mildly indignant at the news.

The more I try to look at what’s happened the past two years, the more I realize that everyone has their own version of history. And, belatedly, I realize how difficult the writing of history must be, trying to figure out how society progressed from an earlier time to a later time, or from then to now. History is only a plausible story that everyone comes to accept as the more or less canonical version. I'm not a relativist, but with regard to cause and effect in human affairs, there is no provably "correct" explanation and there is no proof. Every path to the present has many possible trajectories that got there, maybe even parallel ones, as in the path integral formulation of quantum mechanics.

It seems to me that one plausible version of what happened recently is as follows.

In the excitement and/or greed of the last twenty years, and following the repeated attempts to avert any market downturns, money was easy to borrow and a class of assets, call them class A (think of houses as an example, but I want to be more generic) became vastly overvalued by any reasonable standard. (Fair value is very hard to figure out because it obeys the Hole-In-The-Bucket Law¹.)

Derivatives on class A were therefore vastly overvalued too and, being derivatives, much more sensitive to changes in fair value (think subprime mortgages and their tranches). When people began to come to their senses, they realized these assets weren't worth what they'd paid for them. As a result, the firms that owned them or held too many of them on their books became insolvent.

There were other complex securities in the world, belonging to classes B, C, and D, etc., and as people became scared of complexity, they shied away from these securities too. These securities weren't overvalued in quite the same way. Whereas class A securities became "genuinely" worth much less, classes B, C and D became illiquid and so seemed to be worth much less too, but more for psychological reasons than for "physical" reasons. The companies that owned them got into difficulty too.

As everyone fled the insolvent and illiquid securities they lost confidence in the economic future and stock prices fell, and people felt poorer and spent less and companies projected less future profits and fired people who then spent less money and so they drove other companies that depended on them to do badly and so on and so on.

The administration is trying to cure insolvency and illiquidity with stimulus, but stimulus is mostly a cure for illiquidity. They are using a medicine for living people to revive the dead². The best thing would be to ring fence and restructure only the insolvencies and to stimulate the illiquidities. The desperate effort to treat insolvency with stimulus and the Chicken-Little warnings about the consequences of not doing so detracts from the confidence necessary to restore liquidity.

Much of the sense of unfairness and indignation about the current bailout and bonuses comes from the fact that large insolvencies are being treated as illiquidities in the hope that time and volatility will save them, but small insolvencies don't get the same kindness. This is a kind of appeasement of large firms and people whose risk-taking should instead merit an honest declaration of insolvency, which is why I still think we need just one Churchill, not many Chamberlains.

___________________

1: The Hole-In-The-Bucket Law: Fair value depends on future cash flows; future cash flows depend on the state of the future economy; the state of the future economy depends on how people use their money now; how people use their money now depends on their perception of their net worth; their net worth depends on fair value. See http://en.wikipedia.org/wiki/There's_a_hole_in_the_bucket, Belafonte, H. & Odetta. See also Soros, G (1987) The Alchemy of Finance.)

2. A little old Jewish lady at a funeral shouted: "Give that man some chicken soup."

"Are you out of your mind? Can't you see he's dead?" someone said. "Chicken soup won't help."

"Well it can't do any harm," said the little old lady. Not true here.

In January I wrote that after the Exodus, when Moses ascended Sinai, the Israelites panicked when he didn't return quickly. They constructed a golden calf to pray to and indulged in a literal orgy of consumerism.

God, more of a disciplinarian and a stick-and-carrot thrifty kind of guy than a Keynesian, then compelled them to wander the desert for forty years until the old guys died off and a new confident generation emerged.

It seemed to me, I wrote, working entirely off introspection, that we're going to have to wait a comparable amount of time for our generation of bankers and consumers to fade away and a new untraumatized generation with undamaged animal spirits to emerge.

__________

Here is a paper documenting the empirical proof of my conjecture: : http://www.econ.berkeley.edu/~ulrike/Papers/DepressionBabys_16.pdf

From the abstract: "Our estimates indicate that stock market returns and inflation early in life affect risk-taking several decades later. "

Not surprising even without research.

Tithonus got eternal life, but forgot to ask for eternal youth. (See Alfred Lord Tennyson and Aldous Huxley.)

The whole point of eternal life is eternal youth, or at least eternal middle age.

The whole point of a monetary stimulus is to restore the confidence of psychological youth. Confidence in the future is the key to the velocity of money, and government employment is perhaps a necessary but surely not a sufficient means of creating it.

But so many people have tin ears these days.

* The government thrashing around, warning of disaster in order to justify the massive bailout, thereby at least partially nullifying the confidence they aim to restore.

* Bailed-out people who would get no money if the company collapsed complaining about their pay.

* The New York Times blithely informing us that "As part of Shaw’s rigorous screening process — the firm accepts perhaps one out of every 500 applicants — Mr. Summers was asked to solve math puzzles. He passed, and the job was his."

A pleasing contrast: Lloyd Blankfein talking about changing things so that long-term pay should reflect long-term performance.

If you want to understand the difference between the possibilities of science and the possibilities of economics and government, you could do worse than to look at North Korea. They can build a nuclear bomb and launch a missile with ease, but they can't feed their people or run their society.

Something quite strange happened to me the other day, related to my previous blog entry about the poem "A Martian Sends A Postcard Home".

Once, maybe 10 years ago, I read an article about the Martian poets. I didn't remember whom it was by, and I didn't remember that they were called Martian poets. In fact, I thought they were called extra-terrestrial poets. All I remembered was that the poem observed someone picking up a telephone after it rang and viewing that as the telephone crying for help and being soothed by gentle talking into its mouthpiece. I didn't remember the author of the article or the name of the poet or where I'd read the article.

Occasionally, over the years, I've googled "telephone" + "extraterrestrial" + "poem" but never succeeded in tracking down the poem I recalled.

The other night I wanted to write a blog entry about how some people look at the bailout as a travesty involving saving the people who least need saving, and I thought about how in that poem I once read the poet looked at the telephone as a crying life form that needed soothing, totally but plausibly misperceiving what was happening. Who, I wondered, was right -- the people who looked at the bailout and the restoration of the status quo as normal because they were used to life on financial earth, or those who looked at it as abnormal?

So I started googling more seriously and eventually tracked down the poem. It was by Craig Raine, a name I didn't recognize at all, and it was called "A Martian Sends A Postcard Home", and the original article I read may have been by James Fenton in the New York Review of Books.

The reason I hadn't found it before was because the poem didn't explicitly contain the word "telephone"

Then I cut and pasted the poem into my blog entry.

That night I started reading the latest issue of the New Yorker, Mar 30th, and there, inside, was a two-page short story by Craig Raine. I got up to check that it really was the same name I'd discovered that morning.

Something synchronicitous like that but much much stranger happened to me once before, but that's another story.

This is a 1979 poem by Craig Raine:

A MARTIAN SENDS A POSTCARD HOME

Caxtons are mechanical birds with many wings
and some are treasured for their markings --

they cause the eyes to melt
or the body to shriek without pain.

I have never seen one fly, but
sometimes they perch on the hand.

Mist is when the sky is tired of flight
and rests its soft machine on ground:

then the world is dim and bookish
like engravings under tissue paper.

Rain is when the earth is television.
It has the property of making colours darker.

Model T is a room with the lock inside --
a key is turned to free the world

for movement, so quick there is a film
to watch for anything missed.

But time is tied to the wrist
or kept in a box, ticking with impatience.

In homes, a haunted apparatus sleeps,
that snores when you pick it up.

If the ghost cries, they carry it
to their lips and soothe it to sleep

with sounds. And yet they wake it up
deliberately, by tickling with a finger.

Only the young are allowed to suffer
openly. Adults go to a punishment room

with water but nothing to eat.
They lock the door and suffer the noises

alone. No one is exempt
and everyone's pain has a different smell.

At night when all the colours die,
they hide in pairs

and read about themselves --
in colour, with their eyelids shut.

____________

People refer to the school of poetry he initiated as the Martian school of poetry because of the way they look at familiar things and make them strange.

I read the blogs about the bailout a lot lately, and there are two extreme camps.

The conservative group wants to restore the status ante quo, and thinks almost anything that can get us there will be good for us. Fairness be damned.

The radical/disgusted group looks at the bailout as aimed at the undeserving rich people and rich institutions who always ran the world and cannot conceive that they shouldn't continue to do so. Some of them claim that now, with big institutions, Russian oligarchs and bankers who are trying to sell their estates on the ropes, is a good time to change the way the world works.

What would a Martian sociologist who wasn't familiar with our system say about current goings-on, I wonder?

I was reading Yahoo Finance and came across the following Associated Press release:

________

"Democrats are looking for a way to respond to the public's outrage over taxpayer money being used to bankroll big bonuses for financial executives without alienating an industry whose cooperation is crucial to the nation's economic recovery.

The House Financial Services Committee planned to endorse on Thursday a bill that would let Treasury Secretary Timothy Geithner and financial regulators decide whether an institution was spending too much money rewarding its employees.

The measure would exempt institutions that agree to participate in a government-sponsored program aimed at buying up $1 trillion of bad debt, or "toxic assets," sitting on the books of major banks. Geithner proposed the new investment program on Monday."

____________

This is the third-world stuff that dreams are Madoff: the threat that if you are not a GSE (Geithner Sponsored Enterprise) you will not be exempt from arbitrary legislation.

There are other third-world portents: the printing of money (James Grant keeps stressing the link with Zimbabwe's Central Bank); the threat of inflation; the prop-up-the-stock-market investment advice by the government; the punitive retroactive tax legislation; the corruption. Not to mention the grandstanding by senators from CT and congressmen from NY. among others, who are hardly exemplary themselves.

I come from South Africa during the bad days, where, though it was a second world country, there were big moral battles to be fought, and one of the few things that was inspiring about politics there was that politicians in those days thought it was their job to lead the country, to inspire them, to have some view about what's right, to persuade, to be political leaders, not followers. Here politicians often think it's their job to take the temperature of the country and then set their own verbal thermostat to the same level, to surf rather than to steer.

.........................

From Yeats, unfortunately clichéd already:

The best lack all conviction, while the worst

Are full of passionate intensity.

From Schopenhauer again, always interesting even after two centuries:

The normal, ordinary man takes a vivid interest in anything only in sofar as it excites his Will, that is to say, is a matter of personal interest to him. But constant excitement of the will is never an unmixed good, to say the least; in other words, it involves pain.Card playing, that universal occupation of "good society" everywhere,is a device for providing this kind of excitement, and that, too, by means of interests so small as to produce slight and momentary, instead of real and permanent, pain. Card playing is, in fact, a mere tickling of the will.

The Geithner plan and the general behavior of the administration seems to me a perfect example of the flaws in human thinking that behavioral economics cautions us against.

People are constitutionally averse to losses, and would prefer to wait and hope for Time to repair and replace what they've lost rather than acknowledge the market and call it quits. Investors like to be long volatility when they are down.

This seems to be the unstated philosophy with regard to distressed securities and failed financial managers.

Happy ever after in the market place...

Molly lets the children lend a hand...

Desmond stays at home and does his pretty face...

And in the evening she's a singer with the band...

…

Nothing personal, but more people with appropriate or inappropriate names:

Don Rich and Don Chance, professors and authors of various papers on options pricing.

The unfortunately named Glen Swindle, an energy trader at Credit Suisse. It could have been worse if his parents had named him Glengarry Glen Swindle.

On a related issue of names: The Great War eventually became World War I; let us hope that The Great Depression doesn't soon become World Depression I.

Recently I heard a bunch of 1960s professors at Columbia participate in a panel about whether Marxism is still relevant today. One of them pointed out what he perceived as the spontaneous energy of capitalism, how it always seeks to find a way past obstacles, no matter what. Though he said it admiringly, he didn't mean it in a totally good sense.

There is indeed a tremendous vitality related to the acquisition of money. It's undeniable. Look at the ingenious fierce energy with which financial companies grew rich, and observe the fury associated with the bailout, the AIG bonuses and the AIG counterparties. And notice the powerful homing instinct implicit in the vast sums of money that are returning to the firms that lost them in what should have been uninsured risk-taking.

This observation about energy reminded me of Schopenhauer and his theory of the power of the noumenon, the will implicit in all matter and human beings that seeks to preserve itself. I looked up what he had to say about money.

"Money," wrote Schopenhauer, "is human happiness in the abstract; he, then, who is no longer capable of enjoying human happiness in the concrete devotes himself utterly to money."

I have a slightly different theory.

I think money, and especially fiat money, is simply the disembodied Will itself, the urge to exist and accrete and reproduce, which is what money does best.

A djinn/genie is a supernatural creature in Arabic mythology which possesses free will.

Like the selfish gene for whom human beings are merely a convenient shell to aid the genes' reproduction, so perhaps money is pure Will, a $elfish Djinn seeking to unerringly attach itself to those humans who will best aid it to reproduce as widely as possible. This simple hypothesis could explain a lot about the world.

In most schools, you can take some courses Pass/Fail rather than for a grade. If you pass, the course then it counts towards your degree, but not for your GPA. If you fail, it counts towards your GPA. I suspect that most Pass/Fail grades end up being Pass.

Grades are a kind of balance sheet. Pass/Fail is the analog of abolishing marking to market, except in the case of total bankruptcy.

Perhaps this would work with securities too. The owner of a security could, in advance, declare that he or she is acquiring the security according to On/Off accounting rules. On means worth more than you paid for it, and hence it appears on balance sheet but with no value other than the statement that it is in the black, worth more than what you paid. Analysts and auditors are not allowed to ask exactly what it's worth. Off means worth less and hence will be off balance sheet.

The theory of grading isn't stagnant either, but keeps progressing, usually in the same direction. Some schools now offer Pass/D/Fail, or PDF. If the instructor gives you above a D, your grade is simply registered as a Pass and doesn't contribute to your GPA. If you get a D or an F, it does. But PDF comes with an embedded option,much like a convertible bond: as a student, you can decide, after the exam and if you pass, to retroactively "uncover" your Pass grade. "Uncover" is a euphemism for "convert". This means that if you think you did well, you can convert the pass into a letter grade that will contribute to your GPA. If you think you did not so well, you can stick with Pass.

The avowed aim of Convertible grading is to make students take more risk, to not fear experimenting with difficult courses, by diminishing the possibility of a GPA-reducing grade. But actually, it's making them take less risk, just as a convertible bond is less risky than pure equity.

Convertible grades, like convertible bonds, are a great invention. The corporate world may have something to learn from this. One could extend On/Off Accounting into Convertible Accounting. A security acquired under Convertible On/Off Accounting Rules can stay off balance sheet until it's in the black, at which point you can move it on balance sheet, and you can convert the On into a true mark to market if you think that will benefit you. This too will make investing less risky.

Gresham's Second Law: Bad grades drives out good grades.

Everyone has his own model of appropriate behavior. My nemesis is people who think their model is right, not just for themselves but for everyone else too, and have no compunction telling you so. Many of them have standards that change with time, sometimes by 180 degrees, but their certainty that you should be following their current set of standards doesn't.

No doubt I am guilty of the same crimes, but …

A few posts ago, tired of reading about how the world would be better off if the financial engineers of the world did real engineering and put their brains to better use, in a vain attempt to divert attention I wrote: There may be too many financial engineers. There are certainly way too many MBAs and economists.

Now, confirming my temporarily bad-tempered prejudicial view, here are excerpts from Philip Broughton at http://www.timesonline.co.uk/tol/news/uk/education/article5821706.ece, himself a Harvard MBA, on Harvard MBAs.

________________

Harvard Business School alumni include Stan O’Neal and John Thain, the last two heads of Merrill Lynch, plus Andy Hornby, former chief executive of HBOS, who graduated top of his class. And then of course, there’s George W Bush, Hank Paulson, the former US Treasury secretary, and Christopher Cox, the former chairman of the Securities and Exchange Commission (SEC), a remarkable trinity who more than fulfilled the mission of their alma mater: “To educate leaders who make a difference in the world.”

It just wasn’t the difference the school had hoped for.

Business schools have shown a remarkable ability to miss the economic catastrophes unfolding before their eyes …

In the late 1990s, their faculties rushed to write paeans to Enron, the firm of the future, the new economic paradigm. The admiration was mutual: Enron was stuffed with Harvard Business School alumni, from Jeff Skilling, the chief executive, down. When Enron, rotten to the core, collapsed, the old case studies were thrust in a closet and removed from the syllabus, and new ones were promptly written about the ethical and accounting issues posed by Enron’s misadventures …

You can draw up a list of the greatest entrepreneurs of recent history, from Larry Page and Sergey Brin of Google and Bill Gates of Microsoft, to Michael Dell, Richard Branson, Lakshmi Mittal – and there’s not an MBA between them.

Yet the MBA industry continues to grow, and business schools provide vital income to academic institutions: 500,000 people around the world now graduate each year with an MBA, 150,000 of those in the United States, creating their own management class within global business.

Given the present chaos, shouldn’t we be asking if business education is not just a waste of time, but actually damaging to our economic health?

etc.

___________

500,000 MBAs a year is daunting. If half of them, I don't know, each wrote just ten error-free lines of C++ a day, or co-authored one paper on behavioral finance a year, or babysat one day a week so that more women and househusbands could go out to work, imagine the effect on the world.

Now is the time for all good men to come to the aid of their country.

Next up: management consultants. Still on the bench: executive coaches.

___________

I wonder if fat tails have finally peaked.

Here is Rick Bookstaber on the Fat Tailed Straw Man:

"I remember a cartoon that showed a man sitting behind a desk with a name plate that read ‘risk manager’. The man sitting in front of the desk said, “Be careful? That’s all you can tell me, is to be careful?”

Observing that extreme events can occur in the markets is about as useful as saying “be careful”. We all know they will occur. … The flaw comes in the way we answer that question, a question that can be stated more analytically as “what are the dynamics of the market that we failed to incorporate. …

So, to recap, we all know that there are fat tails; it doesn’t do any good to state the mantra over and over again that securities do not follow a Normal distribution. Really, we all get it. ”

_____________

I'm still not sure the administration understands psychology. As I wrote previously, "As far as the bailout goes, the stock market responded badly to Geithner because it is crying out for someone in authority who can make bold moves and justify them, someone non-mealy-mouthed, someone who has an equal mix of brains, principles and confidence. The market wants Churchill and they keep tossing it Chamberlains."

The latest NYR of Books has an article by Amartya Sen in which he points out the contributions of Arthur Cecil Pigou (never heard of him) to economic psychology, and its importance:

"One of the problems that the Obama administration has to deal with is that the real crisis, arising from financial mismanagement and other transgressions, has become many times magnified by a psychological collapse. The measures that are being discussed right now in Washington and elsewhere to regenerate the credit market include bailouts—with firm requirements that subsidized financial institutions actually lend—government purchase of toxic assets, insurance against failure to repay loans, and bank nationalization. (The last proposal scares many conservatives just as private control of the public money given to the banks worries people concerned about accountability.) As the weak response of the market to the administration's measures so far suggests, each of these policies would have to be assessed partly for their impact on the psychology of businesses and consumers, particularly in America."

___________

Recently a journalist emailed me: "Should working in finance equate with the responsibilities of public service?"

"Should working in journalism equate with the responsibilities of public service?" I responded.

You can't do Monte Carlo simulations on history because you don't know the laws of evolution, so anything anyone says is simply unsubstantiated theory.

Nevertheless, here's mine. The S&P 500 has now fallen from 1580 to the high 600s, down 57% and counting, despite intervention and cheerleading. If, instead, we'd let the market have its way with companies it didn't like, more than a year ago, without government bailouts or interference or attempts to restore an unsustainable status quo, I am skeptical that we'd be much worse off now.

We would perhaps have had a fierce forest fire and now be looking at fresh growth on the forest floor. Instead, the flames keep finding fresh fuel.

What follows is not in very good taste.

In Dec 2006 I wrote the following entry:

_____________________________

Some time in the early 1970s Nature magazine published an article about people whose names matched their occupations. There was a famous neurology textbook "Diseases of the Nervous System" written by Lord Brain. There was a published article on birth control written by Maria Concepcion ...

A few days ago I dealt by email with a health plan administrator whose surname was Nurse. And, on the front page of today's New York Times, there's a article about the promising fact that H.I.V. risk is halved by circumcision. From a few paragraphs down into the article:

'Circumcision is "not a magic bullet, but a potentially important intervention," said Dr. Kevin M. De Cock, director of H.I.V./Aids for the World Health Organization.'"

________________________________

Once bitten but not yet twice shy, your intrepid follower of news about the razor-sharp policy makers on circumcision at WHO has kept a wary eye out for further developments and breaking news.

A few paragraphs into a March 3 New York Times article entitled "New Web Site Seeks to Fight Myths About Circumcision and H.I.V." the Times reports that "malecircumcision.org … gathers scientific studies, policy documents and news articles and is meant to help fight popular myths, like the new one that circumcision is 100 percent protective so men can stop using condoms, said Dr. Kim Dickson, a W.H.O. medical officer who oversaw the site’s creation."

Dr Dickson's last syllable is vaguely reassuring. But closer inspection of the website reveals many contributions from collaborator Dr Bruce Dick, whose unfortunately adjectival-sounding Christian name, thought it suggests a certain fellowship with the beneficiaries of the website, will not inspire popular confidence.

It;'s beginning to be pretty clear about what it takes to get a cutting-edge job at WHO.

I like to think I've been as good as almost anyone in pointing out the limitations of financial models. I can trace my first published article about so-called model risk to no later than early 1996. If you google "financial model risk" several of the first links that come up refer to that article.

I say the above in order to justify my attempt below to dampen the tendency to say wilder and wilder things in what are desperate times.

Someone pointed me to a speech by Paul Volcker in which he says:

'A year or so ago, my daughter had seen something in the paper, some disparaging remarks I had made about financial engineering. She sent it to my grandson, who normally didn’t communicate with me very much. He sent me an email, “Grandpa, don’t blame it on us! We were just following the orders we were getting from our bosses.” The only thing I could do was send him back an email, “I will not accept the Nuremberg excuse.”'

I think Volcker's grandson's remark is a bit pathetic, but I think Volcker's response –-showing his righteousness at the expense of excerpting once sentence, perhaps out of context, out of a private letter from his grandson, (who will no doubt communicate with him more frequently after this) –– is a bit cheap.

There may be too many financial engineers. There are certainly way too many MBAs and economists by orders of magnitude. But let's not destroy the language. There are true holocausts, past and present, and most of us have been complicit or silent about most of them. Even Merrill Lynch and John Thain haven't been putting Jews and gypsies in concentration camps yet.

I recently watched a TV production of Un Ballo de Regina, a Balanchine ballet set to music by Verdi, and I had this strange sensation you sometimes get when you listen to music you've never heard before: every successive note seemed to be just what you thought it was going to be, and yet, to be honest, you couldn't quite predict it. There was something both inevitable and yet unpredictable about what came next, but it was deceptive because you couldn't have foreseen it, though it sounded like it had to be. You weren't the composer and yet you had the illusion you might have been. I suspect this has something to do with the nature of Time and why music can keep you in the present and temporarily evade the future. You have to be unconscious and yet still in control enough to watch your unconsciousness to evade Time in a meaningful way.

Which brings me to the bailout.The psychological trouble with current attempts to fix the economy by stimulation is that they don't have that air of unpredictable inevitability that is associated with good music and inspired action. Everything the people in authority now do has an air of delayed predictability. The nationalization of failing banks, when it comes, will be accompanied by the sound of dragging heels. I have an image of a child being reluctantly pulled towards the bedroom, his heels scraping against the carpet as he resists the inevitable bedtime.

What's needed is to get people confident enough about the future to spend again. I'm increasingly skeptical that public spending will quickly effect this, because confidence is shot. Everyone is going to be cautious about spending for a long time from now on, Keynes or no Keynes. The velocity of money slows as everyone starts to hoard, and GDP declines despite an increase in money supply. One way to fix this is to charge a fee for saving your money, i.e. negative interest, or high inflation, use it or you lose it, but that's fearful velocity, not confident velocity. Another is lower taxes, putting more money permanently in people's pockets, but that leaves less for government spending initially, and has no effect on the unemployed. A third is a charismatic confidence-inspiring leadership, but think Germany in the Thirties. I'm a little stymied for now, and so, I sense, is everyone else. There's no quick fix and no substitute for good fresh wise leadership.

I was talking to a graduate student the other day, and he referred me to the "fundamental theorem of finance".

Isn't it strange? I thought later, that finance should have a fundamental theorem (and that I wasn't quite sure what it was). Axiomatic systems have theorems. If you google "the fundamental theory of chemistry" you won't find much because chemistry isn't about axioms. Here is what you find if you google "fundamental theorem of arithmetic/algebra/calculus/finance".

° The fundamental theorem of arithmetic states that every natural number greater than 1 can be written as a unique product of prime numbers

° The fundamental theorem of algebra states that every polynomial equation of degree n with complex number coefficients has n complex roots.

° The first fundamental theorem of calculus states that, if f is continuous on the closed interval [a,b] and F is the antiderivative (indefinite integral) of f on [a,b], then the definite integral of f(x) from a to b is F(b) - F(a).

So far I get it.

Now … … (wait for it):

° Fundamental Theorem of Finance. Security prices exclude arbitrage if and only if there exists a strictly positive value functional, under the technical restrictions that the space of portfolios and the space of contingent claims are locally convex topological vector spaces and the positive cone of the space of contingent claims is compactly generated, that is, there exists a compact set K of X (not containing the null element of X ) such that C = {x ? X : x ? 0} = U ?K for ?>= 0

You must remember this / A kiss is still a kiss / A sigh is just a sigh / The fundamental things apply / As time goes by.

On Charlie Rose last night, Charlie played straight man to Larry Summers. "What economist has influenced you most?" Charlie asked. "Keynes," Summers answered, trying to look like he wasn't saying something obvious, "Keynes."

Keynes understood psychology, but there is something about human psychology that all this end-of-days talk about Keynes misses. When the government throws money at the populace, and keeps describing it as a Hail Mary pass they regret they have to make, it must vitiate the effect of the stimulus itself. The first time Keynesianism was used, it was a surprise move to a nation that wasn't an expert on economic theory; the second time around, everyone knows what is supposed to happen, and that can't be good. In human affairs, history matters.

Penicillin works even if they tell you they're going to give it to you, maybe even better. But people's minds are different from people's bodies. Is a stimulus so stimulating when they keep telling you they are going to stimulate you? Can you get excited when everyone around you is watching to see how excited you get?

1. I read again an old paper by Daniel Ellsberg of Pentagon Papers fame. It's called "Risk, Ambiguity and the Savage Axioms," and shows, from empirical studies, that people cannot assign a consistent set of probabilities -- not even subjective probabilities -- to diverse outcomes for which they don't know the frequency distribution.

That seems to drive a stake into the heart of both classical and even behavioral finance, so much of which assumes people make rational or even irrational decisions based on their probabilistic views of the future translated into an expected value.

2. As far as the bailout goes, the stock market responded badly to Geithner because it is crying out for someone in authority who can make bold moves and justify them, someone non-mealy-mouthed, someone who has an equal mix of brains, principles and confidence. The market wants Churchill and they keep tossing it Chamberlains.

The interesting excerpt below is from a 1950s letter from Normal Mailer to William Styron.

"I didn't write[The] Naked [and the Dead] because I wanted to say war was horrible, or that history is complex, resistant, and almost inscrutable, or because I wanted to say that the coming battle between the naked fanatics and the dead mass was approaching, but because really what I wanted to say was, "Look at me, Norman Mailer, I'm alive, I'm a genius, I want people to know that; I'm a cripple, I want to hide that," and so forth."

This is what political theory and capitalism in particular have to deal with: how to regulate so as to take advantage of the upside and limit the downside of this attitude.

I guess Daschle will have to go back to consulting and lobbying.

In that respect, there is an interesting article by Christian Caryl in the NYR of Books at http://www.nybooks.com/articles/22277 about Edward Lucas's book "The New Cold War: Putin's Russia and the Threat to the West", which I haven't read. The review quotes several excerpts from the book on capitalism which I reproduce below.

1. "The regulators of the world's financial centers must rethink how they deal with Russian (and for that matter Chinese) companies wanting to use them. The free market cannot be decoupled from the free society. The industrialized world has shown its capacity for collective action in dealing with money laundering. It could do the same for corporate governance and property rights. That would mean, for example, that any company wanting to list its shares or sell its bonds in London, New York, or Frankfurt would have to make it clear that it was engaged in a real business, not the collection of artificial rents; that its property was not stolen; and that its ownership was clear and truly private. Gazprom and [the Russian oil company] Rosneft, along with most big Russian companies, would be immediately disqualified."

2. "Either [the G-8] should become a big-economies club (in which case China, India and Brazil should join), or it is a body for rich countries that respect the rule of law and political freedom. In that case Russia does not even belong in the waiting room."

And, most relevant

3. "If you believe that capitalism is a system in which money matters more than freedom, you are doomed when people who don't believe in freedom attack using money."

One wonders if there will ever be a viable third political party in America.

When Moses went up to Mt Sinai to get the Ten Commandments, he left his brother Aaron in charge of the children of Israel. While Moses was away, the people panicked and lost their faith. They collected all their jewelry, melted it down and created a golden calf to pray to.

When Moses returned he found them dancing about the calf and doing a lot of unsavory but titillating pagan stuff. He got very angry. God realized that these people, still slaves at heart, would never have the courage to be free men. He needed a new generation to enter the promised land. So the Israelites were obliged to wander the desert for forty years, waiting for the old guys to die off, and for a new unscarred generation to grow up.

I fear we're going to have to wait a comparable amount of time for a generation of bankers to get over their trauma and a generation of consumers to regain their confidence.

I just watched a breakingviews.com video on the web in which Anthony Currie suggests that maybe it's time for non-bankers to run the banks.

There was indeed something incestuously clubby about the confirmation process for Geithner, no matter how smart he is, that made the same thought run through my head.

So, I hope Steve Jobs gets better quickly, and when he does, he'd be the perfect person to run Treasury. He's tough, he's creative, and he knows how to to fix broken companies.

iMac, iPod, iBank.

Here are the two founders of the Quantum Fund in today's Reuters, my excerpts and emphasis, with diametrically opposed opinions which both sound equally convincing.

______________

WASHINGTON (Reuters) - The stimulus plan the U.S. government is currently considering is necessary to help American citizens, but it will likely not reverse the country's economic decline, hedge fund manager and billionaire philanthropist George Soros said on Monday …

"The economies of the world are falling off a cliff. This is a situation that is comparable to the 1930s. And once you recognize it, you have to recognize the size of the problem is much bigger," he said.

Soros said the United States needed "radical and unorthodox policy measures" to prevent a repeat of the Great Depression of the early 20th century that include recapitalizing banks and writing down the country's accumulated debt.

--->Also, he said, it should create more money to offset the collapse of credit and then rapidly pull that cash out of the system when inflation emerges. The government would have to be very nimble in the timing of such moves, he said … <---

______________________

HONG KONG (Reuters)—The global financial crisis has only strengthened renowned international investor Jim Rogers' acerbic criticisms about the U.S. economy and his resoundingly optimistic view on China's future. Mr. Rogers, co-founder along George Soros of the Quantum Fund, railed at the Federal Reserve and incoming U.S. Treasury Secretary Timothy Geithner, while also saying the high saving rate and solid fundamentals in China make it a powerful force to be reckoned with. …

He accused U.S. authorities of consciously trying to devalue the U.S. dollar by flooding the market with liquidity—or in his words, "turning on the printing presses"—and said anyone chasing the rally in government bonds is making a "terrible mistake."

--->"The idea that you can fix a period of excess borrowing and excess consumption by more borrowing and more consumption to me is just ludicrous," he said.<---- …

__________________

Just in time to help the struggling financial industry comes Dr Ari Kiev, who, where others see only difficulties, sees an opportunity, and so should you.

_________

NEW YORK, Jan. 7 /PRNewswire/ -- Psychiatrist, trading coach and author Ari Kiev, M.D. announced that he has launched Kiev Consulting, a consulting firm specializing in peak performance coaching for hedge funds and institutional investors and traders. Regarded as one of the top trading coaches, he has worked with some of the most prominent hedge funds in the country for more than 16 years. Kiev said he is expanding the services he provides to hedge funds and other investment firms to include the assessment of new portfolio managers, teambuilding and leadership training.

"This consulting practice effectively allows me to broaden my reach and offer customized services to an increasing number of fund managers who are recognizing the importance of a psychological perspective in managing investments," he said. "Given the stress of today's market and the challenges faced by professional investors, I felt the time was ripe for expanding my consultation work."

Kiev said his counsel will encompass dealing with the stress of drawdowns, the behavioral dimension of risk management, psychological screening of analysts and portfolio managers, and creative approaches to building cultures of collaboration. Kiev, who has lectured worldwide on the psychology of trading, is the author of more than 20 books …

_____________

If you are a trader or money manager, it seems to me you could pretty easily get your health insurance company (if they're still around) to pay for this treatment, provided that Dr Kiev diagnoses you with 312.31 in the DSM (Diagnostic and Statistical Manual of Mental Disorders), which I reproduce below:

________

Diagnostic criteria for 312.31 Pathological Gambling  (PG)

A. Persistent and recurrent maladaptive gambling behavior as indicated by five (or more) of the following: 

(1) is preoccupied with gambling (e.g., preoccupied with reliving past gambling experiences, handicapping or planning the next venture, or thinking of ways to get money with which to gamble) 

(2) needs to gamble with increasing amounts of money in order to achieve the desired excitement 

(3) has repeated unsuccessful efforts to control, cut back, or stop gambling 

(4) is restless or irritable when attempting to cut down or stop gambling ?

(5) gambles as a way of escaping from problems or of relieving a dysphoric mood (e.g., feelings of helplessness, guilt, anxiety, depression) 

(6) after losing money gambling, often returns another day to get even ("chasing" one's losses) 

(7) lies to family members, therapist, or others to conceal the extent of involvement with gambling 

(8) has committed illegal acts such as forgery, fraud, theft, or embezzlement to finance gambling 

(9) has jeopardized or lost a significant relationship, job, or educational or career opportunity because of gambling 

(10) relies on others to provide money to relieve a desperate financial situation caused by gambling 

B. The gambling behavior is not better accounted for by a Manic Episode.

_________

I like that "five (or more)" -- precision is always admirable. Four and I'm afraid you will not qualify, unless Dr Kiev is willing to bend the truth a little.

Madoff certainly could use 312.31 as a defence, since he indubitably qualifies under (6) through (10), and he's done it for so long it cannot be better accounted for by a Manic Episode.

And (1) - (4) pretty much defines anyone in the money business right now, including the gummint.

The 5th edition of the DSM, forthcoming, which keeps growing in size and diagnostic precision, is still being edited, and iis reportedly adding

312.39 Pathological Adherence to Efficient Market Hypothesis and/or Behavioral Finance (PAEMHBF)

which will help with treating the next crisis.

I will try to stop now. I think I'm having a Manic Episode.

I keep thinking about TARP and I'm persuaded that Chapter 11 is better.

Maybe it's time to stop the trick-le of bailout money to the moribund. Put all failing banks and companies into Chapter 11. The bankruptcy laws are adequate: equity holders, who took risk knowingly, get zero; bondholders get the company, which then restructures and can go about its business. Replace many of the people at the top: these guys are already too distracted with trying to save their own skins and reputations to do a good job. They've been burned and can't forget it soon. New people and a clean start is the right capitalist solution -- take risk, suffer the consequences. Then the government can help the new equity holders go about their business of creating credit again.

Never been a libertarian, but I think creative destruction is the right thing at this point. It would put an end to the drip drip drip, and to the sight of formerly evangelistic free-marketsters now asking for government help to survive.

As I was going to the Street

I met some firms that felt the heat

Every firm could no more borrow

Now TARP has come and eased their sorrow

Their stock is good until tomorrow

Tomorrow, sorrow, borrow and heat

What's a solution with less deceit?

---------

Chapter 11

I used to be against the bailouts. I thought that if financial firms get the benefits of taking risk, then they should get the malefits too.

Then I was persuaded that this was merely Schadenfreude, and that for the greater good of us all it was better not to punish a few people at the cost of destroying the entire system.

Now, I wonder. I've heard people say that market impact of trading is the same in the end, whether you trade slowly or quickly. Perhaps there's some principle of invariance that says the end result will be the same no matter how you get there.

In that case, are markets now undergoing death by a thousand cuts? The S&P has slowly worked its weary way to the 800s. Maybe it would have dropped no lower if the government hadn't bailed out so many financial firms and simply let the market go after the Lehman collapse.

On January 9 The Wall Street Journal compared the desperate bailouts to Ayn Rand's "Atlas Shrugged". When I first read Ayn Rand in 1960s South Africa, as I wrote a few months ago, I thought she was a left-winger. South Africa was a right-wing apartheid state that deprived all blacks and liberal whites of their individual liberty, and so when Ayn Rand glorified individualism, I assumed she had to be left. In the distorted politics of South Africa the extreme left and extreme right converged to the same point.

Now more and more of the former role models of private enterprise and capitalism are begging for government intervention. Since socialism and objectivism are beginning to seem equally plausible solutions to the problem, it's clear no one knows what to do.

Except the man in the purple booth, whose reassuring message about how to find him is everywhere.

is a British historian who has written lots of reviews in the New York Review of Books, including a recent one of Niall Ferguson's book "The Ascent of Money". Below are some paragraphs I like from his review.

A final reflection on Ferguson as a historian. He is overimpressed by economics. Many historians feel that history is in some way inferior to the more exact sciences; the thought that he can "do" economics gives the historian an expanding sense of mastery. I know the feeling, because I've lived through it myself. Economics, especially in its mathematicized form, purveys a peculiar vision of society. Society to the mathematicians is a market imperfection. Among other imperfections, the idea is that allocation of resources is not as efficient and information for making choices is not as complete as they should be.

This delusive, but powerful, idea suggests that behind the imperfection lies perfection, a world in which the future will be perfectly known and therefore hold no surprises. Mathematics is the inheritor of the platonic ideal; and mathematically driven financial innovation is its handmaiden. At one time philosophers projected their utopias, and the early economists followed suit. Keynes was perhaps the last one who indulged in utopia building. In his essay "Economic Possibilities for Our Grandchildren" (1930), he looked forward to a time when the economic problem was solved and an age of abundance and leisure had arrived in which people would cultivate the arts of life.

…

Ferguson realizes that mainstream economics is flawed, but then veers away to what I think is the dead end of "behavioral economics" and false analogies between financial evolution and Darwinian natural selection. Behavioral economics claims that we are "wired" to behave "irrationally"; theories purporting to derive from Darwinism claim that finance follows the law of the "survival of the fittest," whereby firms fitted to their environment flourish and weaker ones go to the wall—a process that inevitably involves "creative destruction." These attempts to explain the rise of money in terms of natural processes strike me as being both morally and philosophically naive.

Clawback is a very ugly-sounding ugly-looking word. Whoever said words are arbitrary combinations of letters put together to signify something is wrong. The sound matters.

First it was Olympic medals and Tour de France anointments, clawed back for drug use. Then people suggested clawing back bonuses, which they tried on Grasso, unsuccessfully. Now I have seen suggestions to take back Nobel prizes too. What next? I live in fear and trembling lest Wilmott magazine demand back the 2006 Wilmott Award for Contributions to Quantitative Finance that I once perhaps unjustly received.

I have greater scruples than Dick Grasso -- I'm much more like John Thain or John Mack, to tell the truth -- and so I'm going to voluntarily return my award. Hang on a while while I try to find it … Hmmm, I don't recall actually getting anything material, somehow … Damn … there must have been something … I think I got an email … perhaps I can make the email bounce back … nope, I think I deleted it … Ummm … maybe I'll just be rude to Paul next time I see him …

The truth is that prizes are mostly arbitrary and not decided on Mount Olympus. (Sainthood, now that's a different matter entirely.) I'm on the committee of some prize that will go unnamed, and in the end it's just a bunch of people who ate a hurried breakfast that morning, burped once or twice on the way into work, and then voted. They maybe weren't smart enough to give it, and they probably aren't smart enough to know when to take it back.

For some reason I can't put my finger on all this sound and fury about taking Nobel prizes back reminds me of a Mother Goose nursery rhyme I learned when I was a child and then read to my own children:

______

Ride a cock horse to Banbury Cross

To see a fine lady upon a white horse

With rings on her fingers and bells on her toes

She shall have music wherever she goes

_______

I wonder why.

Like Paul, I have been thinking a lot about what makes a good model and what makes a bad one. In physics or even biology, theories can come pretty close to being indistinguishable from the real thing. (Tables ARE made of atoms. Avoid the temptation to think about this or you will lose your footing.)

Models are different, and are by definition not the real thing. They are simplifications, more or less gross as the case may be. (Stock prices do NOT evolve lognormally).

What is good simplification?

Axiom 1: All models sweep dirt under the rug.

Axiom 2: A good model makes explicit the dirt swept away.

For that reason, and despite the campaign to discredit it, and no matter what it's creators think or say about it, I like Black-Scholes: it's an idealized recipe for creating an option, a piece of engineering. The assumptions are very clear, and so you know what  you are taking for granted when you use the model, and you know what has  been swept out of view. It' s your job to figure out how well the world matches its assumptions, and what to do about the mismatches. I beg your pardon, its creators should say and believe, I never promised you a rose garden.

_____________

www.edge.org asked a bunch of people to guess what would be the biggest scientific game-changer in their future: http://www.edge.org/q2009/q09_index.html.

Here's my answer: http://www.edge.org/q2009/q09_7.html#derman

____________

Happy New Year and I hope for less dirt under everyone's rug, or failing that, better vacuum cleaners.

I suggested in a recent blog that people in the financial supply chain be paid in PIKs, in the illiquid securities they participate in creating, in order to give them the appropriate incentives to price the securities fairly.

Now Credit Suisse is paying its employees bonuses in illiquid securities stuck on their books:

http://www.nytimes.com/2008/12/19/business/worldbusiness/19bonus.html?_r=1&adxnnl=1&adxnnlx=1229781748-mVk0DEOkQD3JBkFl7GlQ1A

This looks naively like what I intended, but the incentives are totally reversed. It's too late to price these things fairly; they already exist. Now it's just a convenient and clever way of getting rid of troubled assets while simultaneously evading perceived limits on pay.

Structured products are often used for regulatory and tax "arbitrage", and this is another example, except usually the beneficiaries are clients, and here the beneficiary is the structurer. (I suppose you could argue that the beneficiaries are also the stockholders, perhaps). People are infinitely ingenious.

Names are destiny, as I've observed in a previous blog.

The building my son lived in recently "retained the services of Mr Jonathan Flothow, the buildings heating consultant, to investigate and recommend options for replacing both the burner and boiler." How could he not go into that line of business?

As for Mr Madoff, he has the right name too.

I once wrote in a column in Risk about cranks, that

"Finance, after nutrition and psychology, may be the field in which it’s hardest to distinguish between a really enthusiastic academic or practitioner and a genuine crank … Recently I saw an academic article that found “strong global evidence that stock returns are lower on days around a full moon than... around a new moon.” Crankademic? Pranktitioner? The real thing? Can one devise a Turing test to tell the difference? "

If it wasn't so embarrassing to be part of a business with so many scams, it would be mildly schadenfreude-ishly gratifying to observe how easily supposedly smart and rich individuals are taken in. Don't ask, don't tell.

I just returned from 6 days in Florence and then 2 days in London.

In Florence I saw lots. It rained every single day there, no kidding, and just about every hour. Yahoo Weather had warned me of this, but I chose to disregard it before I left.

Churches generally leave me a little cold, and so the highlights I remember (it all blurs a little) were Donatello's David in the Bargello (the first free-standing nude sculpture, I'm told, since the Romans), frescos in the Palazzo Vecchio, Paolo di Francesca, Bronzino & Memling portraits in the Uffizi, the Tizian Venus d'Urbino which reminded me of Manet's Olympia, and a Raphael Veiled Woman in the Palazzo Pitti. My son pointed out to me how the stylized portraits of the biblical figures in the early Renaissance paintings quickly evolved into portraits of recognizably real models with their own anatomical idiosyncrasies only a few score years later. For reasons of weather and weariness, I didn't get to see Michelangelo's David.

------------

I report on all this so that no one can get me to fall into the Sarah-Palin-what-newspapers-do-you-read trap that travelers fear:

You: What did you see in Florence?

Me: Oh lots.

You: But what for example?

Me: Just about everything really. Everything worth seeing.

You: What was your favorite sight there, would you say?

Me: Any of them, really. Most of them, actually. I have a vast variety of favorite sights.

------------

In London, where I went for work for the (N+1)th time, I no longer try to see anything much, not because I've seen everything but just out of some cocooning instinct. I almost invariably give in to the regrettable tendency to stay in my hotel room when I'm free and spend my time skyping and googling. The nice thing about hotels, someone once told me, attributing it to V. S. Naipaul, though I've never been able to corroborate it, is that nice hotels disembody you but they don't depersonalize you. Provided that you don't have to worry about the cost, they remove the anxious heaviness of physical existence and its corollary needs, and leave behind only the lightness of being, at least for a little while. You become wifi rather than wired. I suppose that's what it must be like to be in heaven -- no body to worry about, pure spirit.

Having now established my cultural credentials, I can proceed to the more mundane stuff.

1. A bad experience -- feel free to skip this, I don't know why I'm even imagining you need my permission.

I left Florence at 7:30 a.m. on a Wednesday morning to head to London for work, taking a bus to Pisa to get a 12:50 flight to Gatwick on British Air. I went through passport control, got my passport stamped for exit, and waited at the gate. My cellphone was low on gas, but I wasn't worried since I was soon to take off.

The sign for the flight indicated nothing out of the ordinary, but I noticed I was the only person at the gate. Someone then explained to me that there had been a belated inaudible announcement that the flight was cancelled. One suspicious British man claimed the airlines were trying to save money by cancelling half empty flights. Unfounded as it turned out. Pisa's nice small airport was fogged in (floods in Venice, bear market rallies in the US and Europe) and the fog never cleared. Planes that were there could in fact take off in the fog, having the whole sky to aim for, but planes that wanted to get there couldn't aim for the landing strip through the fog. Someone claimed that Pisa doesn't have instrument landing. Sounds implausible, but who knows.

I stood in line for an hour to get a boarding pass for the 4:30 flight to Gatwick, as well as a food voucher. I bought a 10 Euro Vodaphone cellphone voucher.

The airport WiFi didn't really work in Pisa, though I tried to pass some time that way. The Vodafone service didn't take you to the web page you needed to enter your credit card on. I tried using my iPod Touch but that didn't connect either. (More in the future about some of my disappointments with the Touch, loath though I am to acknowledge them.)

I wanted to use my cellphone to let my coworkers know of my inability to get to London. There was a sign for a Business Center, but no Business Center there. The WiFi area had no electrical outlets. The Vodafone booth wouldn't let me use theirs, no matter how many times I said Scusi and Prego. The rest of the airport seemed to have no need for electrical power outlets in any visible place.

Then I saw a sign for the Chapel, which I entered, and Thank God (sic) it had two electrical outlets. I plugged my phone in at the outlet behind the altar and laid it down unobtrusively on the floor. Then I sat down on a chair and closed my eyes and prayed for an end to the financial crisis, a doubling of stock market levels, and a reduction in CEO compensation. I threw in an extra prayer for the end of crises of all kinds. Five minutes later a woman came in, crossed herself, apologized in Italian for disturbing me (I was flattered), and then left, shutting the door behind her. Ten minutes later my phone was half charged and I departed.

I bought another 10 Euro cellphone coupon from Vodafone. At 3:30 I went through passport control for the second time, and got a second Pisa exit stamp. I waited until 4:30 at the gate with several well-dressed Italians. Tthere was no indication of any problem, but no plane. Then I heard the sound of my name faintly issuing from the loudspeaker to go out again and return to checkin. There I was met by a man with my suitcase who told me the 4:30 flight had been forced to land in Genoa rather than Pisa because of the weather, and that the bus taking us to Genoa was about to leave. News to me. We took a two hour bus ride to Genoa, and there finally boarded a flight to Gatwick, twelve hours after I got to Pisa. I now have proof in my passport that I departed from Italy three times on the same day, and will have to get more pages inserted. It always irritates me that passport stampers don't aim for the corner of your passport page, but like to hit the center and force the next stamper to start on a new page.

2. Some bad things about Italy, aside from the above.

My son's Italian academic colleagues were unanimous in admiring the relatively meritocratic hiring in the UK and the USA, saying that Italian universities are binefficient and ruled by nepotism, and that all the historical measures taken to enforce fair play in hiring are now used to avoid it. You knew in advance, they said, who was going to get a job that was advertised, and jobs were given to friends and family members.

3. Some really good things about Italy, aside from the Renaissance.

When you order a cappuccino, anywhere, it has beautiful fresco-white foam streaked with yellow ochre and burnt sienna. Even better than the color, I noticed after a few of them, was the temperature: it was drinkable the instant you were handed it, just warm enough to make you feel good inside, not hot enough to make you choose between a sip and spit or a burnt palate.

Coolest of all the things in Italy were the IVRI at Genoa airport, muscular Mel-Gibson-like men with a little stubble, tough but not showily muscle-bound, and lithe but full-figured Emma-Peel like women with flowing hair (sorry if you don't know who Emma Peel is), all dressed in navy flannel pants tucked into leather boots, guns on their hips, and with the white letters I.V.R.I emblazoned on the backs of their navy flannel bomber jackets. The IVRI, it turns out, are not one of the ten lost tribes as I mistakenly first assumed, but the Istituti di Vigilanza Riuniti d'Italia, Italy's private security force. They look efficient and purposeful and glamorous, even when they Xray your luggage or wave a metal detector over the puzzlingly beeping parts of you. They don't look distracted like American airport security checkers, who often seem like they'd rather be somewhere else, and already are in their heads -- the IVRI look like they mean business, like in a movie. They look like they can run and chase and shoot and fight, unlike the guys and gals you see checking your luggage on American airports, who sometimes look like they can barely move.

(Why hire unathletic security guys? I was in Hong Kong once watching the Rugby Sevens, and a spectator vaulted over the crowd barrier and ran onto the pitch, and the security guys tried to catch him, but they were very small and very pudgy and breathless, and the streaker outran them effortlessly for minutes -- I suddenly understood what it meant to run circles around someone -- until he finally ran back to the crowd barrier and hurdled it, and disappeared. Give me the IVRI anytime.)

I finally got to London at 10 pm, 15 hours after I left Florence.

I am in Florence for a few days, having taken a very convenient Delta flight from JFK to PIsa on Thanksgiving evening. On the plane I intended to watch a movie I had downloaded for rental onto my new iPod Touch, which I finally and reluctantly bought because fighting the urge to not get one was becoming too exhausting and time consuming.I would really like an iPhone but I won't leave Verizon for AT&T.

Before I watched the movie I opened up a book I bought a week ago that someone recommended to me when I said I didn't know much about central banks. It's called "The Origin of Financial Crises" by George Cooper, who appears to be a hedge fund manager with a PhD in what is likely some scientific area, though his bio doesn't say in what.

Anyhow, I started reading it and couldn't stop, so I never got to the movie. It's written about 6 months ago, and explains why stock and bond markets are unlike the more or less efficient consumer goods markets that Adam Smith described, and proceeds from there to money, banks, central banks, booms and busts. It's very well written and I'm going to read it again when I get to the end. I used to think economics was a boring nonsubject, which says more about me than it does about economics, and I'm beginning to change my mind.

http://executivesuite.blogs.nytimes.com/2008/11/26/pik-your-own-poison/#more-139

http://executivesuite.blogs.nytimes.com/2008/11/26/pik-your-own-poison/#more-139

In 1990 when the cold war ended it was fashionable to think about the end of history and the triumph of the benign two-cheers-for-democracy capitalist system and free markets.

Severe economic crises often engender new political movements and instabilities. What will follow from this one?

In the current New Yorker, John Lanchester marks the publication of Black-Scholes as the start of modernism in finance, and then remarks: "It seems wholly contrary to common sense that the market for products that derive from real things should be unimaginably vaster than the market for things themselves."

That violation of common sense has mystified me for a long time, but not in relation to derivatives. What puzzled me for the past twenty years was why I pay 9$ for a grilled cheese, french fries and a coke to eat them for an hour in a restaurant that has to buy the bread and cheese and potatoes and soda and cook them and pay for rent, electricity and the waiter, while we pay $100 an hour or much more for someone to write C++. I cannot live without food; I can (one would think) live without C++. Why does the service cost more than the product? I

I looked at The Economist's Pocket World in Figures, and in the U.S. 80.5% of the GDP is Services (including utilities, to be fair);. Agriculture is 1%. In China only 40% is Services. Isn't this a much more shocking example that the market for products that derive from real things should be unimaginably vaster than the market for things themselves? Why are companies that sell intangibles (Google) worth so much more than companies that fly planes? I lived easily without googling. I would have lived much worse without airplanes. Why is service worth more than substance? And isn't paper money the most intangible derivative of all?

Everything comes in flavors these days, even things you see while waiting in drugstores that you don't want to think or talk about, and so when I first glimpsed the phrase "Artisanal Coffee Movement" two years or so ago I thought of colonoscopies and purgatives rather than lovingly made lattes.

A month later I went to a business dinner at the Four Seasons restaurant. Come dessert, listed among the expensive delicacies was

"Artisinal Cheese" (sic).

I had never heard of the "Artisinal Cheese Company", but, not having grown up in America, I still hadn't completely forgotten how to spell, and so I eventually convinced my colleagues of my superior syntactical skills by having the waiter to bring us the cheese, which, sure enough, had a label that announced "Artisanal Cheese." I still have the memento in my suit pocket. Since then I've noticed that "artisanal" has become a hot word. If you google most adjectives in the language, you end up in Wikipedia or a dictionary. If you google "artisanal", amazingly enough, the first hit is Artisanal Fromagerie. Not far behind comes "artisanal chocolate", followed shortly thereafter by "artisanal meth" from Wasilla and "artisanal soy".

Now Godiva has a sign on Columbus Avenue that says "Artisanal Chocolate". Although I called the bottom of the current stock market on October 10 (I was ultimately wrong and I couldn't be sorrier), I take a chance and guess again that when Godiva (made by Hershey's??) starts to use the word "artisanal" it's very likely past the top of the artisanal market.

It's the kind of word you shouldn't use to describe yourself, only others. If you use it, you aren't one.

_________________

Postscript. In my daughter's ex-college town in Minnesota there was a coffee shop called Goodbye Blue Monday. The students working there made the best-looking best-tasting cappuccinos I've ever had. The foam on the cappuccino was beautiful. When I read beyond the headline in the article about the artisanal coffee movement http://www.nytimes.com/2006/09/13/dining/13coff.html?pagewanted=print, I realized it described what they made there, and it tasted and looked very good.

I agree with Paul Wilmott's latest blog: "For several years now I have been advising that potential investors in funds really need to take their due diligence far more seriously than they do at the moment."

I'm involved in risk management at a fund of funds and this is the part we take most seriously. Once you've put clients' money into a hedge fund, you're stuck for a while. We don't do overlays, and anyhow, it's hard to do an overlay on a fund that itself is trading dynamically. So you have to live with what you've done. Allocation is relatively irreversible and therefore the most critical part of the whole investment process, and so we put our major effort into deciding (a) which strategies as a class hold promise, and then (b) very careful due diligence in terms of the managers, their explanation of their strategies, their operational setup and their risk management. I don't know if I believe in psychometric testing -- I think there's too much of this around -- but I do pay attention to my intuition about managers.

I found the book cover at left on the internet.

According to

http://www.telegraph.co.uk/news/3255972/Harry-Potter-fails-to-cast-spell-over-Professor-Richard-Dawkins.html

Richard Dawkins is now worried about the effect of fables on children and intends to rationalize the world for them. According to the article above:

_________________________ START OF QUOTE

The prominent atheist is stepping down from his post at Oxford University to write a book aimed at youngsters in which he will warn them against believing in "anti-scientific" fairytales.

Prof Dawkins said he wanted to look at the effects of "bringing children up to believe in spells and wizards". "I think it is anti-scientific – whether that has a pernicious effect, I don't know," he told More4 News. "I think looking back to my own childhood, the fact that so many of the stories I read allowed the possibility of frogs turning into princes, whether that has a sort of insidious affect on rationality, I'm not sure. Perhaps it's something for research."

____________________ END OF QUOTE

Aldous Huxley, who foresaw cloning, easy sex and drugs, and many other trends in "Brave New World", also foresaw Dawkins. In Brave New World children are taught scientific fairytales and nursery rhymes like this one:

_________________

Orgy-porgy, Ford and fun,

Kiss the girls and make them one.

Boys at one with girls at peace;

Orgy-porgy gives release.

----------

It is, of course, an adaptation of M****r Goose, M****r being a vulgar obscenity in a world with only assembly line births.

This is a picture of a rare useful expensive-looking corporate gift. See below.

________________________________________________________

Irritants:

1. Invitations to LinkedIn and email reminders that they're about to expire

2. The phrase "I could care less" intended to mean "I couldn't care less."

3. Useless Expensive-Looking Corporate Gifts

I don't meant to be ungrateful (really) but when corporations or event/conference organizers give gifts to speakers or participants, it would be nice if they didn't just show they spent money, but gave you something useful. Over the years I've received multiple sterling silver luggage tags that cost more than my luggage, sterling business card holders, sterling money clips that cost more than my money, and so on. Most of them are Tiffany's. They look expensive but they're designed for people to the manor born, who have butlers and polishers downstairs ready to remove the black oxide that forms on silver within a few days. Who on earth uses money clips or business card holders anymore? And you can't give them away because they're so obviously corporate.

That said, the one fabulous gift I did get via Tiffany's was a sterling silver keyring (see picture, which is actually a fake I found on the internet -- the real Tiffany's one is a little thicker). When I lost it actually spent my own money to buy another one. Now, searching for a picture, I found out you can buy fakes that are 1/5 the price.

____________

Meanwhile, I feel obliged to brag that the bottom of the market I called on Fri Oct 10th still holds. Hope I'm right.

Financial Innovation Conference Vanderbilt University October 16, 2008 Nashville

The Law of Selective Gravity By Leo Melamed

There is no way to sugar coat it: Current economic conditions have the earmarks not only of a severe U.S. recession but—dare I say it—the potential of a global depression. That is about as dire as it can get. However, for me, as tragic and ominous as that prospect may be, it does not represent the worst consequence of today’s global economic conditions. I fear in The Law of Selective Gravity—a cousin of one of Murphy’s Laws—which postulates that “An object will fall so far as to do the most damage.”

As the world knows, a couple of weeks ago, Treasury Secretary Henry Paulson asked Congress to approve a $700 billion rescue of the banking industry. Without this sudden, massive infusion of federal cash, we were told, economic disaster loomed. Prompt approval, on the other hand, would assure the solvency of the financial sector, thaw frozen credit flows and give investors a badly needed dose of confidence. Faced with the prospect of rising unemployment, a plunging stock market and the inability of corporate America to borrow, Congress approved a revised package on Friday, Oct. 3. 2008. This gave investors the weekend to contemplate the economic value of the federal action. Were it able to inspire some confidence and halt for a moment or two the bloodletting, one might be a bit more charitable in assessing the panic driven action by the captains of American capitalism. On Monday, the stock market plunged into an abyss and the turmoil spread to Europe, Asia and South America. The plan which Secretary Paulson and Fed Chairman Bernanke told us we must approve to prevent a market crash did nothing of the sort. The market crashed. Now the plan is for Government to rescue the banks with direct capital investment, whether they want it or not. Did you every think that maybe the market doesn’t want any more of Government plans?

But don’t miss the point. I am not lamenting the fact that the desperate plan did not have an immediate medicinal effect—in all reasonableness the Trouble Asset Relief Program (TARP) will take time to take effect. But what I am lamenting is the fact the Executive branch of an American administration was so desperate that it proposed a rescue operation of gargantuan proportion which gave it unlimited power, with minimal oversight, little accountability, no recourse, and no judicial review. I am lamenting the mind-set that would devise such a plan—surely its blueprint had a Venezuelan origin. A plan that Steve Chapman of the Chicago Tribune described as “giving the executive branch powers that a Russian czar would envy.”

I am lamenting the fact that hardly anyone paid the slightest attention to a warning by a group of 122 economists, including at least two Nobel laureates, who stated:

"If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America's dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted."

I am lamenting that U.S. government officials were in such a state of panic that they abandoned market solutions in favor of Third-World sorcery like blaming speculators and banning short-selling. I am lamenting the fact that all the world’s capitalists have turned to the government for salvation. I am lamenting the fact that federally inspired rescue operations were so quick to surrender the fundamental free market principle that mistakes by the private sector must be borne by the people who made them. As Thomas Donlan of Barron’s remarked “The U.S. and Europe are racing down the trail marked by such economic leaders as Mexico, Argentina and Russia.” Or as Yale’s Jonathan Macey put it: “Officials at the Federal Reserve, the Securities and Exchange Commission and the Treasury Department are to blame for publicly losing confidence in the very economic system they are supposed to protect.”

Above all, what I am lamenting is the real cost of these operations and not in terms of billions of dollars to American taxpayers. I am lamenting the fact that The Law of Selective Gravity will result in the unthinkable—a renunciation of the free market. With that—America will lose its most precious asset, the ability to innovate.

This is not some fantasy of a hysterical pessimist with a propensity for paranoid prophesies. The developing underlying blame—within the walls of Capital Hill, Wall Street, and main street—is that the economic disaster is the result of a laissez-faire deregulatory mentality. Greed on Wall Street —has become the conventional theme of both Presidential candidates. In the public vernacular that is short-hand for the free market. “I was a free market guy, but no more,” is a common refrain heard from ordinary folks on the streets of America. Its damning echo is resonating throughout the pages of American newspapers, radio talk shows, and TV programs.

And it is a message roundly applauded by every enemy of freedom on the planet. This is not to suggest that the financial system is not in trouble. Or that some form of federal action was unwarranted. Nor is this an attempt to absolve the private sector from blame. Surely, greed played a major role in what happened. Clearly, financial institutions in their rush for greater immediate returns irrespective of consequential long-term risks, were guilty of irresponsible behavior or worse. As Randal Forsyth of Barron’s suggested, OTC structured investment vehicles became the financial equivalents to steroids. Regulatory reform, as suggested by Arthur Levitt Jr., is necessary pertaining to lending practices, licensing standards, oversight of mortgage brokers, capital requirements for monoline insurers, and transparency in the sale of OTC derivatives so that risks associated within all forms of structured investment vehicles will be fully disclosed. Similarly, as Gary Becker suggested, there is a need for increased capital requirements relative to assets of banks in order to prevent the highly leveraged ratio of assets to capital in financial institutions.

But while endorsing regulatory reform, allow me also to draw attention to one place, where in stark contrast to the turmoil of recent events, the market system operated flawlessly. I speak of futures markets, an indispensable component of the global marketplace. While their growth in the last decade was substantially less than in OTC derivatives, last year the CME Clearing House cleared more than two billion futures contracts, representing more than a quadrillion dollars in value. Which begs the question, how did exchange traded futures perform during these unprecedented turbulent conditions? The answer is clear: Flawlessly. No defaults, no failures, no federal bailouts. The futures market model is a poster child for the free market and innovation: Price transparency, liquidity, central counterparty clearing, twice daily mark-to market, zero debt system, and regulatory oversight.

Two examples: On March 14th, 2008, the last day before Bear Stearns was acquired by JP Morgan Chase, Baer held $761 billion, in notional value in open futures contracts for customer and house accounts at the CME. All positions were paid for and settled. Impressive, yes? Then how about this: On Friday, September 12, 2008—the last weekday before Lehman Brothers filed for bankruptcy—their total notional value of customer and house positions at CME was $1.15 trillion. No defaults, no failures, no federal bailouts. Unabated, futures market continue to perform their essential functions: To create a venue for price discovery, permit low cost hedging of risk, and to innovate.

But here is the rub: The free market model cannot function when it is directed, or better still, misdirected by the heavy hand of governmental edict. No matter how one views what happened, no matter of what political persuasion, much if not most of its causation has a governmental origin. First, because during the past decade the world became awash with liquidity. Low interest rates, engineered by world central bankers caused interest rates, especially the U.S., to fall to the lowest level in a generation. The consequential cheap money when combined with loan syndication and securitization produced some highly unintended consequence. A mortgage lending boom ensued, and bankers found ever more clever ways to repackage trillions of dollars in loans. Bob Shiller summed it up this way: “The housing bubble is the core reason for the collapsing house of cards we are seeing in financial markets in the US and around the world.”

This leads us to the second and most egregious culprit of the financial collapse: two Government Sponsored Enterprises, Fannie Mae and Freddie Mac. They were viewed in the market place, correctly as it turns out, as government-backed buyers. These two GESs were on an affordable-housing mission, becoming the largest buyers of subprime between 2004 and 2007 with a total exposure exceeding $1 trillion. It was a mission supported and backed by elected Congressional officials who presented themselves as champions of affordable housing. It fostered the so-called NINJA loans to borrowers—no income, no job and no assets—and poisoned the global financial system. “The Fannie-Freddie bailout,” wrote the Wall Street Journal, “is one of the great political scandals of our age. Officials at the federal Reserve warned about it for years, only to be ignored by both parties on Capitol Hill.”

In other words, it was a rigged game. The dictates of the free markets are always stymied by a monopoly, a cartel, or the actions of government. It would be a tragic misdirect and a perverted leap of logic if the conditions that caused the global meltdown, the transgressions that occurred within the private sector, or the regulatory reforms that are required, were blamed on the precepts that made this nation so great. More than any other nation on this globe, Americans are free to think, to experiment, to innovate. It is a legacy of the free market. A story of two miracles: an economic miracle and a political miracle. Its application by a people with an immigrant ancestry, of a multi-cultural heritage, and a multi-racial composition, produced an unimaginable result. It became a lightning rod for ideas. It created a crucible for innovation. It combined to become the decisive driver of progress in science, technology, and economic development. I pray that my fear is misplaced—but Murphy’s Law demands that I sound the alarm.

* * *

I've been catching up on the Nobel prizes.

I was pleased to read about Nambu's physics prize. He did profound and yet simple work on dynamical symmetry breaking and relativistic string theory. Mixing him up with Kobayashi and Maskawa is a little strange; other than all of them being Japanese, as far as I can recall, there isn't much in common between his work and theirs. Their work was an extension of Cabibbo's, as many people have pointed out, and it seems to me that if they got it then he should have too.

The prizes for economics, except the ones for finance, often seem mysterious; the work cited often seems either hard to explain or else commonsensical, but no doubt that's a reflection on my lack of understanding or appreciation.

There's a tendency to regard the Nobel prize as coming from God. But don't forget it's just a bunch of fallible people voting on something, so it's a pity it becomes such a weighty arbiter of achievement. It's not like the prize for the 100m dash with a well-defined metric. It's more like the prize for synchronized swimming.

I give myself the the prize for calling last Friday the market bottom in my blog of Oct 11. I hope it was indeed not just a local minimum but also a global one.

This is still on my mind.

There is a coupling between marking illiquid securities and rewarding people for trading them; in both cases, you need to have a reserve for the uncertainty of your judgement.

Brad Delong remarks in his blog that

"What we need in the longer term are:

Global rules to make outsized compensation incentive-compatible; the Princes of Midtown Manhattan and Canary Wharf need to know that their fortunes will be lost if their institution blows up within a decade of their handing over operational control—only such can you make them truly long the fortunes of their firms and of the global economy rather than simply long volatility.. "

This is the way good partnerships used to be run. "Greedy, but longterm greedy" in the words attributed to Gus Levy.

For a while yesterday I felt like the market was finally hitting the bottom, and so I wasn't surprised to see the recovery late in the day. I still feel that way, based on pure tremors in the air, nothing rational.

But world governments are in a terrible bind. Things have been moving much too fast. They need to point their guns at where the target is going to be, or better yet, at the next target. Instead, they keep shooting at where the target is. That's the case with the $700 billion bailout, aimed at the distressed assets of financial companies. By the time it passed there were many more endangered species, to mix metaphors.

The danger is that if they shoot ahead of the flight, extrapolating into the future, they risk highlighting targets other people hadn't thought of yet. They may need to do something so drastic that all potential targets are safe. The possibility of taking equity positions in many classes of threatened companies may help, but the air of desperation about that has its own dangers.

When I lived in South Africa in the '60s, we used to buy Ayn Rand's books when we traveled overseas, together with those of Henry Miller. They all seemed equally subversive.

South Africa was an apartheid state, its government avowedly conservative and right wing, and the political parties that wanted to treat all individuals as equal were banned. "One man, one vote" (in those pre-feminist days) was a subversive slogan. So, when my friends and I read Atlas Shrugged and its glorification of the selfish individualism it proposed, we saw individualism as a liberal rather than conservative notion, and in our context we sort of assumed she was a left winger, not a right one.

I am reminded of this when I see the extreme role models of private enterprise and capitalism embracing government intervention almost everywhere in the economy. On the real line, plus infinity and minus infinity are the same point.

Just some odd remarks.

1. Re Paul's Name and Blame blog: I don't think quants are the main mover behind the current crisis, which was driven much more by cheap credit and a chain of players from homeowners to securitizers and everyone in between trying to take advantage of it. But I do think CDO models are vastly overrated and users have conveniently turned a blind eye to their faults.

It is not uncommon to compare correlation models to Black-Scholes. But options markets have observed and often liquid implied volatilities, observable realized volatilities, and some strategy for replication. The correlation markets have little liquidity in implied default correlations, no observable realized correlation of default probabilities, and no replication strategy. The analogy is much too simplistic.

2. Nassim Taleb in his adjacent blog affirms that "Yes, many of you (providers of risk measures) will be sued by the innocent people who lost their savings --like tobacco companies who were sued by the innocent smokers."

False analogy. Smokers haven't been innocent since I was a child. It's like people who get fat and then sue McDonalds. This self-victimizing attempt to blame others for one's behavior is one of the less pleasant characteristics of politically correct behavior.

Those who blame Bob Steel's optimistic statements about Wachovia for their purchase of its ultimately doomed stock are also letting themselves off the hook.

3. Following up on an earlier theme, the urinals at JFK Airport in Terminal 4 (illustrated) have a black fly (member of animal, not the mineral kingdom, zipless) embossed or stuck on the porcelain, just off-center, an elegant touch. It looks quite real. I checked Wikipedia as I'm writing this, and they beat me to this piece of information, which I'm pretty sure is unlikely to be in the Encyclopedia Britannica.

Last night after I got home a colleague called to suddenly offer me a last-minute ticket to see a preview of The Seagull directed by Christopher Hampton of the British Royal Court Theater. I'd seen it before years and years ago, maybe twice, in England, and remembered it as sad.

Maybe I'm wrong, but despite the high praise it's received, this British production seemed odd to me, done almost as a sitcom. There was a woman in the row behind who had watched too much TV and provided a steady laugh track of uproarious laughter, filling up the pauses, sometimes in anticipation or in the silence afterward something was said. It was very irritating. But it wasn't just her; a sizeable section of the audience laughed a lot at some of the lines.

Yes, it's about self-indulgent people who dedicate themselves to love - everyone loves someone who doesn't love them, and they can't get over it. Except for Arkadina and Trigorin, who are the Fannie Mae and Freddie Mac of the play, always taking care of themselves above everything, and, unlike Freddie and Fannie, emerging pretty much unscathed.

Trigorin, played by Peter Sarsgaard, caught the weakness of a popular self-recognizing second-rate writer, but didn't have the good looks or charm that should have gone with it, so you couldn't tell why people fell for him. (See the attached picture of Stanislavski in the original cast. He looks more impressively like a Trigorin to me.)

Kristin Scott Thomas, as the self-involved Arkadina, didn't have the genuine seductiveness she should have had -- she hammed it up a bit, even the cruelty to her son. I found it hard to feel sorry or touched by any of the characters. But their plight wasn't genuinely funny either, unlike a brittle Noel Coward or Joe Orton play. I googled articles about the play itself, and many people do describe it as a comedy, but somehow this version of it didn't click with me, and I think the casting was odd too.

With the financial crisis on my mind, I begin to think not only of the Fannie Mae-Freddie Mac couple, but also of Dr Dorn as Alan Greenspan, trying hard to be philosophical and kindly but not really able to help anyone in the long run. Here I'm beginning to stretch things a bit.

There are sad things in addition to the continuing collapse of the visible financial world and I ran into two of them in the past few days.

-----

First of all, the suicide of David Foster Wallace. My son once interviewed him ten years ago for a university newspaper when he visited the school, and then told me about his books. Ever since I always recommended "A Supposedly Fun Thing I'll Never Do Again", a book of essays. He apparently hung himself at age 46.

I never read his early novels, which sound Pynchonesque and interesting. I did read a bunch of essays and short stories and they range from really laugh-out-loud funny (A Supposedly Fun …) filled with recursive footnotes, to accurately acerbic (The Depressed Person) to frighteningly creepy (Girl With Curious Hair). I just ordered 'Infinite Jest' , his 1009 page novel, which is currently out of stock.

One should be thankful to avoid such fates.

----

The other day I called American Express to complain that they charged me twice for one Economist gift subscription nine months ago. I just noticed the error now. The woman on the phone went to great lengths to help me.

"I can't do it, Mr Derman," she said. "i can't change such a huge charge." "

"Huge??" I said, "It's ninety-eight dollars." American Express must see many multi-thousand dollar charges for travel, hotels, clothing, traders' meals-with-wine in the good old days.

"Well Mr Derman," she said, "It's huge to me."

Fair enough and I was a little embarrassed. When she signed off I asked where she was located and she said "Manila."

I guess one should also be thankful that ninety-eight dollars doesn't seem that huge.

For weeks the word 'decimated' has been appearing with increasing frequency in the financial press:'decimated banking industry', 'Lehman's decimated mortgage portfolio' etc.

I remember hearing the word 'decimated' on TV during the 1967 Arab-Israeli war, when some newscaster said that the Israeli air force's planes had been decimated, according to the Arabs. I assumed it meant reduced TO 1/10th. In fact, decimate (literally) means to reduce BY 1/10th. Someone once explained to me that if 1/10th of the soldiers in an army are killed in war, than perhaps three times as many are wounded, or more, and hence the army is basically incapacitated, and so decimation is is pretty bad, even if it sounds like a perturbation. According to the dictionary however, decimate comes from some old Roman custom of killing every tenth man in mutinous legion, a more plausible but less pleasing explanation.

I'm reminded of two things.

The first is that about two years ago I heard a dinner talk by someone from Lehman prime brokerage who said that everyone was so good at estimating risk and setting margin based on it that nothing bad could ever happen again. During the questions I asked him if he could think of anything that might cause financial disaster. "Only some massive disruption of society, like SARS …" he answered. I wonder if he believed it himself.

The second is September 11th. There was an op-ed article in the NY Times by Jeffrey Goldberg in which he wrote that next president will be judged by whether he can prevent anyone from "gaining control of a nuclear device and detonating it in America. Everything else — Fannie Mae, health care reform, energy independence, the budget shortfall in Wasilla, Alaska — is commentary. The nuclear destruction of Lower Manhattan, or downtown Washington, would cause the deaths of thousands, or hundreds of thousands; a catastrophic depression; the reversal of globalization; a permanent climate of fear in the West …" Goldberg then put the probability of that over the next ten years at about 10%, whatever probability means in these cases.

Stan Jonas once told me about aldaily.com and I made it my home page. Every day it has links to all sorts of new articles, books reviews and essays.

The other day there was an article by Carl Elliot, a professor of bioethics at Minnesota, about the use of beta blockers in Olympic competition. I had read something about this before. Beta blockers were first used competitively by classical pianists and other musicians to still their nerves, and are now used by pistol shooters in competition as well. Elliot claims they stop the symptoms of your nervousness (trembling fingers, etc) but not the nerves, and so it's OK to use them. If your hands don't tremble anyhow, they won't help you; if they do, they will; hence, if I represent him correctly, it's OK for everyone to use them and not to ban them; they only help those people who have a problem. Steroids, on the other hand, help everyone, and so, counter-intuitively it seems to me, since they help everyone, are unfair. Beta-blockers equalize, steroids unequalize.

The whole question of what constitutes legitimate drug use in competition - distinguishing between enhancement (steroids) vs cure (sudafed for a runny nose, cortisone for allergies) always eventually leads me to the unwelcome conclusion that if caffeine goes then anything goes. Caffeine helps everyone.

I find it depressing how hard it is to come up with a consistent argument for anything in the human sphere, from taxes to sports. Once you draw a line in the sand, there are a million reasons for why you should move it. There used to be amateur sports and athletes used to get expelled for taking small gifts of money, and now we have paid professionals at the Olympics. Roger Bannister, who was a real medical student, was amateur enough to go mountain climbing in Scotland to relax the week before his assault on the four-minute mile, which was apparently just the wrong thing to do from a training point of view. And even he used rabbits for each quarter mile to pace him, which seems unfair to me, using a team approach rather than an individual one. By the way, for interest's sake, at least mine, he broke the four-minute mile at the Iffley Road track in Oxford, which was cinder and ONE-THIRD of a mile around, not the traditional quarter-mile.

Now that there seems to be a movement to change the name of Black-Merton-Scholes to Bachelier-Thorp, I have my own proposal. Since amateur athletes are people who pay for themselves and don't take external sources of money -- that is, are self-financing -- I would like to propose that we no longer use the word self-financing to describe trading strategies that borrow the money they need, but call them rather 'amateur' trading strategies. It's a much nicer word.

Anyhow, this led me to look up some more stuff by Elliot on the web, and I found he'd written several articles about otherwise healthy people who want, and go to great lengths, to have some of their limbs amputated. God knows why. But it reminded me of a great science fiction book I read many many years ago, and I'm not a science fiction fan. It was called Limbo 90 then and is now called simply Limbo, written by Bernard Wolfe in the Sixties and set in the Cold-War Nineties. As I recall, a pilot in the Western bloc has gone AWOL to escape his duties and leaves behind a diary in which he cynically suggests that the only way to disarm society is to dis-arm them, literally. Then he crash-lands in Madagascar or some other tropical island and lives there happily in a Gaugain-like paradise with his new-found native woman, eating tapioca (very important for feeling peaceful) and living peacefully. (Tapioca is really good if you make it from scratch. Rice pudding is merely poor man's tapioca.) Meanwhile, cynical politicians find his diary and take it seriously, starting a political movement in which people voluntarily have one or more of their limbs amputated in order to promote and fulfill disarmament. It gets more complex etc. Meanwhile some of the amputees are willing to use prosthetics, because you can remove them when you feel violent. Prosthetics engineering moves ahead by leaps and bounds, the Olympic Games then becomes a cold-war battle between the prosthetic engineers, in which the Eastern bloc athletes one day show up and high jump a hundred and sixty feet. And so on. Eventually the pilot returns and then …

I have been busy with a psychiatrist friend of mine studying the effect of tapioca pudding on the PET scans of traders brains. I'm not allowed to say too much, but I will point out that there is a long-term boom in commodities and that you can trade tapioca futures on the AFET, in case you didn't know.

I like swimming and track and field, but why should only swimmers be allowed to traverse the same distance via four different methods, and to be able to get a medal for each one of them?

It would be great to have a different medal for each different method of traversing track too, culminating in the 400 m track individual medley, consisting of

First 100m: Backstride

Second 100m: Crawl (knees and hands alternately touch the ground)

Third 100m: Hop (you can choose your leg, but then the other one can never touch the ground)

Fourth 100m: Freestyle (anyway you like).

It sounds weird, but it's no weirder than triple jump.

Many years ago in the past, while running, I decided to try to shut my eyes and see how many steps I could take at the same pace without actually seeing where I was going. I thought of it as a combination of putting faith in my own capacity to run straight and faith in the universe not to harm me, like some kind of mental/spiritual exercise.

If I'm running on the ring road in Central Park, and there are no people nearby to worry about smashing into, I find I can do ten steps easily, twenty with difficulty, and then I start to get panicky. I imagine I'm going to crash into the sidewalk and trip and fall. I've done forty, but feel very unsafe at that point.

Running on the beach I once did 140 steps, but that's cheating a little, since you can feel the surf at the edge of the sea and know which way is too far left or too far right. But even then, at 100 or so I got mysteriously uneasy.

Somehow, at least for me, it's harder than it seems.

when I came here came from one source, a fictional one: the novel "Marjorie Morningstar" by Herman Wouk. It's the story of a young Jewish girl (Marjorie Morgenstern) living on CPW in the 1930s and her break-the-bourgeois-rules affair with a pseudo-Bohemian Jewish Cole-Porter-wannabe named Noel Airman (formerly Ehrman). 'Marjorie Morningstar' is the stage name Marjorie hopes to adopt. It ends in the 1950s with the sad triumph of conventionality. But I and my friends read the book several times in high school, and it left a vivid impression of the charms of a romantic bohemian life. In it I discovered the Village, Riverside Drive, the Catskills, summer camps, Broadway, Central Park, the Bridle Path, and so on. It was made into a not very good movie with Natalie Wood, if I remember correctly, and I bet they gave it a happy ending.

One of these days I have to read it again. But thinking about it, I was struck by how literature has changed. In the 1950s and 60s, authors like Herman Wouk and Irwin Shaw wrote really popular best sellers that were good literature. Nowadays, it seems to me, the literary world has fractured into trashy best-sellers and less popular good books.

Ever since I read Camille Paglia's "Break Blow Burn" in which she comments on 43 famous poems, I've admired her writing. Her commentary is completely transparent; nothing about her or her personal life and sexual preferences gets between the reader and the poem. She almost doesn't exist. It reminds of me an article I once read on meat and vegetable eating by Margaret Visser in which you absolutely couldn't tell whether she was vegetarian or not. (Margaret Visser also wrote a book called 'Much Depends on Dinner' about food which is surprisingly interesting.)

In more political pieces Paglia's written, her personality comes through fiercely, and why not. In commenting on a poem you don't want to overshadow the poet. In commenting on politics, it's fair game.

Anyhow, here's the conclusion of a recent talk that she gave on feminism at some Harvard conference:

"My final recommendation for reform is a massive rollback of the paternalistic system of grievance committees and other meddlesome bureaucratic contrivances which have turned American college campuses into womblike customer-service resorts. The feminists of my baby-boom generation fought to tear down the intrusive in loco parentis rules that insultingly confined women in their dormitories at night. College administrators and academic committees have no competence whatever to investigate crimes, including sexual assault. If an offense has been committed, it should be reported to the police, so that the civil liberties of both the accuser and the accused can be protected. This is not to absolve young men from their duty to behave honorably. Hooliganism cannot be tolerated. But we must stop seeing everything in life through the narrow lens of gender. If women expect equal treatment in society, they must stop asking for infantilizing special protections. With freedom comes personal responsibility."

I spent six days in Stockholm at the Nasdaq OMX Derivatives Week. It was a phenomenally well-organized conference, with only 4 or 5 speakers each giving two or three talks, no parallel sessions, relatively relaxed. It's a good if luxurious way to run things, like taking the QE 2 to London rather than British Air. No one does that anymore.

Though I'd been to Oslo and Reykjavik and Bergen before, I'd never been to Sweden. And though I feel like a southerner, someone who likes hot summer climes, there's nothing to beat long summer nights, where, while the western sky still has the afterglow of dusk, the eastern sky is already beginning to lighten. It's astonishing. I wonder if winter is as bad as summer is good.

One of the people speaking at the conference was Bill Sharpe, whom I'd neither seen nor heard in person before. He gave a very impressive talk on utility functions and asset allocation. But somehow, in my heart and maybe my brain too, I can't overcome my kernel of residual skepticism about applying optimization to future scenarios that will not turn out to be what you assumed when you started. Is there any other reasonable quantitative way to proceed in the non-risk-neutral measure?

There are a slew of books on happiness lately: http://www.nybooks.com/articles/21197

Many years ago a colleague of mine, dissatisfied about the mismatch between his potential and his actual rank, asked the firm we were working at to give him a coach. This was in the days when corporations enthusiastically hired psychologists of various kinds to help "treat" the organization and its members.

With the permission of my colleague, his coach sent me a multitude of forms requiring me to appraise him (my colleague) on various psychological or pseudo-psychological scales. After I'd completed them, the coach flew down from Maine to speak with me in person. Somewhere into the conversation, the coach told me that if I too was really serious about getting ahead, I too would overcome my reluctance and ask the firm to provide me with a coach.

I know you can get tennis coaching, and it works, though it depends very much upon the nature of the coach. Some of them really have the knack of translating into words the corrections you ought to make to your body as you hit a backhand; others can talk till you're blue in the face and can't quite get their words to transmute your actions. But there is something objective and measurable (if qualitative) about tennis skill and success, and so it makes sense that someone perceptive can teach it to you.

But can you get happiness-coaching? There I'm sort of agnostic:

- It seems reasonable that someone who knows how to handle the complexities of life and interactions can teach you something.

- But anyone sufficiently interested in teaching happiness must have been kind of unhappy to start with. Does a once-bad swimmer make a better swimming coach?

- Being good at being happy is very different from being good at dribbling or topspin -- happiness is an internally perceived state, not objectively measured. It's not a thing, it's a meta-thing.

No conclusions, but I'm somehow reminded of two remarks:

One by Schopenhauer, who wrote you shouldn't read except when you are tired of thinking for yourself.

Another by a physics professor in graduate school who said that he preferred to read the results of new papers and then try to derive them on his own rather than read the paper and its proof carefully.

Unexpected pleasures are always better than expected ones, and occasionally I've gone to see movies that I know almost nothing about except for the fact that something about them grabbed me in the first few lines of the newspaper review, and then I stopped reading it in order not to have the movie spoiled by excess information.

I've had this experience several times: My Dinner with Andre (sorry, it's aged badly), Jackie Brown, and Amores Perros. Recently I had it again with Jellyfish, a (nonpoiitical) Israeli movie that, a little like Amores Perros ,but less brutally, traces three sad intersecting elliptical stories. I haven't seen anything that good in a long time.

Why does using neuroscience to improve advertising bother me? I'm not sure, but here's one argument I came up with.

According to Corinthians (and many parent of young girls in the good old days), the body is a temple. Therefore, it should be entered only for holy purposes -- for healing or procreation or even merely pleasure. Scanning your brain to check out the efficacy of advertising is entry for unholy purposes.

QED

While sleepless and low in Hong Kong at 4 a.m. I've seen several newspaper news reports that don't seem either as dramatically good or bad as the reporters think.

1. Much worse than reported:

The latest thing in neuro.* (excuse the regular expression notation).

http://www.nytimes.com/2008/03/31/business/media/31adcol.html?ex=1207627200&en=e1030a056035e50c&ei=5070

Scientists who want to make a buck and the advertising agencies are teaming up to check out what kinds of ads trigger your brainwaves. I know this is old stuff -- see Vance Packard's The Hidden Persuaders of the 1950's -- but still, it seems truly pernicious to me for people to use science (as opposed to psychology) to figure out how best to stimulate you to buy what they want to sell you. I don't know why this is worse than using sex to sell things, or worse than Google tracking your clicking habits, but somehow it seems to me a deeper violation of something I can't quite name yet, some sort of sanctity. No doubt we'll all get used to it soon. If it works.

2. Better than reported: We'll meet again don't know where don't know when ...

http://www.nytimes.com/2008/03/29/science/29collider.html?ref=science

So the Large Hadron Collider at CERN may produce a mini black hole that will destroy the universe, or at least the earth? Unlikely,but it doesn't seem so bad to me. If we have to go (and we do), it seems not at all a bad exit route, all of us together rather than individually, and preferable to almost anything in the God-Forbid category: disease, radiation poisoning, suicide bombings, SARS, even old age itself. Instantaneous and no-one left behind to mourn or struggle for survival is better.

3. Better than reported:

Roger Cohen on http://www.iht.com/articles/2008/03/30/opinion/edcohen.php

"HONG KONG: It's the end of the era of the white man ..."

Maybe it's a little sad to think about the expected decline of the U.S and Europe with theirfractional growth rates that can't compare to China and India's double digits, but in the end it's just sentimentality to look at the world in competitive chunks rather than one big whole.

"How is it that this is the only place on earth where people think of what you want before you've thought of it yourself? " Mr Cohen says of Hong Kong and its dynamism.

He doesn't know that Geneva and the designers of the Large Hadron Collider may have thought of what you want before you've thought of it yourself, and may end all blessed eras in addition to that of the white man.

My father knew a man called Mr Gilmour who was an engineer who finally retired somewhere in the late 1960s. In those days you used a slide rule to calculate. (Even in the early 1970s Columbia had a programmable desktop computer made by Olivetti that required you to insert a cassette tape whenever it needed to evaluate a sine or cosine.)

Sometime around 1973 or so, Hewlett Packard produced the first programmable handheld calculator -- you could program it in a sort of assembly code, move things from register to register, evaluate logs and sines, and so on. Mr Gilmour, probably close to 80 years old, went out and bought the $1000 HP calculator he'd always longed for in some form. It was a lot of money, even more so in SA Rand. One evening, during my vacation back in South Africa, he demonstrated it to me. It was amazing. But Mr Gilmour was no longer a practicing engineer and he had no real use for it, other than to demonstrate its miracles. His present and his past wishes overlapped but didn't really coexist any more. It was a little sad, though I don't think he thought of it that way.

The NY Times last week had an article about Eckhart Tolle, a new age guru in the tradition of Dale Carnegie, Norman Vincent Peale, Baghwan Shree Rajneesh and various Buddhists and … who claim that nothing exists except the present, and if you can remain aware of that then all your problems are solved. I looked at Tolle's book in Barnes and Noble, where it's selling furiously, and it's not as bad as it might sound. (Tolle himself doesn't reveal much about his past, but if what he writes is sensible it shouldn't matter what he actually did, you could argue.) Anyhow, it's nice work if you can do it, but who can? Animals without too much difficulty, young children, but not adult humans. And even if you learn to, what about those people around you who can't and are still thinking about the past and future?

I thought about this on an 18.5 hour flight to Singapore today. Getting on an airplane for a long transcontinental flight (on which you don't try to use Word or Excel) is the closest synthetic way I know of for living briefly in the present Within a few hours you lose all track of time, the past recedes a long way, and the future doesn't yet loom. In a very short time you get into a sort of cocooned limbo, cut off from normal life. It's amazing. But then it's over.

Why do they put ice cubes in urinals?

The Indian restaurant I ate in last had about 20 or 30 in each vertical porcelain receptacle, which resulted in a very inappropriate combination of input and output.

You will tell me that Wikipedia has an explanation of the practice, but it's quite unconvincing.

1. This scribble is my signature on the electronic credit card signature-reader at Duane Reade pharmacy. The device has a pathetic little screen, deeply scratched and scored by previous purchasers. Even if it once worked, it now distorts your signature into something meaningless and indistinguishable from that of other people.(See/hear Paul Simon's "The Myth of Fingerprints".) It's clever alright, but not as good as paper.

2. For the past six weeks I've been teaching a course on volatility in a classroom that videotapes your lectures for use by other students who take the course electronically. In order to film it better, the filmers prefer that you write on an electronic tablet that projects what you write onto a screen in front of the class, and also records your writing for the video system. It's clever, but not as good as an old-fashioned blackboard or greenboard. The old fashioned non-electronic classrooms have greenboards that are layered and slide up and down, so that you can keep going from line to line in a derivation without having to erase. The tablet has only one page available. It's clever alright, but not as good as chalk.

3. I dislike whiteboards. They're small, you can't erase them without some organic solvent, the erasers are pathetically thin and smeary, and unless you spray and scrub there's always some palimpsestic irremovable remnant of what you wrote there earlier. Plus, or rather minus, the chemical colored markers dry out in a flash. Who hasn't attended a whiteboard seminar in which the speaker disgustedly tries green marker after red marker after black marker, searching for one that works for longer than a few letters? They're clever alright, but not as good as chalk.

--------------

http://www.chesterton.org/gkc/essayist/chalk.htm has a 1905 essay by G. K. Chesterton about white chalk that we had to read in high school. In it he writes that:

"Virtue is not the absence of vices or the avoidance of moral dangers; virtue is a vivid and separate thing, like pain or a particular smell. Mercy does not mean not being cruel, or sparing people revenge or punishment; it means a plain and positive thing like the sun, which one has either seen or not seen."

This paragraph seems to claim that good things like virtue and mercy are positives, not the absence of negatives. But then, hidden inside there, is the analogy of virtue with pain, a clear negative. Schopenhauer too claimed that happiness is merely the absence of pain. But he wasn't a positive guy. In Chesterton's essay he seems to be a power-of-positive thinker, and then there, snuck in without him noticing it, is the grouping of pain and virtue.

What is it about the phrase

"A Mighty Servant That Never Sleeps"

that makes it mildly blasphemous?

I think it's the "mighty" before the "servant". "A servant that never sleeps" is pretty common -- I've seen live-in housekeepers in New York City who get up before the parents do and go to bed afterwards.

But "a mighty servant"? How can one be a servant and mighty? It's the "mighty" in paradoxical combination with "servant" that has biblical resonances. Mighty servants aren't people, hence the reference is to someone who isn't human, and who can be two different things at the same time.

Don't ask about the biblical overtones of Mighty Mouse, please, either the Apple one I'm using to write this or the one above. (I meant the picture to be below, but this blog editor won't let me put it there somehow.)

Driving on the Van Wyck the other day, I was drafting a giant tractor-trailer, and on its rear in big letters was the company name, followed by the phrase "A Mighty Servant That Never Sleeps".

Blasphemously cute. I remember the Beatles "We're more popular than Jesus Christ", but that was an observation on the strange nature of the world rather than a motto or a claim. See www.youtube.com/watch?v=kZ6NL3iNNMs

"A Mighty Sleeper That Never Serves". I sometimes have that feeling when I'm waiting to ask for help at Staples.

I put some of my lecture notes, in casual form, on my website at

http://www.ederman.com/new/docs/laughter.html

I'll add to them as my class progresses.

As I continue to look through applications to graduate programs, I keep running into the general degradation (that's the right word) of the whole grading system. It's not just that there's grade inflation. There's also the grading of the ungradeable.

When I went to school in South Africa, all that mattered for admissions to college was your grade -- not your personal qualities, not your sporting abilities, not how much good you'd done to the world. (Of course, sad to say, your color mattered, but that's another story.)

Here, all sorts of things besides your grades matter, and why not I suppose? But then don't grade things that don't matter.

What sort of information is conveyed by an A in "Introduction to Tennis"? I didn't make this one up.

And in that case what sort of information would be conveyed by a C in "Introduction to Tennis"? (No C's given, I'm sure.) Could you take it Pass/Fail, and if so could you fail?

It's great to learn tennis. It may indicate something of significance that you played on the university squash or chess team. Maybe some sort of sports should be compulsory at college - mens sana in corpore etc - but why the letter?

I once knew a student who tried to get in to Intro to Tennis, and the course was full, so he audited it.

I've been spending a fair amount of time looking at applications for admission to financial engineering programs. It's mind-broadening to see how many reasonable students with decent but not stellar GPAs are histogrammed by their faculty into the [top 1%] category of students in their class who went on to graduate school.

The problem then is how, as faculty, do you write an honest recommendation letter or complete an honest admissions form for a good student? The temptation to exaggerate is overwhelming.

It's another version of the economic adage that "bad money drives out good".

I suppose it's possible to be honest and still put someone in the top 1%. You just have to define the subcategories tightly enough.They do this well in two other areas I can think of:

1. Food packages. If something is all fat, they say on the label "No sugar." If something is all sugar, they say on the label "No transfats".

2. Amazon book rankings. Suppose you write a book entitled "How I learned to stop worrying and love the bomb". You will soon discover that you're # 2 in the category Psychology:Training:War:Explosives and #3 in History:Battles:Explosives:Anxiety.

I've never looked at facebook.com, though I know what it is, but periodically I get people emailing me with encouragement to join facebook and then and make various other people my friends.

While I'm into most internet things, this one hasn't yet grabbed my attention. I feel like I already suffer from being exposed to more items than I want to handle. I want less info, not more.

There was a book in the 80s that I liked called Easy Travel to Other Planets, by Ted Mooney, with intelligent dolphins and melting Poles and I can't remember what else. I don't think he wrote anything as good again. I liked the title and used it as a chapter title in my book. Anyhow, in the near-future world in which that book was set, many people suffered from "information sickness" whose initial symptoms were spontaneous bleeding from inside the ears.

When you stay at cheap hotels, you get no cotton robe at all, not even a synthetic one. When you stay at good hotels, they have luxurious Turkish cotton robes in the bathroom (two usually), and they have a sign in the bathroom that tells you that if you like the robe a lot, you can buy one in the lobby store (i.e. you may be the kind of person that steals or thinks it's OK, Sixties style, to rip off corporations, but please don't). The same hotels also have a sign telling you to put your dirty towels in the bathtub if you want them washed, in order to keep detergents out of our rivers (and save laundry money for the hotel). (Full disclosure: once, many many years ago when I was younger and foolisher, I did take one of three robes away with me, and I regret it.)

Recently, I got to spend a night or three in some extra-good hotels. Not only did they have no sign about saving the rivers from detergents, but they also showed not the sllghtest doubt that I needed a warning about buying robes rather than taking them. I don't think it was because the price of the hotel efficiently incorporated all future information about my likely behavior.

I heard a talk entitled "Financial Engineering: An Oxymoron" by Jim Grant tonight at our NYQF seminar. It reminded me of something I once wrote about defining the field.

-----------

I first heard the words “financial engineering” in 1992, and I thought they were a poor descriptor of the field I knew. I had been on Wall Street for seven years, and the contents of the few available textbooks we practitioners typically owned – Cox & Rubinstein’s Options Markets and Jarrow & Rudd’s Option Pricing – looked more like science than engineering to me. But inappropriate though I thought the name was, it’s become accepted, and, I now think, more or less rightfully so.

Mechanical engineering is concerned with building devices based on the principles of mechanics, i.e. Newton’s laws, suitably combined with empirical rules about more complex forces (friction, for example) that are too difficult to derive from first principles. Electrical engineering is the study of how to create useful electrical devices based on Maxwell’s equations. Bio-engineering is the art of building prosthetics and other biologically active devices based on the principles of biochemistry, physiology and molecular biology.

Science – mechanics, electrodynamics, molecular biology, etc., – seeks to discover the fundamental principles that describe the world, and is usually reductive. Engineering is about using those principles, constructively, for a purpose.

What about financial engineering? In a logically consistent world, financial engineering, layered above a solid base of financial science, would be the study of how to create functional financial devices – convertible bonds, warrants, default swaps, etc. – that perform in desired ways, not just at expiration, but throughout their lifetime. Which brings us to financial science, the putative study of the fundamental laws of financial objects, be they stocks, interest rates, or whatever else your theory uses as atomic constituents. Here, unfortunately, be dragons.

Canonical financial engineering rests upon the science of Brownian motion and other idealizations that, while they capture some of the essential features of uncertainty, are not very accurate descriptions of the characteristic behavior of financial objects. Markets are filled with anomalies that disagree with standard theories. Stock evolution, to take just one of many examples, isn’t Brownian (see Mandelbrot, or Stanley and his econolaborators). So, while we in financial engineering are rich in techniques (stochastic calculus, optimization, the Hamilton-Jacobi-Bellman equation, and so on), we don’t (yet? ever?) have the right laws of science to exploit.

-----------------------

Now I think that maybe "financial engineering" suggests too much precision, like using too many decimal places in specifying your height as 6' 1.2345". Maybe FE is a politically correct word for something more fuzzy.

Computer scientists should be called computer engineers. Nutritional scientists should be called nutritionists, without the science. Maybe people shouldn't be allowed to self-describe and name their occupation.

What is the most accurate job name to describe what financial engineers do?

is the hobgoblin of little minds. (Emerson).

Excuse me, but, on a recent trip I went into the mens' room at the airport. The toilet sensed when you left, and flushed automatically. The urinals did the same. The faucets began to emit water as soon as you put your hands beneath them. And the paper towel holder emitted a paper towel as soon as you put your hands near it.

But, you had to push the button on the soap canister to get a squirt of soap.

The New York Times on Oct 3 had an article about the miseries of being a graduate student, and how universities were trying to shorten the time taken to get a PhD. I thought I would quote from the beginning of Chapter 2: Dog Years in my book:

If you didn’t mind wasting the best years of your youth, graduate student life at Columbia was paradise. Once you got over the first two hurdles – passing the Ph. D. qualifying exams and obtaining a research advisor – no-one seemed to give a damn about what happened to you. Being a graduate student was not a bad sinecure. They just kept funneling you a small but livable stipend and hoped you stayed out of their way. I spent seven Biblically-lean years in the physics department. One friend spent ten. We both got out alive.

Some didn’t. It wasn’t long before we had all heard the legend about the graduate student who’d shot his Ph.D advisor. Several years ago I read a New York Times article about two gradu¬ate students who committed suicide while studying in the Harvard laboratory of Nobel Prize win¬ner Prof. E. J. Corey. In a subsequent letter to the Sunday New York Times Magazine of December 20, 1998, Linda Logdberg of Upper Nyack, N.Y. wrote in to comment on life as graduate student:

""...Perhaps even more now than then, graduate education is an extended adolescence during which highly intelligent young people see their world shrink to fit the dimensions of their advisor’s laboratory... With their identities bound to the outcome of the thesis project, graduate students are socialized to view other options (teaching, industry, even changing to another type of work altogether) with contempt. Wanting a decent wage and meaningful work that occuupies, say, only 50 hours per week are considered signs of selling out.""

It’s an accurate description. We went into science for the love of it and thought nothing else was half as good. Some failed the Ph.D. qualifying exam and left at the end of one year. Others passed the exam and then gave up before getting a thesis advisor. Many threw in the towel mid- thesis. The remainder struggled through and went on to a life of itinerant post-doctoral research. Few of us had an easy time. Ms Logdberg is especially accurate in acknowledging the undeclared self-hatred we felt in looking down on those of our friends who, like failed novitiates in a nunnery, shamefacedly transferred their efforts to less ambitious endeavors. Shame is Pride’s cloke, I read in Blake’s Proverbs of Hell, and understood exactly what he meant. But that was later.

Once I visited a doctor who had a sign in the waiting area saying "Do not arrive 15 minutes before your appointment." I never did.

Then last night I wanted to eat at a diner on Broadway which had a cautionary sign in the window as shown left. I don't have a pet (don't like them), and luckily you didn't have to have one to get in, so everything was OK.

Speaking of which, I have a running discussion with my daughter. "Can I have a Danish please?" you ask at the diner. What do you say if you want several Danish?

1. Can I have three Danish please?

OR

2. Can I have three Danishes please?

In the past couple of months I visited a bunch of fundamentally driven Long/Short Equity hedge funds.

It's not a very profound observation, but one of the things that struck me was what a good time their analysts seem to have, and how enthusiastic they are about what they do. I think it's partly because they can talk about what they do to anyone; they all have a story to tell that comes out of their research into individual companies, and telling stories is fun, and the story they tell is usually something anyone can understand.

I'm not saying what they do is easy, but they seem to enjoy what they do more than most in this arena.

And, as one of them pointed out to me, they know exactly what assumptions they're making about the companies and products they bet on, and know pretty well what can go wrong. It's much harder to predict what can go wrong in a more mathematical model.

A few weeks ago I was part of a sort of sociology workshop about economic valuation under uncertainty. There I listened again to Dr Taleb talk about Extremistan and Mediocristan. Listening to the examples of fat-tailed quantities (money, stock prices, etc) it occurred to me that all of these were mental concepts, human constructs, not "natural" ones. So I wondered if mental concepts were fat-tailed whereas physical ones were more normal.

The speaker claimed that the same fat-tailedness held for physical phenomena, for example that was always a chance of finding a larger mountain or larger earthquake according to some scaling law.

Probably that's true. But it's not totally clear to me. Think of hills. There isn't always a chance of finding a larger hill, because at some point we cease calling a large hill a hill and begin to call it a mountain.

It always seemed to me, and recent occurences seem to confirm it, that most algorithmic trading strategies are long volatility but short volatility of volatility.

I was having dinner with someone the other evening who commented that there were many people who didn't seem talented or industrious when he knew them, years ago, but somehow they had now ended up making large amounts of money.

Here's my take on this. It's either a proof of the fact that God doesn't exist (how could he possibly let this happen!?) or, more likely, a proof of the fact that he does exist and that he wants you to be humble.

According to the Friday June 23 NY Times, "Research Finds Firstborns Gain the Higher IQ," about three points higher in the eldest child than in the closest sibling.

And what is that good for? I quote the fourth paragraph on the front page of the Times:

"Three points on an I.Q. test may not sound like much. But experts say it can be a tipping point for some people — the difference between a high B average and a low A, for instance. That, in turn, can have a cumulative effect that could mean the difference between admission to an elite private liberal-arts college and a less exclusive public one."

It's hard to imagine anything worse than that, except perhaps being denied admission to an elite nursery school for the lack of three points of I.Q.

Doug Hofstadter's book about Godel's theorem, "I am a Strange Loop", points out that mathematicians before after Hilbert and Russell and Whitehead thought that in axiomatic systems,

(a) if you could prove it, it must be true, and

(b) everything true could be proved.

Godel threw a monkey wrench into (b).

There's a similar set of assumptions people often make about human beings:

(a) If you can persuade someone of the logic of something, they should experience the same feeling as you about it; and

(b) if people experience some feeling, there must be a logical cause.

But this too breaks down in various ways.

In my case, take global warming as an example of the falseness of (a): it's logical that I should be anxious to do something about it, but the logic doesn't really move me enough. I could try to explain why, but, in the end, that's how I feel. It's a version of Schopenhauer's "You can do what you want but you can't want what you want." I might want to be a person that wants to do something about global warming, but I can't be that person. That said, a long time ago I was friendly with a philosopher/physicist who told me in all serious that he wanted to be a person that liked classical music, and he could really make himself into that kind of person. I never knew whether to believe him.

(b) is more difficult. There probably is a cause for most feelings or reactions, depending on what kind of cause you like -- Freud, Darwin or some neuroscientist stuff. But on the other hand, who cares: I like licorice: why? God knows and no-one cares. And why justify it?

I thought of this when some telemarketer called to get me to donate money to some charity. I told her not to bother me at home. She tried to explain to me the virtue of the charity. I said I didn't want her to call me. She kept asking me WHY I wouldn't give money for something good? She wanted an explanation and I was tempted to give her one. But when I asked her why she had to call me, she said I was on her "list" and that was that. She didn't need any justification, though she wanted me to justify not giving. There's an old Lou Reed song called "Doin the things that we want to," and she knew how to do it.

I keep becoming more aware of contradictions and of the inability of reason to cope with them or reconcile them.

On my way to the ICBI Derivatives 2007 conference in Paris last week, I got involved in a conversation with my taxi driver who was a bit of a new-age guy. Somehow he started telling me about the existence of negative and positive energy in his clients, and how some of the people he picked up sucked all the energy out of him, while others by their conversation put positive energy into him.

I could understand that. But then I began to realize that he meant energy literally, in the physics sense as well as the psychological sense. Still not ridiculous.

But then he began to tell me about an ultrasound or laser device he'd bought through some new-age store that worked on your energy when you put it on your skin. Lasers could do that, he said. And then he told me that the way to deal with people who radiated negative energy was to put 10cc of water between you and them, because water molecules in their complexity had the capacity to absorb negative energy. When they left, you then threw the water down the sink. There's something attractive about this metaphorically, but he was quite serious and literal about it.

I have a hard time dealing with these kinds of contradictions, when someone tells you something that is both half-true and half-nonsense (or is it? -- for all I know the water trick works). I like things and people to be clear cut; people should be either obviously smart or clearly bullshit artists. So how do you cope with someone who's a bit of both, and believes what he says?

Which reminds me of the movie "Little Children" that I saw a few months ago. The sex offender in the movie violates clear boundaries: you have to judge him as responsible for his actions (he's a sex offender) and yet you can see that he's in the grip of forces beyond his control and can't help himself. The man and the woman in the movie, they face similar dilemmas about responsibility. They're all little children. How do you integrate all that?

Which reminds me of Nabokov's "Lolita." Humbert Humbert is a vile creature (his own words, if I recall correctly) and yet you also understand that he's in the grip of forces beyond his control. (I don't want to say he can't help himself, because I think he could have.) In "Lolita" though, there is some small redemption: he starts out craving Lolita because of her nymphet qualities, all physical, and ends up loving her five or more years later when she's no longer a charming young girl at all but pregnant (by a simple almost stupid very unglamorous man). Now, Humbert notes, she is "hopelessly worn at seventeen," "with her ruined looks and …" etc. But now he loves her more than anything he had ever seen or imagined on earth. Lionel Trilling on the back of the paperback I own says it's really a book about love. And somehow these two impossible things -- his moral responsibility for his perversity and his near inability to avoid it –- become a little transformed.

There's a much more easy-to-live-with transformation in the recent movie "The Lives of Others", about the Stasi, in which the initially repulsive secret-police eavesdropper becomes step-by-step humanized so that by the end of the movie he's transformed from a beast into a totally sympathetic character.

There isn't always such an easy resolution. Maybe you just have to deal with other people's hybrid nature (and your own) by transcending reason and accepting everything about them, if you can, but that's dangerous too. IIt would be nice if 10cc of H2O helped.

Somewhere I once quoted an observation made by Fischer Black in 1994 about the need for judging traders by their reasoning rather than results. Several people asked me about it and I recently found the paragraph, part of a longer note he wrote.

"All … opportunities have stories. When prices are funny, and we can tell a good story about why they are funny, we should take big positions. But stories about trends or monetary policy … are usually not good stories …

When we evaluate traders, it's crucial to judge the stories they trade on. Looking only at their profit and loss statements is a recipe for disaster."

Maybe human beings do have an urge to put a story around everything, but everything we say is a story or an analogy (see Hofstadter's 'I am a Strange Loop'), even the story that we have an urge to put stories around events, so it's unavoidable.

I used to detest vulgarity, but that was long ago. Now I don't mind it too much. In the good sense, vulgarity can be the recognition of the essential identity between yourself and the crowds. You're born in a pretty vulgar way, and you certainly die that way, and only somewhere in the middle of that trajectory can you afford to think badly of it.

A little vulgarity is the life of everything, and especially so in quantitative finance. When it gets too refined and deracinated it loses touch with markets, and what are markets if not vulgar?

William Butler Yeats: Think like a wise man but communicate in the language of the people.

If you want to read an immensely funny vulgar book, try to find J.P. Donleavy's "The Unexpurgated Code: A Complete Manual of Survival and Manners." It seems to be out of print here (the USA) but it might be available in the U.K.

When you forget skills or knowledge you once used but then neglected, I've noticed that they don't fade away gradually. Some of the physics or math I used to use and know well stayed with me for years, and then, after several years or a decade of neglect, faded quite suddenly. Similarly, if you don't run regularly for a while, but only occasionally, nothing about your speed changes until, one day, several weeks or a month later, there's a precipitous drop or an injury.

My sense it that these tails aren't exponential or even power. They're step functions, leaps and bounds.

I realize it contains lots of inaccuracies and sounds cranky, but I sort of like this article: http://www.theamericanscholar.org/sp07/newtheory-lanza.html. I found it on aldaily.com.

The reason I like it is that when I was studying quantum mechanics and I learned that the absolute value squared of the Schrodinger wave function represents a probability, I had the following sequence of thoughts:

Probability is a human concept. You can't imagine probability without imagining an ensemble of identical experiments or coins, and then thinking of probability as some limiting ratio. So, no humans, no probability. But if the Schrodinger wave function measures probability, then it's only there when humans are there.

It seems easier to grasp that something as abstract as the wave function or good looks or charm, are in essence human inventions/concepts. But maybe the same is true of time, mass, charge and space. That's the point this article seems to be making.

Could it be that quantitative finance is only a human invention too?

The epidemic of recent articles in the press about neurolaw and responsibility made me decide to believe in two contradictory ideas:

1. I will treat people as though they are responsible for their actions.

{If they aren't, then I am not responsible for my action of treating them as they they're responsible.}

2. People are in the grip of forces beyond their control and can't help what they do, so they all deserve the mercy of God.

I was always a little prone to the notion that there was a conflict between the transcendental and workaday life.

Now I've been reading a very interesting book, written a little didactically, called "Love, Life, Goethe." It's a kind of biography of Goethe, written with a view to telling you what you can learn from his life. It may be a little like "How Proust Can Change Your Life" by Alain de Botton (which I've never read).

I've covered only 100 pages, but one of the main points the writer keeps coming back to is that "Goethe is determined to bridge the gaps between creative art and what is called 'the real world.' "

A couple of quotes from a chapter entitle 'Power': --------

Goethe's immense hope was that there need not be -- should not be -- a spiritual loathing or artistic contempt for that (bourgeios) life. Which after all, is normal life, broadly speaking.

If depth of thought, maturity of passion and grace of feeling are to be central to a society, these spiritual qualities have to coexist with the normal demands of life.

He is looking at the ways in which the discipline of 'the real world' -- the demands of power and responsibility -- might actually offer special opportunities for personal growth and development.

We tend to think of spiritual growth as a shedding of worldly attachments. Goethe's beautiful idea is of a fine cooperation between inner and outer.

He's suggesting to himself that there is no necessary opposition between the world and the spirit.

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The Brain on the Stand By JEFFREY ROSEN

               How advances in neuroscience could transform our legal system.

… … The extent of that revolution is hotly debated, but the influence of what some call neurolaw is clearly growing … …

… Even if witnesses don’t have their brains scanned, neuroscience may lead judges and jurors to conclude that certain kinds of memories are more reliable than others because of the area of the brain in which they are processed. Further into the future, and closer to science fiction, lies the possibility of memory downloading.

                                                                   [From the NY Times Sunday Magazine]

__________________________________________________________________________________ ____________________________________________________________________________________

From: The Office of the Provost

To: All Faculty and Students

Re: Midterm and final examinations taken under the neuroexamination option

1. Neuroexaminations will consist of six half-hour questions.

2. Examination downloading will be active only during the final five minutes of each half hour, except for multiple choice question, where downloading will take place at the end of each question's completion.

3. Examination papers are currently distributed as hard copy. Starting 2008, students will be able to upload examination "papers" during the five minutes before the start of the examination.

5. Despite this being a neuroexamination, all students must sign the hard copy of the neurohonor pledge: "I have neither given nor received unauthorized neuroaid (neurodownloading or neurouploading) during the taking of this exam." The option to neurosign and subsequent neurodownload the signed neurohonor pledge is currently unavailable.

6. Students who neurodownload explicit comments or expletives (except in creative writing classes) will be excluded from future neuroexaminations. Unavoidable idle fantasies or prolonged periods of voluntary or involuntary celibacy will not be accepted as a valid excuse.

7. Students with medical reasons for being granted extra time on the neuroexamination must submit their supporting documents in writing. We cannot accept neurodownloads concerning medical conditions from people without university neuroscan cards.

8. No calculators, pens, pencils or paper allowed in the neuroeoxamination room. Coffee and AAA batteries can be requested from the front desk.

When I worked in firmwide risk I didn't clearly understand what our job was -- control risk, measure risk, whatever?

Recently I heard a very good logical and philosophical talk by Steve Allen of NYU on the whole business. He's the author of Financial Risk Management: A Practitioner's Guide to Managing Market and Credit Risk.

One of the things he said is that the purpose of risk management is neither to control nor measure risk, but rather to make risk transparent. It's such a clear and sensible idea. And, he said, and I think I'm quoting him correctly, that a risk manager shouldn't get fired if a firm loses a lot of money. They ought to get fired if a loss occurs owing to some risk that he didn't bring to the firm's attention.

When you interview for a position a a firm or admission to a university, it's only common sense to learn all you can about the place in advance. It's relevant information for you and proof for the people interviewing you that you have at least some right motives.

But I don't too much like the line "I've always wanted to work at Firm X" or "I've always wanted to attend University Y." It puts me off a little because it's not relevant to the process. Saying "I always wanted to be a swaps trader" or "I always wanted to study deconstruction" is important, especially if you can explain why and you already have learned something about the subject. Where you always wanted to study isn't, in my opinion.

It's important to remember that firms hire you for what you can do for them, not for what they can do for you. About fifteen years ago I was helping build an equity derivatives trading system, and the Sun workstations we had bought weren't functioning properly. I was tearing my hair out when a new young guy who had just transferred to our group walked in. When he grasped the situation he turned to me and said: "Calm down, that's not your problem, that's what I'm here for." So smart.

1. From Jim Holt's review of Michael Frayn's new book on existence: I like the last parenthetical sentence.

"In philosophy, you can be a “realist” or you can be an “idealist.” You are a realist if you believe that the universe exists independently of our minds, and that it would be more or less the same even if we weren’t around to observe it. You are an idealist if you believe that reality is somehow mentally generated, that we “make” the world.

Idealism may seem a little daft at first blush. Yet even die-hard realists will concede that some aspects of the world — color and fragrance, for example, or humor — are projected onto it by our mental activity; in a universe devoid of mind, nothing would be red or sweet-smelling or funny. Indeed, modern physics tells us that solidity itself is an illusion, that the seemingly real objects around us — rocks and trees, tables and chairs — are mostly empty space. And if you take a closer look at the more provocative claims associated with idealism, they’re not always as outrageous as they sound. When idealists say that we “make the stars,” they don’t mean that we make them the way a brickmaker makes a brick; rather, they mean that we make them conceptually, right down to the elementary particles of which they consist. (But how, you ask, could we have made the sun if it was around long before we were? By making time too, the idealist knowingly replies.)"

----------------

2. From a magazine in a doctor's office:

"Beware of people who, early on in a relationship, tell you they'll never ever do anything to hurt you. They're denying to themselves the future actions they can already dimly divine."

----------------------

3. From the Jew of Malta, which I saw this past week, a classy line:

"Thou hast committed fornication, but that was in another land and, besides, the wench is dead."

Would that all our sins of commission and omission could so easily be set aside.

is a Yiddish word for outrageous nerve. Wikipedia does pretty well on it, as follows. ---- Leo Rosten in The Joys of Yiddish defines chutzpah as "gall, brazen nerve, effrontery, incredible 'guts,' presumption plus arrogance such as no other word and no other language can do justice to." In this sense, chutzpah expresses both strong disapproval and grudging admiration.

One humorous example of chutzpah is often given as follows: "A boy is on trial for murdering his parents, and he begs of the judge leniency because he is an orphan." ----

I thought of the word when I was recently repeatedly contacted via email by a company called RiskWhosWho.com. They asked me to apply at some length to be considered for their WhosWho directory, provided I agreed to attend their conferences and speak for free at them, and provided I agree to write a paper a year with other WhosWho's. When I didn't reply to the email, I got a subsequent email that said:

'We have written to you *several times* in the recent months asking you to list/ become a member of RWW. Pls take a look at our January 2007 acceptances who are all top-flight executives/ leading academics.'

The *several times* was underlined, to indicate how peeved they were.

Who's Who companies always seemed to me a sort of scam that feeds on human vanity, and you need them even less now that you can look people up on the internet. But I did look at their January 2007 acceptances, and some of them were indeed as described.

I was curious and so I followed the links on riskwhoswho.com, which says:

"Dr. Sammy Ho is our CEO. He is currently the Managing Director of Euro Group. Sammy runs the operations of the group as well as specifically covers the finance and technology sector clients in the region. … … Sammy has worked in Hong Kong, England, Japan and Canada. He received his Ph.D. in Process Control from England in 1996."

What makes Sammy run? It turns out that Euro Group is in the business of headhunting. Call me naive but I think its pretty outrageous.

And Riskwhoswho is not GARP or PRMIA. Though they don't say so, they are for profit. I believe some former GARP people once tried to run it for profit, but eventually they left and GARP was restructured.