October 5, 2009

"I was a brilliant math guy on Wall Street and I got out partly because of the 'math abuse'..."

"... I recognized that the mathematical complexity and sophistication of the models was completely wasted because of the stupidity of the underlying assumptions about economic behavior and the unreliability of the input data."

A comment by JoeShipman from yesterday's "Capitalism: A Love Story" post.

***

Several commenters knocked me for saying: "My favorite thing in the movie was the trashing of young math and science graduates who, instead of applying their talents to the benefit of humanity, went to Wall Street to design the complicated derivative securities that almost destroyed the economy. The closeup on an incomprehensible math equation was, for me, the most shocking image in the movie."

I wish I could get a screen shot of the equation shown in the movie. It's far more complicated that my critics are imagining. (More complicated than this.)

Why were people with such depth of mathematical skill using it this way? I guess the question answers itself. For the money. I agree with Michael Moore's disgust over the misapplication of intellectual work.

Now, Moore operates through cinematic technique not conventional rational argument. He's an entertainer and a polemicist, and complicated math can't be funny for long. It's interesting to see how he presents the stuff about the financial crisis. At one point, we see him sitting on a park bench next to a guy who tries to explain derivatives, and what's funny is the expression on Moore's face — we see in him what nearly all of us are thinking — I can't understand. And that generates a further emotional/political reaction: If I can't understand it, I'm worried that it's an evil scheme. Moore's cinematic "argument" works like that.

86 comments:

Dust Bunny Queen said...

I wish I could get a screen shot of the equation shown in the movie. It's far more complicated that my critics are imagining. (More complicated than this.)


Ha. Just exactly the stuff I deal with in my work.

Why were people with such depth of mathematical skill using it this way? I guess the question answers itself. For the money. I agree with Michael Moore's disgust over the misapplication of intellectual work.


I seriously don't get why you are disgusted. Math is a tool. What's wrong with using the proper tools to make money, aka have a career that pays the bills?

Are you just as disgusted that my husband uses complicated and expensive electronic testers that rely on a foundation of mathematics to earn his money?

Edgehopper said...

At one point, we see him sitting on a park bench next to a guy who tries to explain derivatives, and what's funny is the expression on Moore's face — we see in him what nearly all of us are thinking — I can't understand. And that generates a further emotional/political reaction: If I can't understand it, I'm worried that it's an evil scheme. Moore's cinematic "argument" works like that.

That may make for persuasive propaganda, but it's also, well, scummy and dishonest.

After all, you could do the exact same thing with a physics department, which typically uses much more confusing equations than finance people.

Actually, Moore doing this reminds me of creationists who scoff at evolution because they can't comprehend anything more nuanced than "I weren't no monkey!" Except that creationists are less dangerous, because their beliefs affect my life far less than Moore's socialism would.

MadisonMan said...

See, that linked-to equation doesn't look complicated to me. Advection, time-tendencies, diffusions?

Put up a little Eliassen-Palm flux analysis. Then we'll talk.

Maybe I should see the movie, but I doubt the equation is put up there for very long. Just a screen-flash to cause math-phobics a little fear.

Original Mike said...

It's not the complexity (e.g. what you linked to isn't complicated), it's the paucity of data we have for detemining the value of the variables in the models. They should have known that, as I'm sure some (most?) of them did.

Ger said...

So you think these mathematicians are the equivalent of ambulance chasing lawyers - folks who sully an otherwise noble pursuit?

Are you also disgusted by mathematicians that design thermonuclear weapons?

MayBee said...

Why were people with such depth of mathematical skill using it this way? I guess the question answers itself. For the money. I agree with Michael Moore's disgust over the misapplication of intellectual work.

Doesn't this way of thinking eventually lead us to the conclusion that only stupid people should make lots of money?

Henry said...

Why were people with such depth of mathematical skill using it this way?

For an outlet?

Math is the most rarefied of disciplines. I imagine that (in addition to the money) the ability to apply your ideas has to be very attractive. There aren't that many complex systems out there that provide rapid feedback (climate modeling does, but very slowly).

If I remember rightly, Nassim Taleb once asked Benoit Mandelbrot why he studied finance and the answer was simple -- that's where the data is.

I'll add that Taleb and Mandelbrot are very skeptical of predictive models.

Salamandyr said...

I can't understand. And that generates a further emotional/political reaction: If I can't understand it, I'm worried that it's an evil scheme.

In the old days that impulse led to burning witches and excommunicating philosophers. In the 20th Century it led to Lamarckism and the Khmer Rouge. Is this sort of thinking something we should encourage?

traditionalguy said...

The math Guy is admitting that the financial actuarial/math models are like global warming models that have not got enough of the correct variables entered so that their outcome/predictions can easily be set for any result that helps the maker up of the model steal money from the rubes who believe in their pretended new science.

Pastafarian said...

How bad can applied math be? Let's see the proof of the fundamental theorem of Galois Theory. Or anything from set theory -- that stuff makes me queasy.

But seriously, I'm still not getting what could be so dark, sinister, and disturbing about some math on a chalkboard.

Alex said...

In Michael Moore's Communist utopia, math geniuses will only use their gift in service of the state.

Henry said...
This comment has been removed by the author.
Alex said...

But seriously, I'm still not getting what could be so dark, sinister, and disturbing about some math on a chalkboard.

Think "atomic bombs" from math... Math is evil, science is evil! Let's go back to the stone age, life was much better then!

AJ Lynch said...

Althouse:

This is a basic fact: the reasonableness of the "assumptions" you use is the key to the worth of a complex or a simple model.

Our Congress critter are as guilty of using faulty [perhaps criminal] assumptions in almost every bill they pass.

Original Mike said...

The math Guy is admitting that the financial actuarial/math models are like global warming models that have not got enough of the correct variables entered so that their outcome/predictions can easily be set for any result ...

While not going so far as you (ascribing sinister intent), I do worry at the apparent similarity between the two problems.

Darcy said...

I'm starting with the assumption that these individuals with great mathematical skill didn't intend any harm to any investors. Assuming that, I am seriously puzzled as to why anyone would be disgusted at the application of their depth of skill to make money.

How is that any of our business, and why should it be? Should we judge everyone's talents this way?

Big Mike said...

Why were people with such depth of mathematical skill using it this way? I guess the question answers itself. For the money. I agree with Michael Moore's disgust over the misapplication of intellectual work.

The comment above is even more disgusting to me than your thrown-off comment yesterday. Do you feel a comparable disgust over the "misapplication of intellectual work" when a lawyer uses junk science to win a case? A while ago you mentioned that you were good at math in high school, but chose not to pursue it further. Pity. Maybe instead of using your brains to help create truly worthless creatures like lawyers you could have learned enough math to understand the equations and then you wouldn't be writing such foolish things.

For the record, I'm not a quant myself; I apply my mathematical skills, such as they are, in other areas. But I fail to see what's wrong with using one's talents to make money.

Michael Hasenstab said...

I agree with Michael Moore's disgust over the misapplication of intellectual work.

Do you apply that same disgust over Michael Moore's misapplication of his "intellectual" work?

Wouldn't it have been better if Moore had applied his talents in his originally chosen field - as a GM assembly line worker - for the benefit of his co-workers and GM stockholders?

And how can you know that you wouldn't have made a better use of your intellectual work had you remained and artist and not become a professor of law?

None of us can see how the world would have been if we had chosen a different application of our intellectual work. To presume so is fantasy.

Paul Zrimsek said...

The comparison with the average person's reaction to legal "fine print" is so obvious that I'm almost embarrassed to make it.

MayBee said...

People who can do things like complex math and complex surgeries should not be doing it for the money. They are intellectuals. They are healers.

On the other hand, a lot of actors are stupid and have no other real option. So pursuing a career path which leads to extravagant salaries is moral.

Dust Bunny Queen said...

I was a brilliant math guy on Wall Street and I got out partly because of the "math abuse" -- I recognized that the mathematical complexity and sophistication of the models was completely wasted because of the stupidity of the underlying assumptions about economic behavior and the unreliability of the input data.

I agree entirely with Joe here. The math models can be useful in some instances, but I usually put more weight on fundamental analysis.

I also disagre completely that there is something evil about using your skills to make money. As if money is evil and we should all be poor and subservient to the state.....OH wait....That is Moore's vision.

Does Althouse have mutual funds, a pension plan? Maybe she would prefer the managers of her retirement money use Oiuja Boards instead of mathematical models and statistical evaluations to help her retire?

Henry said...

The failure of geniuses to manage the economy is not a failure of capitalism. It is a failure for socialism.

The virtue of the free market is in its flexibility and adaptability. Notably, Hayek broke with some of his more dogmatic free market allies in asserting the essential irrationality of economic systems.

Socialism demands that young geniuses don't get things wrong. Only if the system is programmable can the government actually pretend to manage it.

traditionalguy said...

Darcy...The banks in the USA create the loans that are the money that goes into 90% of the new ventures that we expect to see and call growth. The making of more than 2% bad loans kills a bank dead. The fake insurance to make some really horrible loans seem safe ( Such as,FNMA's new 100% loans) was approved under the Math Modeler's scheme of investments from 1999 until the crash. When somebody blew the whistle, we had a Tsunami of bad loans nearing 50% and it has destroyed the Banking system. Other than that, it was just everyday business. By the way you cannot get a bank loan today for anything new, and very little refinancing at a 50% ratio on loan to FMV. That keeps a few banks functioning at a low level hoping to be the last bank standing one day.

Darcy said...

traditional guy: In short, are you saying that the intentions of all of these people that Althouse and Moore are judging to scam the system (create harm for monetary gain)? If so, I agree that it was an evil application of talent.

Darcy said...

Insert "was to" after "judging. Ugh. Sorry.

MayBee said...

traditional guy: In short, are you saying that the intentions of all of these people that Althouse and Moore are judging to scam the system (create harm for monetary gain)? If so, I agree that it was an evil application of talent.

Even so, the evil application is in the scamming, not in the pursuit of monetary gain.

That's true in any field, at any level of intellectual ability.

El Presidente said...

Making a movie about financial markets is like dancing about architecture.

Just because Moore is too stupid or too ideologically biased to understand, doesn't mean that the divine Ms. A, has to fall in line. I know that you are smart enough to understand the point of the markets. And I hope you understand that they are a benefit to humanity.

Darcy said...

Maybee: Yes. I agree!

1jpb said...

DBQ,

I don't think you meant to claim that you spend your days creating complex mathematical models that will blow-up, as presumably the one in the movie did.

I'm guessing that you meant to say that not all differential equations are evil, since they are simply models (of various orders) of phenomena. And, you probably meant to note that that our financial system successfully uses plenty complex differential equations as a matter fact.

But, please don't even hint that you sit around creating your own complex differential equations, like the folks who created the failed "black boxes" on wall street--which, no doubt, was what Moore was focusing on.

Your attempts to minimize the mess caused by Wall Street mathematicians run wild is silly and foolish. Even Scholes (of Black-Scholes; complex math that does directly impact your daily work) went down in flames at LTCM.

So, it makes sense to be afraid of brilliant math folks (from Scholes (Nobel prize) to some of the current quant folks on Wall Steet).

Althouse should be scared, and you (if it's true that you can understand what these complex formulas that blew up meant) should be MORE afraid of them than Althouse. Of course, being afraid of the bad math doesn't exclude defending the complex formulas that won't blown up.

MikeDC said...

Why were people with such depth of mathematical skill using it this way? I guess the question answers itself. For the money. I agree with Michael Moore's disgust over the misapplication of intellectual work.

You're still missing the point of the criticism, because you're still implying the notions that:

1. A complex equation and/or complex mathematics in the service of improving finance doesn't better humanity. Why doesn't it? I mean, it might not always, but improving finance allows us to have greater wealth and less poverty.

The conter example of some scientist working for the "better of mankind" is also fallacious. Many of them spend their entire lives working on things that never amount to much. Sometimes they proceed (like quantitative finance) along promising lines and end up wasting lots of resources.

2. Worse, the notion that these guys don't do things for money, and should be exalted for this, is also quite strange. First, I know several and live in a neighborhood chock full of scientists and mathematicians who make quite a lot of money.

At the end of the day, making money is also, a pretty strong sign that what you're doing actually does have quite a lot of value to humanity. Not a perfect indicator, of course, and one that could be made better, but all things considered it's probably the best one we've got.

1jpb said...

DBQ,

I see in a later comment you pretty much got there.

"Just exactly the stuff I deal with in my work. "

To get the rest of the way you'd need to clarify that you're not claiming you spend your days creating complex differential equations of the type Althouse was describing. But, I'm guessing that you'd confirm this.

madawaskan said...

Look if you try to analyze a Michael Moore film for too long you end up like Qadaffi's translator.

Please.

Lockestep said...

Wired had a very well done article on the derivatives equation in March. Nothing was wrong with the math, the issues were with the underlying assumption that risk would be properly categorized by the market. When the market stopped discounting mortgage assets based on the underlying risk of the loan, the equation for pricing the baskets of loans was toast.
Link to article: http://www.wired.com/techbiz/it/magazine/17-03/wp_quant

madawaskan said...

Jeebus come on people it's easy.

Anyone in the "soft" sciences would be jealous of the hard.

Just ask Titus.

El Presidente said...

1jpb,

Moore is using math to scar the rubes. "oohhh, look symbols you don't understand." The derivatives market worked just fine, increasing liquidity and generating wealth for years.

What changed? It wasn't the math.

1jpb said...

Lockestep,

That's kind of like saying Nazi orders to kill Jews weren't misspelled. [Of cousre, I'm not comparing, in any way, shape or form, the harm done by the two situations: math isn't murder.]

Math people use math symbols.
people use words.

What matters is what you do w/ the symbols or words, not the so-called grammar in each context.

Paul Zrimsek said...

By a small miracle of synchronicity, one of Eugene Volokh's co-bloggers just posted this.

daubiere said...

so the lesson im taking from this is: math scares girls.

great! score one for feminism!

Paul Zrimsek said...

So far, none of my favorite econbloggers seem to have seen the movie. I'm looking forward to finding out what the Dread Equation actually is. (I still harbor a hunch that it's some innocuous thing with no particular connection to the financial crisis, say a yield-to-maturity formula or something like that.)

Dust Bunny Queen said...

To get the rest of the way you'd need to clarify that you're not claiming you spend your days creating complex differential equations of the type Althouse was describing. But, I'm guessing that you'd confirm this.


Correct. I don't create the formulas. I'm not capable of that!!!

I merely use them as evaluation tools and portfolio construction/modeling tools. Some of this modeling is required by my firm to be done and filed in the account's permanent records, especially for managed accounts.

Nevertheless, as I indicated I tend to rely more on the fundamentals than the math models.

Even so. I don't understand the evil part.

Much of the melt down on Wall Street and the Derivatives market can be directly tied to the misguided policies, laws, meddling and regulations from Congress and not blamed so much on mathematics, which is a tool. A hammer is a tool and I can use it to build a bookcase or to bash in someone's head. You don't blame the hammer manufacturer. Why blame the math/science guys for inventing models that were misused?

Darcy said...

Paul Z.: Heh. :)

And daubiere...lol. You'd better duck!

Original Mike said...

I want to see the scary equation, too, but there's no way I'm watching Moore's movie. Maybe it'll get posted, somewhere.

Meanwhile, I'd recommend contemplating Paul's 11:37 A.M. comment.

Michael Hasenstab said...

Larry Summers was right.

Paul Zrimsek said...

I wonder how many Moore fans are worried about the Dihydrogen Monoxide menace. With a name like that it's got to be toxic.

AJ Lynch said...

May Bee's comments win this thread. Madawaskan's 12:20 is a close second.

wv = rudgu

Original Mike said...

Bottled or tap?

Gabriel Hanna said...

I looked at the scary equations that Althouse linked to; they look to similar to the diffusion equations in statistical mechanics, and I was pretty underwhelmed.

My field is physics and equations are not scary to me. They either model reality well or model it poorly, and they need to be as complicated as they need to be.

If the scary stock market equations were 1+1 = 2, and the data did not justify such a model, the consequences would be just as bad as the model that seems so frightening to law professors.

paul a'barge said...

If most of us can't understand it, it may not start out being an evil scheme but you can be certain that it shortly will transition into an evil scheme.

careen said...

PBS has a great special on Black-Scholes that makes it totally understandable - or at least reasonably understandable to the layman. IIRC, A rocket trajectory is overlaid on the part of the equation that is similar to those calculations. Reminds me of the old math joke "and here a miracle happens" - "and here the rocket takes off".

Bruce Hayden said...

Ok, their models may have cost a bit of money this time around, but also, as has been pointed out, much of the problem was a direct result of government intervention.

In any case, the quants, as some call them, have helped create a significantly more efficient market for liquidity and risk. This efficiency has added trillions of dollars to the world economy.

I just wish that this stuff had been around when I was graduating from college. I looked at my math degree, and tried to figure out what to do with it. I could teach math, at either the high school or college level, though the later would take an advanced degree or two. That wasn't the issue, but rather, the question of what would I have if I got a MS or PhD in mathematics.

So, I went into computer science instead, and then, ultimately, law.

Today, if I were facing the same choice, I would probably go for that PhD in math, and maybe an MBA (which I do have). And then try to get rich by making other people very rich, with my mathematics.

madawaskan said...

Darn it AJ!

But come on I'm a regular and try harder-that's gotta count for...

[ok,ok...]

Darcy said...

All that at 19, Bruce? You have time to change your mind, looks like. ;-)

Freeman Hunt said...

I have to agree with others who are saying that while the lack of data or flawed underlying assumptions may be bad, an equation's being complex isn't bad.

Sometimes people need math that is incredibly complex. What's wrong with that? Or maybe more precisely, why does that seem sinister?

Anything we don't understand can seem terribly foreboding, but then that rational part of the brain is supposed to kick in and say, "Well, in this case, the thing only seems frightening. I just don't understand it."

Original Mike said...

Ok, their models may have cost a bit of money this time around, but also, as has been pointed out, much of the problem was a direct result of government intervention.

Good point. And I wonder if you can account for government intervention in the models.

Gabriel Hanna said...

Good point. And I wonder if you can account for government intervention in the models.

This is from the wikipedia article Ann linked to:

The Black-Scholes model of the market for an equity makes the following explicit assumptions:

* It is possible to borrow and lend cash at a known constant risk-free interest rate.
* The price follows a geometric Brownian motion with constant drift and volatility.
* There are no transaction costs.
* The stock does not pay a dividend (see below for extensions to handle dividend payments).
* All securities are perfectly divisible (i.e. it is possible to buy any fraction of a share).
* There are no restrictions on short selling.

From these ideal conditions in the market for an equity (and for an option on the equity), the authors show that "it is possible to create a hedged position, consisting of a long position in the stock and a short position in [calls on the same stock], whose value will not depend on the price of the stock."

If these become bad assumptions the model becomes useless.

Bruce Hayden said...

I think that one of the things that is tragic about Moore is that he is where he is right now, and talking about the movie he just made, because of the economic system he so deplores, capitalism.

Under any real form of socialism, whether it be Marxist, Fascist, or whatever, the state will ultimately (and often, fairly quickly) get involved in determining the content of the art it will allow the people to partake in. Moore's problem is that, in the eyes of the elite, such as Obama and those of his ilk, Moore is still that automotive assembly line worker, and lacks the sophistication to be anything else. So, as a result, whatever he does as "art" will not be "art" as they understand it, and, therefore, his "art" will ultimately be suppressed.

Yes, all those entertainment people who spend their free time advocating socialist causes are all hypocrites for obvious reasons. The difference here though is that they may have an expectation that when socialism/ Marxism is imposed, that they will benefit from it due to their being favored by those elites. Moore doesn't have that. He is too uncouth to ever be accepted.

Original Mike said...

The difference here though is that they may have an expectation that when socialism/ Marxism is imposed, that they will benefit from it due to their being favored by those elites. Moore doesn't have that. He is too uncouth to ever be accepted.

Hopefully, he's invested well.

Freeman Hunt said...

Moore is depending on ignorance. When I worked in marketing, I had to design a system of sales bonus computation. It needed to be fair, and so, it had to account for a huge number of variables.

It was very complex.

To a coworker, it might have appeared impenetrable. If that coworker did not like me, it might have appeared sinister.

To the CEO, however, who understood the system perfectly, every step was clear, and every purpose obvious. There was nothing sinister for him as there was nothing unknown for him to emote over.

If you could look at the equation and know what every part of it meant, you could judge it like the CEO at my old workplace could judge my method of sales bonus computation. You could say, "Oh, here's where it goes wrong!" or "I don't see how you can get a reliable variable to input here!" But Moore seems to be depending on the viewer having no knowledge to evaluate the equation this way. He wants you to go, "Damn, that looks crazy!" What good is that?

Kev said...

(the other kev)

Well, Michael Crichton argued that the mathematical models for AGW were based in part on the Drake Equation, and that the Drake Equation was essentially worthless because all of its components were speculative. It could be manipulated to prove anything you wanted it to. Sometimes complexity can be used for obfuscation. Like when they try to prove Social Security isn't going broke.

Rialby said...

This is the same fear of technological sophistication that drove the Unibomber to madness.

Chip Ahoy said...

Moore, bless his bleak little heart, wants to set blame for financial disaster squarely and fully on financial markets, and none at all on the well-intended socialistic legislation in the form of Community Reinvestment Acts (and their derivative legislation) that created the circumstances that forced the creation of financial derivatives in the first place. There's is no getting around the facts that it was legislation that originally caused bankers to step waaaaaay out of character by forcing them to make themselves un-bankerly incautious in order to adjust to new community-oriented, lower-income-friendly laws that compelled them to extend loans to people without the resources to back them. Kindhearted yes, financially wise, no. What's a banker to do then, hold that paper? Bankers were forced to create instruments that repackaged that obvious risk to dilute it among tranches, then pass them off to traders who were assured of profit by government backing. Otherwise they would never be touched.

Government guarantees created a nation of house-flipping investors way over their heads financially with nothing but the false security of the certainty of continuously-rising artificially inflated cost of housing to cover their investment certain they too would profit thus increasing the demand for housing and quite effectively making it even more difficult to enter the market, not easier as the legislation originally intended so short-sightedly . It was the legislators on the right and on the left who willfully and knowingly created the classic bubble.

See? The intention was to help poor people own homes to live in. Instead it helped poor people become investors in housing with the intention of flipping them into something more grand, a perfectly natural and predictable development. Objectivists call this fact of human nature simply and harshly greed. Government fed greed at the lower level but then blames greed at the higher levels for the inevitable collapse of the false economy itself created. I do believe Moore's world view, his weltanschauung if you like, refuses to allow him to understand this. If he did understand it, he'd be making movies about less government interference, not more, and shocking his audience with incomprehensibly written legislation not incomprehensibly written economics, both sciences so soft in mathematic terms they amount to mush.

Having said all that, for obvious reasons, I feel no impulse to view the man's film. I'll leave it to you to contribute to his wealth.

Expat(ish) said...

Funny, my wife has a Ph.D. in sociology and wrote a dissertation and a book using advanced statistical techniques understood by probably a few hundred other social scientists around the planet.

Certainly I didn't get them. All I did was keep the computers running for a year while she ran models.

Scary? No. Different than what the risk and derivatives guys were doing? Well, after a year she's made $114 off the book, so there are some zero's that are different.

Otherwise not so much.

-XC

PS - Ok, she is way hotter and funnier than the guys I know on Wall St. so there is that.

Chris said...

Because derivative models are so poorly understood, it is easy for investment bankers to dismiss results they don't like and embrace results which validate their wishful thinking. Models have been at the root of past financial disasters such at the '87 stock crash. While Moore is fast and loose with most facts, he's dead right on this one. There are too many dumb "smart" people who fail to grasp the limitations of modeling complex chaotic systems such as financial markets or the climate.

Der Hahn said...

Is the look on Moore's face really I can't understand or is i more likely I don't want to understand?

Cedarford said...

Althouse is well on target, I think, in highlighting the use of complicated math models.

People forget that business accounting, and responsibility for collapsed schemes...can be successfully obscured if the perps can say THEY BELIEVED, where acting in good faith, and can haul up various PhDs and economists that can show "this was an accepted math model in our esteemed scholarship...Oy! Who knew all the UofChicago economists and MIT grads were wrong!!"

That is a key reason why no prosecutor is looking to slam any of these bozos - from Reaganomics supply siders, to Fannie Mae execs, to Wall Street financiers to jail.
They used their math technology mainly as a LEGAL COVER to justify warping accounting rules, to smokescreen reckless abandonment of financial prudency and previously unacceptable risk - to advance their personal fortunes and political objectives.

Several commenters knocked me for saying: "My favorite thing in the movie was the trashing of young math and science graduates who, instead of applying their talents to the benefit of humanity, went to Wall Street to design the complicated derivative securities that almost destroyed the economy. The closeup on an incomprehensible math equation was, for me, the most shocking image in the movie."

Who are the courts to say that an Israeli-American who personally made 380 million in 7 years selling rebundled mortgage derivatives that eventually cost US taxpayers 21 billion to bail out cannot keep his personal fortune...after all, he ACTED ON GOOD FAITH...he has 20 PhD theorists and mathematicians lined up to testify that he paid them well for their best advice.
Who can fault the Bushies for rax cuts they touted would pay for a trillion dollar war, a 40% expansion in Fed Gov't, and eventually the whole unfunded premium price prescription drug benefit?? Why, they had Nobel winners saying Reaganomics dogma was reality!!!

It is a pity that White Star, the owner of the Titanic, was not able to dredge up a 27-variable algorithm with incomprehensible (save to a few) Laplace transformations to show that only having half the lifeboats was in fact, supremely good judgement because it was based on the 27-variable algorithm backed by 20 of Britain and Frances greatest minds. It was something that replaced "conventional, old 19th century ideas about risk".

Why, the admiralty court would have had to shaken the hands of the great wizards of risk assessment, hoped them well on future Nobels...And commended White Star on their innovative quest to better serve "shareholders". And absolved them of any "tragic, but unanticipated drownings" from their GOOD FAITH VENTURE.

Back to present. Does anyone expect any of these financiers in NYC, the crooked politicians, the scum at AIG or Freddy to serve a day in jail?

1jpb said...

"This is the same fear of technological sophistication that drove the Unibomber to madness."

Meade needs to let folks know if Altouhse starts skulking around in a hoodie.

Bruce,

At any point as you're banging away at the keyboard w/ your mind reading and future predicting do you get to a point where you consider alternative scenarios? For example, did you consider that BHO thinks Moore is an entertainer, or a hack, or a smart guy w/ some decent ideas, or the left's version of Rush?

Or, do other peoples' minds and future events spill out of your own mind in a consistent uninterrupted stream, similar to the way driving directions are spit out of Mapquest. So, of course you knew that BHO thinks Moore is still an autoworker (which I'm not sure he ever was, but whatever).

Your comment re this stuff is hilarious...not sure that's what you were going for.

1jpb said...

Moore's use of the equation reminds me of the Rs organizational chart that was said to represent the Ds health care reform plan.

They're both scary (to many). But, either could possibly represent something very good or something very bad. It really depends on the particular math in the equations, or the particular bubbles in the organizational chart.

Except that I'm fairly sure Moore used an equation from a product that is now know to have been a disaster, so there's not too much mystery about that. But, any possible disaster associated w/ the D plan would not have occurred yet.

Gabriel Hanna said...

Well, Michael Crichton argued that the mathematical models for AGW were based in part on the Drake Equation, and that the Drake Equation was essentially worthless because all of its components were speculative. It could be manipulated to prove anything you wanted it to. Sometimes complexity can be used for obfuscation.

I think you are confused about what Crichton said.

The Drake equation is nine or ten numbers multiplied together to get an estimate of a probability. It has nothing whatever to do with climate modeling.

Climate models are differential equations that have to be solved numerically. Some of the parameters in the equation have to be estimated, and the model is checked by comparison with actual climate data.

Crichton mentioned the Drake equation when he was speaking against climate modelling, but there is no way he said climate modeling was BASED ON the Drake equation, because that would be totally crazy and wrong to say.

miller said...

Who gets to choose which applications of knowledge are "socially acceptable"? For example, is my current job a worth explication of my college education? Who decides?

Gabriel Hanna said...

Anyway, the Drake equation just numbers multiplied together to produce another number. Differential equations are relationships between equations, and the solutions to them are themselves equations which can usually only be calculated numerically.

MadisonMan said...

Well, Michael Crichton argued that the mathematical models for AGW were based in part on the Drake Equation, and that the Drake Equation was essentially worthless because all of its components were speculative.

Well, the question becomes: Is his assertion correct? I have never heard of the Drake Equation being used for anything related to AGW.

Cedarford said...

And if we look at culprits, an old familiar name comes up, Fast Andy Fastow, of Enron fame:

While at Continental Illinois, Fastow worked on the newly emerging "asset-backed securities" - a system of raising capital by selling notes backed by risky loans.[citation needed] The practice spread across the industry "because it provides an obvious advantage for a bank," noted the Chicago Tribune. "It moves assets off the bank's balance sheet while creating revenue." Continental became the largest U.S. bank to fail in American history until the seizure of Washington Mutual in 2008.[citation needed]

Based on his work at Continental, Fastow was hired in 1990 by Jeffrey Skilling at Enron Finance Corp. Fastow was named CFO at Enron in 1998.


The consequences of the Enron debacle was that the Fastow family and his wife's Weingarten Family...all part of the "offshore entity" scam masked in mathematical slight of hand in accounting...had their passports seized so they couldn't flee to Israel. Andy got six years, his wife 1, and the rest of their families escaped punishment or fines in the plea bargain.

Fast Andy had to pay 25 million, but other family "earnings" were untouched. As was 30 million he and his wife "legitimately earned" through the noncriminal part of their activities at Enron and Continental.

It's really not that bad of a deal. Imagine robbing investors, employees, and taxpayers of billions...getting 55 or so million from the heist personally.

Then being "punished" by a 6-year sentence, almost getting your wife completely off the hook, but suceeding in immunizing family confederates?
Would you do 6 years time for 20 years of living high on the hog and have 30 million in loot waiting when you got out?

Would Fast Andy say his own personal, complicated math risk models justified his actions?

Would he do it again if he could be guaranteed the same great and negative personal consequences???

You guess.

1jpb said...

Cedarford,

The Laplace is actually quite basic.

For impact you should at least use the Sumudu Transform in your future comments. Or better, you can refer to the Poisson–Mellin–Newton cycle. That'll win a few more "exotic points."

Paul Snively said...

I'm curious what Dr. Althouse would make of the equations that Google uses. Or Amazon. For that matter, check out the papers published under the auspices of the Netflix Prize.

How complex a set of equations appears to a non-specialist means less than nothing.

That is all.

Word verification: antinom. Being opposed to extremely tasty comestibles.

Original Mike said...

Well, the Drake equation does have a term for the probabilty that a civilized society destroys itself, but other than that ...

Kurt said...

I'm quite late to this discussion, but that's an excellent point, traditionalguy.

I'd also add that Henry makes an excellent point about being able to apply rarefied theory. Furthermore, not all mathematicians working in finance are coming up with complex models that ultimately fail. Some hedge funds specialize in arbitrage or commodities and are still doing relatively well, as far as I know.

Besides, being able to make money through the application of abstract math might in the long term help advance the discipline of math further. I'm thinking of the case of a mathematician turned hedge fund manager who donated a fortune to a mathematics department where he used to teach.

Paul Snively said...

Incidentally, in keeping with my pattern of recommending point/counterpoint coverage of things, please read When Genius Failed and Fortune's Formula back-to-back.

1jpb said...

Nooooo!!! Paul.

"Inventing Money" is a much better (imho) read. I think it's out of print but I'm sure copies in good shape can be found.

Kev said...

(the other kev)

Mea culpa, Gabe. I went back and reread the speech Crichton and you are correct. He did not make a direct link between Drake and AGW. But his argument was that Drake was the forefather to TTAPS, which was one of the bases for AGW. His criticism was more about the politicization of science than about mathematics, so I guess it was an error on my part to bring it up in this discussion.

Hey said...

Ann you took fine art and then law. Math that's scary to you is nowhere close to actually complicated.

As mentioned above, Black Scholes isn't very complicated math. What won them the Nobel was demonstrating (ish) who the simple equation mapped to reality.

E=mc^2 isn't very complex, nor is F=ma. They're both critical, non-obvious, and brought out by legends of Physics.

True complexity comes from walking into the middle of an applied equation. You get Fourier Transforms, PDEs, a few bits of chaos, and perhaps some optimization and ZOMG what's going on. The math behind a basic mobile phone network is pretty crazy, especially if you just flash it on screen.

As to why do these math geniuses go into finance - it's where there are real problems these days. Outside of becoming a math prof (a field that's generally full, and rewards people who are mostly devoted to abstract problems without application - i.e. a completely different personality) there aren't all that many fields that need serious math chops.

There used to be a huge demand in defense industries, but that really went down hill after 89. Lots of high-energy physicists have switched to software (I interviewed with a Microsoft manager who used to do nuclear weapons research), but they rarely have occasion to use serious math skills. There is some work in biology, genetics, and nano-tech, but they're still in the labs and that's what math profs are working on.

So you've got Finance as a place with a demand for math talent. It's not just the money - there really aren't very many jobs out there. It's either do something completely unrelated that doesn't use your skills - and not get paid much - or work in your field for tons of cash. And you claim they're evil.

True evil are the trail lawyers like John Edwards building fortunes from fraudulent lawsuits that destroy doctors.

Gabriel Hanna said...

Mea culpa, Gabe. I went back and reread the speech Crichton and you are correct. He did not make a direct link between Drake and AGW. But his argument was that Drake was the forefather to TTAPS, which was one of the bases for AGW. His criticism was more about the politicization of science than about mathematics, so I guess it was an error on my part to bring it up in this discussion.

I agree with Crichton about the Drake equation--it was a something dreamed up to look "scientific" to get money out of Congress. I think Crichton was trying to say that climate modeling is the same KIND of thing. I don't agree that climate modeling is the same kind of thing.

Climate models do estimates of temperatures that can be compared to reality. If the model is wrong your parameters are wrong and you can try to correct them.

But there is so far no way to check the Drake equation against the number of inhabited worlds in the galaxy. Since all the parameters but one or two are totally made up, you can get any answer you want. Climate models don't do that. They can give objectively wrong answers.

Scientists don't have to be right every time to be doing science. But they do have to be saying something that can be checked against reality.

1jpb said...

Hey,

I feel compelled to apply a 'guns don't kill people, people kill people' type of argument where I'm taking the NRA view, but math is the gun, and financial calamity, rather than death, is the result.

It'd be nice to be able to figure out who was pulling the trigger on any math (as well as the other practices) that caused things to go sideways. Even if the financial corpses don't surface until years after the trigger was pulled it should (at minimum) be possible to claw back financial gains from these folks.

I think that functioning markets require this sort of accountability/incentives. It's important to make it net-unprofitable to create houses of cards. Today hiding behind math (among other things) makes it possible to take the money and run.

[Of course, the issue of leverage is a complication, because it's not hard to lose way more than you've ever possessed, so you can be stripped of everything and your counter parties could still be screwed. Theoretically this is all well and good in a free market--buyer beware and such--except for two things.

First, there is probably piss poor (if any) transparency and leverage limits for many products (over the counter, in particular), so you have no way to really judge the health of your counterparty (e.g. AIG). That ain't ideal.

Second, it's possible for entities to become large enough and/or very critically placed so that their screw-ups could potentially cascade. This could result in systematic collapse issues. Hence, the need to more carefully regulate who's doing what especially for companies that get really big and/or very critically positioned w/in the system.]

Ken Mitchell said...

The problem with derivatives is that it is difficult to figure out what the risk of the underlying asset is. That's why they were so hesitantly used for decades.

But about 8 years ago, a bright kid came up with a mathematical method of determining proxy values for the difficult-to-measure risk numbers. "Proxy" means "it will give approximately the same results".

Unfortunately, all the proxy methods he came up with devolved, in the final analysis, to a single guesstimate value, one that turned out to have practically no relationship to the underlying risk - and so all those "mortgage-backed securities" that AIG thought were AAA rated turned out to be worthless long before their calculations said that the value had declined.

I'm only paranoid on odd-numbered days, but today is the 5th, so here goes; the mathematician who developed the model, and who won the Nobel prize for it, was Chinese. He went home to China months BEFORE the market imploded. Coincidence? Or cause-and-effect? I suspect that he knew the math was bogus, played the Swedes for fools, and is now moderately wealthy on a PLA pension, having struck a blow at America that the Chinese Army could NEVER have landed.

Gabriel Hanna said...

I'm only paranoid on odd-numbered days, but today is the 5th, so here goes; the mathematician who developed the model, and who won the Nobel prize for it, was Chinese. He went home to China months BEFORE the market imploded. Coincidence? Or cause-and-effect? I suspect that he knew the math was bogus, played the Swedes for fools, and is now moderately wealthy on a PLA pension, having struck a blow at America that the Chinese Army could NEVER have landed.

Yes, I'm sure they wanted the trillions of dollars' worth of bonds they've bought over the last twenty years to be in danger of suddenly being worthless.

As the saying goes, when you owe the bank $50,000, you have a problem. When you owe the bank $50 million, the bank has a problem.

We're screwed if we can't borrow from them and they're screwed if if we can't keep up on the payments; an unhealthy relationship.

1jpb said...

GH,

They own about $400 Billion in Treasuries. If you add up (Treasury debt, U.S. agency debt, U.S. corporate debt, and U.S. equities) all of their investments in the US are probably around $750 billion--it's harder to get a good, current value for this, in 2006 the total was a bit less than $700 billion.

These are very big numbers, especially for a single entity, but they're not huge compared to the total offerings.

And, you don't need to worry about China knowing they should dump US investments, R Congressman Mark Kirk has told them not to trust our deceitful budgets. He was worried that they couldn't figure out such things for themselves.

Pogo said...

don't b hatin on mad math skillz