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Old 27.02.2009, 00:44
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The man who wrote the Doom Formula (geeky)

Nice read about one key ingredient to the current planetary crisis.
Math, money and wrong assumptions, pretty simple.

D'oh!

Paul
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Old 27.02.2009, 15:39
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Re: The man who wrote the Doom Formula (geeky)

What a mathematic misrepresentation of reality! Thanks for sharing.
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Old 27.02.2009, 15:52
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Re: The man who wrote the Doom Formula (geeky)

I always said mathematicians were dangerous.

I remember the slightly deranged look of my first year maths teacher at secondary school... that barely suppressed desire to seize control of the world, its resources and peoples, and bend them to his diabolical will.

That was only my first taste of what was soon to be revealed as a consistent feature of the personalities of mathematicians: Unbounded genius, coupled with a hunger for power, domination and milky tea unmatched by any save the most ruthless of military dictators.

From the teacher who whipped me through my O Level (grade C), to the scary gentleman I met on the tube one morning on his way to a conference on World Domination, with his disturbing habit of examining his knuckles for silverfish and licking the window of the carriage, I have come to realise that, far from being harmless, slightly eccentric academics, these people are dangerous!

Let loose on an unsuspecting world, mathematicians would reduce us all to mere number-crunching slaves, the sweat breaking on our brows as we break the little pebbles of calculus, as they stand, cackling like the crazed megalomaniacs they are, crushing chalk between their gnarled fingers, ready to choose one hapless peon or other to take home and eat, raw, at a table covered in a one-sided tablecloth.

Yes. Watch them. Some of them are OK... but most of them are on a mission of destruction and terror.

Not that I know what I'm talking about or anything...
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Old 27.02.2009, 15:58
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Re: The man who wrote the Doom Formula (geeky)

Recommended reading:

http://www.amazon.com/Fooled-Randomn...5742889&sr=8-1
http://www.amazon.com/Black-Swan-Imp...122623-5948624

both by Nassim Nicholas Taleb.
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Old 27.02.2009, 16:09
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Re: The man who wrote the Doom Formula (geeky)

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I always said mathematicians were dangerous.
The article repeats the fallacy that there is a Nobel prize in Economics. It is in fact the "Nobel Memorial Prize in Economic Sciences". In my opinion, calling Economics a science is stretching things a little. Experimental economics is a young field, but mainstream economics is not scientific.

Otherwise, the article is very good.
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Old 27.02.2009, 16:20
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Re: The man who wrote the Doom Formula (geeky)

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I remember the slightly deranged look of my first year maths teacher at secondary school... that barely suppressed desire to seize control of the world, its resources and peoples, and bend them to his diabolical will.
My secondary school mathematics teacher was the Deputy Headmaster, Mr Jackson. Affectionately known as "Fat Jack", at the end of each lesson (two double periods per week), he would hand out some problems printed on one of those alcohol-based duplication drums that pre-dated the photocopier. Sometimes still warm and fresh, I liked to smell the paper.

I got to love doing those problems. Algebraic factorisations, trigonometric identities and later, calculus. It was good training. Later, at 'A' level, my P&A and Further Maths teachers would berate me for doing too much working out in my head.
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Old 27.02.2009, 16:21
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Re: The man who wrote the Doom Formula (geeky)

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I got to love doing those problems. Algebraic factorisations, trigonometric identities and later, calculus. It was good training.
... for world domination?
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Old 27.02.2009, 17:32
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Re: The man who wrote the Doom Formula (geeky)

Yup - he's the man

Which shows BTW what happens when you couple brainpower w/ a humanistic or philosophical /moral background ... you obtain "ethical success".

In the case of this mathematician (still a brilliant mind, IMHO) the issue is that the system just took the formula as an alibi upon which a toxic industry standard was built... I just can't believe that nobody never ever paused to contemplate it's consequences.

I remember my skepticism when I was reading about the Black-Scholes formula, and of the fact that one of it's basic assumptions was the concept of "price continuity".... and I am no math genius by any standard!

Oh well.

Paul
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Old 28.02.2009, 06:59
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Re: The man who wrote the Doom Formula (geeky)

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In the case of this mathematician (still a brilliant mind, IMHO) the issue is that the system just took the formula as an alibi upon which a toxic industry standard was built... I just can't believe that nobody never ever paused to contemplate it's consequences.
As it said in the article, current problems probably stem from a fundamental misunderstanding of systemic risk. I decide to buy some AAA-rated synthetic bonds issued from a CDO. I then decide to use the cash flows from these synthetics to buy some more AAA-rated synthetics in another CDO.

As soon as I saw that this had been happening in the real world, it was quite obvious to me what was wrong. Did the "professionals" spot this? Or is there some post hoc economic mumbo-jumbo that was invoked to dispel these obvious positive feedback loops?

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I remember my skepticism when I was reading about the Black-Scholes formula, and of the fact that one of it's basic assumptions was the concept of "price continuity".... and I am no math genius by any standard!
As usual, we come across simplifying assumptions intended to make the maths more tractable. One problem with economics is that there appears to be no real incentive for cross-checking theory with reality.

These systems do not factor in a shrinking economy. Continuous, smooth growth is assumed. Makes the mathematics easier. After all, the "professionals" need to be able to operate using a spreadsheet.
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Old 28.02.2009, 07:05
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Re: The man who wrote the Doom Formula (geeky)

This seems relevant:

Quote:
Our federal government has commenced the process of trying to fill holes by inflating government Credit and obligations (by the Trillions). Depending on the reader’s perspective, I risk appearing either the master of the obvious or a rabid sensationalist. Yet the stakes associated with the current course of fiscal and monetary policy are absolutely momentous. And I am compelled to write that “if you’re not confused you don’t understand the nature of the problem.”
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Old 28.02.2009, 10:35
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Re: The man who wrote the Doom Formula (geeky)

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As it said in the article, current problems probably stem from a fundamental misunderstanding of systemic risk. I decide to buy some AAA-rated synthetic bonds issued from a CDO. I then decide to use the cash flows from these synthetics to buy some more AAA-rated synthetics in another CDO.

As soon as I saw that this had been happening in the real world, it was quite obvious to me what was wrong. Did the "professionals" spot this? Or is there some post hoc economic mumbo-jumbo that was invoked to dispel these obvious positive feedback loops?


As usual, we come across simplifying assumptions intended to make the maths more tractable. One problem with economics is that there appears to be no real incentive for cross-checking theory with reality.

These systems do not factor in a shrinking economy. Continuous, smooth growth is assumed. Makes the mathematics easier. After all, the "professionals" need to be able to operate using a spreadsheet.
Bravo! - let's look at it from the perspective of generating as much profit as we can within an increasingly compressed timeframe.
In this case, Q-o-Q profit increases dictate that beyond a given rate of growth you will be forced to take some shortcuts. Now everybody knows that shortcuts are tendentially dangerous, unless you can prove them to be otherwise.
Enter any sort of mathematical theory that will promote the shortcut, and welcome any "assumption" formulated by the seasoned professor that will cut in the bud any discussion about the what-ifs.
Add the good 'ole dollop of regulatory befuddlement and you have the perfect recipe for profits-and-collateral-damage.

Paul
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Old 28.02.2009, 10:54
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Re: The man who wrote the Doom Formula (geeky)

Hail mathematician and prophets, cos the world truly belongs to Thou. All the ****ups of predictions will herald economic doomsdays!!!
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Old 28.02.2009, 23:01
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Re: The man who wrote the Doom Formula (geeky)

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As usual, we come across simplifying assumptions intended to make the maths more tractable. One problem with economics is that there appears to be no real incentive for cross-checking theory with reality.

These systems do not factor in a shrinking economy. Continuous, smooth growth is assumed. Makes the mathematics easier. After all, the "professionals" need to be able to operate using a spreadsheet.
They don't even have that excuse. Huge computing power was used to do the simulations. But economists are REALLY stupid. Unlike physicists they seem not to worry about reality checks*. They like anaytical formulae so they can show off their great skills. But cr@p in still gives cr@p out, however brilliant your derivation. Pride goes before a fall.

* I'm not counting as physicists either string theorists or econophysicists, who have both lost it.
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Old 06.03.2009, 17:03
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Re: The man who wrote the Doom Formula (geeky)

Willem Buiter - man do I love this guy's brain - writes thus, about the nature of "markets":

http://blogs.ft.com/maverecon/2009/0...mics/#more-667

IMHO it's beyond "brilliant".
Paul
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Old 07.03.2009, 00:46
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Re: The man who wrote the Doom Formula (geeky)

Indeed, that's an excellent article. Shame that more FT readers didn't take its message to heart sooner. Being trained as an economist has, until now, implied a complete loss of common sense. What will they teach the poor things in the future, now it's all turned out to be a load of bullocks?
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Old 08.03.2009, 10:24
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Re: The man who wrote the Doom Formula (geeky)

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As it said in the article, current problems probably stem from a fundamental misunderstanding of systemic risk. I decide to buy some AAA-rated synthetic bonds issued from a CDO. I then decide to use the cash flows from these synthetics to buy some more AAA-rated synthetics in another CDO.
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They don't even have that excuse. Huge computing power was used to do the simulations. But economists are REALLY stupid. Unlike physicists they seem not to worry about reality checks

I'm a little tired of everyone pretending that this whole mess resulted from some supergeeks failing to spot a bug in this very complicated formula that made the financial world go round ... and that therefore it was impossible to see this coming.

Risk and its modeling is very well understood by the practitioners. As are the limitations of every probabilistic model of risk. Trouble is, most senior bankers (the ones who run the banks and allocate capital) are mostly clueless about this. (I'm thinking Chuck Prince.. or Dick Parsons.)

But they do - or should - know that house prices can and do go down, for extended periods. They do know that home-owners will turn the keys back in and walk away from homes submerged in negative equity - in their thousands. They also know that rating agencies can be .. well .. 'pursuaded' to award better ratings to their products. They know that if you are not going to hold a loan on your own books, you are unlikely to be very worried about the worthiness of the borrower. They also know that Robert Rubin does nothing to earn the $120 million he received from Citi, but gets it mainly because of his "connections".

This, then, is the crux of the problem; the people running the financial system - individually, and as a group - ignored the very obvious risks - the kind of risks that do not need models to measure, just common sense. And they did that for some very compelling reasons:

a) everyone was doing it.

b) there was a lot of money to be made, but it wasn't obviously going to last for ever, so it had to be done before other banks took most of it, or the game ended, whichever came first.

c) at the end, when the music stopped playing (as immortalized by the Chuck Prince), the state was going to use taxpayer money to bail them all out, so why spoil the party ???

Thousands have lost their jobs. Millions have seen their pension plans wilt and die. Do you wonder why Madoff, who has "CONFESSED" to running a $50Billion Ponzi scheme is still eating dinner at home?
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