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Archive for February, 2009

In Chasing the Dragon, I wondered aloud whether we could dampen boom-bust cycles in the financial system with an economic equivalent of a controlled burn.  Kevin suggested that “generic countercyclical policies” might work.  Underlying both mine and Kevin’s thinking is the idea that you can possibly do better (for the world as a whole) by (a) understanding the entire economic system better and (b) enacting policies which are in line with that understanding.  In contrast to these assumptions are a point of view articulated by one of the readers on a different thread:

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Debbie Maier asks us on the Upcoming Topics page to address Crohn’s Disease.

I don’t know too much about it except that it’s an autoimmune disease and has a complex, multi-causal etiology and pathology.  In my reading on autoimmune diseases in general there seems to be a direct link between latitude an incidence.   Specifically, the farther from the equator you live the more likely you are to get Crohn’s, Type 1 diabetes, rheumatoid arthritis, and so on.

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George Lakoff wrote an interesting piece on FiveThirtyEight.com yesterday called The Obama Code.  I will focus on one of the sections in particular because it articulates something I’ve suspected for a while, but I’ve never heard anyone else give credence to the notion.  Which is that one of the fundamental differences between liberals and conservatives in the U.S. is that conservatives give more weight to individual, autonomous actors and actions in their view of how the world works, and liberals tend to give more weight to systemic causation and interdependency:

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Kevin just posted about a great article by Felix Salmon in Wired.  I underlined three quotes in my reading of it:

  1. “Correlation trading has spread through the psyche of the financial markets like a highly infectious thought virus.” (Tavakoli)
  2. “…the real danger was created not because any given trader adopted it but because every trader did. In financial markets, everybody doing the same thing is the classic recipe for a bubble and inevitable bust.” (Salmon)
  3. “Co-association between securities is not measurable using correlation…. Anything that relies on correlation is charlatanism.” (Taleb)

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In this Times Online article, two psychologists and an author weigh in with their view of Twitter users as narcissistic and infantile:

The clinical psychologist Oliver James has his reservations. “Twittering stems from a lack of identity. It’s a constant update of who you are, what you are, where you are. Nobody would Twitter if they had a strong sense of identity.”

“We are the most narcissistic age ever,” agrees Dr David Lewis, a cognitive neuropsychologist and director of research based at the University of Sussex. “Using Twitter suggests a level of insecurity whereby, unless people recognise you, you cease to exist. It may stave off insecurity in the short term, but it won’t cure it.”

For Alain de Botton, author of Status Anxiety and the forthcoming The Pleasures and Sorrows of Work, Twitter represents “a way of making sure you are permanently connected to somebody and somebody is permanently connected to you, proving that you are alive. It’s like when a parent goes into a child’s room to check the child is still breathing. It is a giant baby monitor.”

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Via Tyler Cowen at Marginal Revolution, an excellent article in Wired about how one formula, embodying one assumption, catalyzed the meltdown.  I recommend you read it and ponder it.  There are many useful lessons for modeling complex systems in general.

However, I will summarize for those of you short on time.  A fundamental problem in securitization is figuring out how different components of a security are related.  Think of it as measuring how well the components are diversified.  The more independent the components, the less risk embodied in the security.  Thus AAA rated tranches of mortgage-backed securities are supposed to be very safe because the components are supposed to be highly independent.

A Chinese mathematician named David X. Li had an insight.  You don’t have to analyze the dependencies directly, you just have to observe the correlations in the market prices of the components.  Then you can compute these really tight sounding confidence intervals on the correlations of various components because you have all this market data.  Of course, the market can’t take into account what it doesn’t understand.  So you see a bunch of 25-sigma events.  At least, your model says they are 25-sigma.  Oops!

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Whenever I have a question about health matters that is too complex for an MD or academic researcher to get right, I ask Kevin.  Nobody I know has a better combination of broad-based current knowledge of the primary literature, plus a whole-system view and understanding of compex dynamics, plus the practical will and experience in living by (and updating) his conclusions.

Here are some questions I had for Kevin recently and his answers.

Rafe: Do the BPA results (such as they are) cause you concern?  Do you still use your Nalgene bottle?  Would you let your infant or child drink from a plastic bottle or sippy-cup?

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