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quotes ranting

Of black swans, flying pigs and the financial crisis

The Guardian has a great article [theguardian.com] by Ian Stewart about the mathematical basis (or lack thereof) of the derivatives market explosion which lead to the financial meltdown when the sub-prime mortgage market collapsed.

As with most things that eventually come crashing down spectacularly we should have seen it coming… between the hubris:

[the equation] allowed derivatives to become commodities that could be traded in their own right. The financial sector called it the Midas Formula and saw it as a recipe for making everything turn to gold. But the markets forgot how the story of King Midas ended.

Ian Stewart, The mathematical equation that caused the banks to crash, from The Guardian

and the eye watering numbers:

[the equation] underpinned massive economic growth. By 2007, the international financial system was trading derivatives valued at one quadrillion dollars per year. This is 10 times the total worth, adjusted for inflation, of all products made by the world’s manufacturing industries over the last century.

All that because of the abuse of mathematics by people who don’t understand math. When people who do understand (scientists) math abuse it you end up with nuclear WMDs. When people who don’t understand it (traders) abuse it you end up with financial WMDs.

To quote:

[M]arket traders copy other market traders. Virtually every financial crisis in the last century has been pushed over the edge by the herd instinct. It makes everything go belly-up at the same time. If engineers took that attitude, and one bridge in the world fell down, so would all the others.

Monkey see; monkey do. My favorite quote in the article has nothing to do with finance or math:

In ancient times, all known swans were white and “black swan” was widely used in the same way we now refer to a flying pig. But in 1697, the Dutch explorer Willem de Vlamingh found masses of black swans on what became known as the Swan River in Australia. So the phrase now refers to an assumption that appears to be grounded in fact, but might at any moment turn out to be wildly mistaken.

That’s a thing I didn’t know.

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quotes

We are all fish…

[A] new study argues that for a democracy to function at all, you need lots of ignorant people blindly siding with the majority.

There needs to be just enough people who know anything about the issues to act as leaders for everyone else, but the majority disintegrates if there are too many viewpoints pulling in different directions.

[The researchers] looked at golden shiners, a species that is naturally attracted to the color yellow. The researchers took a bunch of these fish and trained most of them to act against instinct and swim towards a blue target, while the rest were trained to follow their natural preference and go for a yellow target.

When the researchers placed just these two groups together, the smaller group of yellow-seeking fish was able to dominate the blue-seeking fish, making them all swim to the yellow target 80% of the time. This is because their natural instinct gave them a stronger desire go after the yellow target than their counterparts. But then, when fish with no prior conditioning were added to the mix, the influence of the yellow-seeking fish quickly dropped away, and the initial, blue-seeking majority regained control.

From Democracy needs ignorant people, says science [io9.com]
 

The article is a summary of a paper in Science [sciencemag.org]… now go read the article about how ignorant fish are required for an enlightened fish democracy to work. Before I plagiarise the whole damn article.

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quotes

Pump and dump is a not a good business plan for consumers

[F]ree web services are not like free software. If your free software project suddenly gets popular, you gain resources: testers, developers and people willing to pitch in. If your free website takes off, you lose resources. Your time is spent firefighting and your money all goes to the nice people at Linode.

Maciej, from Don’t be a Free User [pinborad.in] blog post at Pinboard.
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quotes

Neurotic Guess

Neurosis can be the sign of a decent guess

Prof. Tom Murphy, from Wind Fights Solar; Triangle Wins [physics.ucsd.edu] a post on his blog; Do The Math

Bonus points for spotting the reference to They Might Be Giants song Particle Man. Wonder if the author knows it from the album or from the Animaniacs episode?

Categories
quotes ranting

How stupid is US corporate tax law?

Thirty corporations paid less than nothing in aggregate federal income taxes over the entire 2008-10 period. These companies, whose pretax U.S. profits totaled $160 billion over the three years, included: Pepco Holdings (–57.6% tax rate), General Electric (–45.3%), DuPont (–3.4%), Verizon (–2.9%), Boeing (–1.8%), Wells Fargo (–1.4%) and Honeywell (–0.7%).

DuPont and Monsanto both produce chemicals. But over the 2008-10 period, Monsanto paid 22 percent of its profits in U.S. corporate income taxes, while DuPont actually paid a negative tax rate of –3.4 percent.

Department store chain Macy’s paid a three-year rate of 12.1 percent, while competing chain Nordstrom’s paid 37.1 percent.

In computer technology, Hewlett-Packard paid 3.7 of its three-year U.S. profits in federal income taxes, while Texas Instruments paid 33.5 percent.

FedEx paid 0.9 percent over three years, while its competitor United Parcel Service paid 24.1 percent.

Robert S. McIntyre, Matthew Gardner, Rebecca J. Wilkins and Richard Phillips. Taken from Corporate Taxpayers & Corporate Tax Dodgers, 2008-2010

Stop having a tax or find some way of making companies pay it.