Archive for April, 2008

pop finance


Tweet The RSA Lecture by Brooke Harrington last Thursday was a great deal of fun. In a few weeks the RSA will put up a full video on their soon-to-be relaunched website, so when I see that I’ll publish the link. As I mentioned before, Brooke’s work on diverse perspectives overlaps somewhat with that of […]

Brown Bear, Brown Bear, What Do You See?I was thinking about the geophysicist Didier Sornette the other day. The reason being that (in my counter-factual way) I wondered what the world would look like if research (or a prediction, or an analysis) by people like Sornette were avidly watched — front-page news even. And then I remembered that I’d already written that post a long time ago, in my first blog. Like the other Yogi, it was déjà vu all over again.

Every day that I wake up to more bad news about the credit crunch, I feel slightly nauseated. It’s a bit like when you’re on a boat and the weather is closing in. Or the point that night falls and you’re out of sight of land. Or both. You’ve been there before, but your night vision needs to kick in. Time to hit the chart table, fix your position, re-evaluate how much sail you are carrying. A combination of nerves and trepidation focuses the mind. The concern is not so much for yourself, but for others. You’re in a complex system. Your fear must not guide you. You need to be confident, but careful. You may be master of the ship, but not the elements nor the other seafarers. A wetted finger is not good enough to figure out which way the wind’s really blowing. You need to calculate and apply learned heuristics, the wisdom of ages, one of which is “don’t rely on electronics”.

Finance being the bad-news-of-the-day for months on end is something I’ve never experienced before. I cut my teeth as a journalist during the extended bear market in oil that ended with the First Gulf War. The build-up was virtually a private affair for those of us who were specialists; no-one cared that much that the economy was benefiting from lower oil prices. The inflection point, when it came, was very public and geopolitical. Its consequences are still being worked out. I certainly did not see the Iraqi invasion of Kuwait coming; I was convinced that Saddam Hussein was just posturing. And yet, in retrospect, I vividly remember a conversation I’d had with a wise soul from the Middle East who showed an inexplicable agitation a few weeks before the invasion that you might characterise in the same way that animals are said to become jumpy before an earthquake. What was upsetting him was that he could read the runes whereas his colleagues could not. I was 25, still working below decks, lucky that he would take my call, and lacked the experience to fully engage with what was bothering him. The build-up to the credit crunch has been different and in some ways has already engaged the entire economically active population in psychological and also very concrete ways. The fall-out looks like being just as comprehensive.

It would be helpful if one could feel some sense of vindication, but it just ain’t happening. When you see someone driving recklessly, you don’t know whether it will end in a crash; that you are on the same bit of road — to mix metaphors — means you are inescapably in the same boat.

Getting it wrong is the sine qua non of economic forecasting. As the Stand-up Economist (whose gig on Saturday night at Oxford’s OFS I’ll be attending), says:-

Micro-economists are people who are wrong about specific things, and macro-economists are wrong about things in general … macro-economists have successfully predicted 9 out of the last 5 recessions.

Weather forecasters are often pilloried for getting it wrong. But, of all specialists, behavioural studies have revealed that they are the least confident in their own predictions. Economists and stock analysts, by contrast, are the most cocksure. And yet, the same people who failed consistently to identify the scale of the danger are also asked now to explain what happened. Nice work if you can get it.

Predicting markets is a notoriously tricky business, arguably foolish, and the great criticism that bulls usually level at those bears predicting bubble-bursts is that “even a stopped clock is right twice a day”. But what’s the inverse, exactly? Can’t the same criticism be levelled at the bulls? — precisely how “right” are they the majority of the time? And what’s the consequence of the bulls being very wrong just the once? Think back to Joanna Lumley playing Purdey [sigh] in The New Avengers in the 1970s, having to shoot her way through a kind of paintball training course. She was pleased that she’d scored 99%, marked by a single red dot that represented a bullet. Her sidekick, Gambit, pointed out it’s the 1% that kills you.

But I take the stopped clock thing seriously as a criticism of scepticism because it disparagingly suggests inaction and risk-aversion — who would want to be Chicken-Licken, after all? Certainly not the Emperor With No Clothes — and it cropped up in a piece of newspaper coverage about the credit crunch recently. My James Cramer reference the other day bears some reflection too. He would maintain, I believe, that his spiel is aimed at those with spare cash to gamble. But I think, in truth, he has been a cheer-leader for an industry that has been sailing toward the storm carrying every last scrap of sail in the locker.

But then, there is a problem with consistency. It’s generally over-rated. The ability to change one’s mind without shame should be more highly prized. As should be the ability to accept, without regret, that things may turn out better than one fears. Many a fisherman decides to stay in port only to find his catch and income is lost to a storm that doesn’t quite descend. He takes risks for a living, but I’m sure has learned too that it’s better to be wise before the event when so much is at stake. By contrast, a lifeboat man will put to sea in all weathers. But you’re taught at navigation school that he’s not to be confused with the AA man who will come and fill up your tank if you run out of petrol; he should only need to put to sea for the real black swans, not your incompetence. He won’t make that judgement, of course, but will respond to your Mayday anyway.

And so I was looking back at my own adventures as a Jeremiah, thinking about questions of timing. And that’s when I remembered that old post from my earlier blog about Didier Sornette. Sornette has long been on my reading list and in my view is one of the larger anti-heroes of modern finance that comprise my anti-library of unread books. He fits into that category where the Econophysics blog sits. The jacket of his book on markets, like Mandelbrot’s, shows fractal snail-shell patterns: you get the picture. I must buy it some day.

But I did read one or two of Sornette’s papers when they came out. I found them compelling, although the maths was completely impenetrable for me. It would be hard to find a more serious analysis of how vulnerable the markets had become at that point. That was the time to take in sail, batten down the hatches, and prepare (if necessary) to trail warps, spill oil on troubled waters, consider the possibility of removing all sail — what ocean yachtsmen call “bare poles” sailing, in the case of the perfect storm. In finance, it would mean de-leveraging early, not now.

At a very small talk I attended with Nassim Taleb in London way back in 2004, Nassim was asked by a London quant whether he thought the UK property market was in a bubble. Typical of Nassim at that time, I believe, he was confessing to not reading the newspapers so had no idea. The quant persisted that Sornette thought UK housing was in a bubble. Taleb’s response, if I recall correctly was this: “If Sornette thinks there is a bubble, then there is a bubble”. These are things I tend to remember.

Interesting, because Alan Greenspan was defending himself in the financial press the other day — and has done many times before — saying that it’s not possible to identify when markets are in bubbles. It’s a view that the prediction industry likes to repeat. But my understanding of Sornette’s science is that this is just not correct; you can identify bubble conditions from within trading price data using the same approach a seismologist does to gauge the susceptibility of the fault lines between tectonic plates to a sudden shift. I think the mathematical model he applied to the housing markets goes by the name of “log-periodic oscillations”. Predicting when the quake will occur, and with what magnitude, is the problem. That is still a work in progress, but one guesses that Sornette will be at the forefront of it as it unfolds.

Anyway, this is part of what I posted way back in June 2005 in my first, rather arch attempt at blogging called “Not that I’m Biased”:

If one is looking for a truly disinterested expert, and one with the latest knowledge on bubbles, we recommend geophysicist Didier Sornette. The mathematics of Sornette’s discipline is well beyond the lay reader. The essence of it is to show how complex systems work. He is an expert in the study of earthquakes. Stock market and housing crashes are the financial equivalents.

When people think about housing they don’t tend to think of a complex system. They will first think about their own house, those in the neighbourhood, and then a national price index recently described in the press which provides a sense of overall direction. They will probably then invoke a sense of someone who made a killing on property, or whom they saw renovate and sell at a profit on some TV show. From this they will make decisions to buy or sell. There is a strong element of imitation in what motivates them.

These behaviours are definitely part of what makes up a market, but Sornette’s specialism is in analysing them mathematically through study of the price activity of markets. Sornette’s last paper on housing demonstrated that the UK housing market would peak late 2003 or mid 2004, and then be susceptible to a crash. At that time, he did not characterise the US market as a bubble, but in his latest paper he shows that, two years on, the US is in a bubble.

A bubble with a crash in the UK will be one thing, but a serious reversal in the US would be very damaging. It remains to be hoped that the pump priming that occurred in 2000-2001 has not created a greater problem from which the world economy will suffer a more severe hangover.

It is no doubt a symptom of our collective aversion and lack of understanding of mathematics that Sornette’s work is not major news.

When the Asian tsunami hit, there was much hand-wringing about why the cooperation required to create an early warning system had failed. And yet, we know that events of that size are indeed extremely rare black swans, even though they appear to live in the folk memory of some of the coast-dwellers on Africa’s eastern seaboard. Financial shocks are coming with increasing frequency, but financial institutions, governments and the regulatory authorities — let alone the critical faculties of the media, — do not seem to be prioritising really listening to the complexity folks, despite the increasing volumes of accessible literature they have been generating in the past several years. It’s something I discussed yesterday with Brooke Harrington from the Max Planck Institute after her talk at the RSA. But that may have to wait for another post.

Photo credit: BrittneyBush

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Tweet Brooke Harrington of the Max Planck Institute will be speaking at the RSA on Thursday 17th April, 1 pm, about the subject of her new book Pop Finance. Anyone hearing the news reported this morning about hormonal excess leading to bad risk-taking in trading will be interested in this from the synopsis of Brooke’s […]

It had been my intention to take the blog on vacation with me to see what — in a very restrictive sense — ubiquitous computing might feel like. And to see whether a travelogue should ever form part of this miscellany. I bought a 3G dongle (not from a spam email…) and carried more digital and optical equipment than you can point a telescope at. The only things lacking were the skill to use it all and a guarantee of internet connection.

The immediate consequence of an absence of wireless reception beside the remote estuary where we perched for the duration of last week was that for the first little while there was not much to do but stand still. This was a good thing, but as the Knackered family has not stood still for well more than six months of rolling crisis, it was only natural that some of the tangled thoughts of grief found an opportunity to unwind and, for those few early days, occasionally overwhelm.

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Road to Nancenoy

But the Cornish peninsula is nothing if not varied. And would a geographer pick an argument with me if I said it may be one of the most fractal landscapes on earth? — whether one is talking about the trees, the rugged coastline, the self-similarities of those flooded river-valley creeks, or the surf as the Gulf Stream makes landfall.

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Kynance Cove

Within barely a few minutes’ drive the contrasts can be extraordinary. We’re quite happy with beaches out of season and in most weathers, and now — with the necessary neoprene — the option of body-boarding (and, someday soon, surfing) before supper presents itself.

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Kynance Cove

In true amateur form, much of our expedition was inspired by reading Simon Barnes’ book, How to be a Bad Birdwatcher. And with a much diminished self-consciousness, this point-and-shoot ethos carried us through birdwatching itself, astronomy, body-boarding, rowing our own boat up the muddy creek (with paddles, thankfully), and much lower-maintenance-than-usual holiday gastronomy (pasties and fish pies from Gear Farm in St Martin).

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Serpentine rock at Kynance (on the Lizard peninsula)


Helford River



Photo credits: stonechat, Andrew Pescod; aerial view of Helford River, Google ;the rest, Knackered Hack

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bike psyche


Great Britain again dominated the World Track Cycling Championship at the Manchester Velodrome this weekend. I watched only briefly, taking a break from the Twitter stream to see an interview with team psychologist Steve Peters.

Peters is something of a phenomenon, if not a genius; Undergraduate Dean of Sheffield University, much in demand in a variety of UK sports, he’s a sometime visitor to the England rugby training camp here at the Sports Training Village in Bath — which, by the way, seemed to be a secret he did not want told on national TV.

Vicky Pendleton and Shanaze Reade

But most interestingly, perhaps, he is a former forensic psychologist, who spent many years working in Rampton Secure Hospital, exemplifying our own belief here at Knackered Towers that the study of that which is broken yields useful lessons if you want to succeed.

If that were not enough, the unassuming Dr Peters is a highly competitive Masters M50 sprint champion (that’s running fast for old folks). His training regimen, discussed here, would likely pass muster with that most eminent of critical thinkers on all things sporty, Professor Art de Vany. It’s very unorthodox.

Now, recently I’ve been tempted to comment on Reuters’ CEO Tom Glocer’s blog, but held back. Tom was talking about national character, negativity and optimism. If I understood his point correctly, he was saying that if only you think positively, good things will follow (that was the post title in any event). He referred to the need for an optimistic outlook, drawing on the athletic coach and the self-talking salesman as examples.

You can’t really argue with that. Except that, as Ed Smith painted in his book, the truth is a lot less certain and requires a more subjunctive qualification: think positively and good things might happen. The corollary being, think negatively and it ain’t gonna happen, not now, not never. And that’s more my own experience; as Woody Allen would have it, 80 pct of life is about turning up.

But, in my own corporate experience, positivity and negativity tend to be understood in very binary terms. And because of that, useful information about how products could be improved (or an organization better configured) does not flow freely up the ranks. With tools like wikis, of course, it now flows much more freely across reporting lines, if managers take the step to encourage their use. And it flows pretty freely among the folks who stand outside the office smoking, but let’s not go there.

Returning to individual and team confidence, what Peters had to say was quite brief but highly nuanced. What was clear was that positive thinking, and the psychological tools needed to create it, were not straightforward: they were specific to the individual, but also situational depending on the person, whether a team was involved, the type of event, the coach, championship and location. What mattered was educating athletes into how their minds worked, what trigger points led to negative emotions, and how those could be turned around.

Vicky Pendleton, the diminutive and self-confessed “girly girl” who won two gold medals and a silver over the weekend, had lacked confidence, according to Peters, when he started working with her. But he described how she had been able to train herself to turn her mood around within 10 minutes of a setback.

Peters explained how large events, such as the Olympics, create a huge range of distractions (from transport to security) each of which will affect each athlete differently, and for which all need to be prepared if they are to secure their own best chance of success.

What makes sport an interesting crucible through which to understand performance these days is that there is just so much of it, it is so professional, and there is so much research (physiological, neurological, psychological) . And it produces characters like Peters, Martin O’Neil and Ed Smith.

Sportsmen and women are dealing with the most intense of situations in which their vulnerabilities are very public, even on a day-to-day basis in training. They have a lot of complex information to understand, and failure to self-manage can quickly lead to injury, loss of form, loss of a place on the team, loss of funding, denial of access to quality coaching, etc. And that ignores the consequence of a random fall or illness at a critical moment in a training schedule. This cascade gathers its own momentum because at each stage the athlete finds him or herself increasingly isolated, so the reversal becomes commensurately difficult to effect.

It should not be forgotten, and if you have ever trained really hard you will know, that resulting sharp mood swings can affect motivations and relationships outside of the sport as the body and mind adapt and recover from the process of extreme exertion. Indeed, a protracted bad mood is a sign of over-training syndrome which is very hard to pinpoint in oneself until it’s too late, and takes a surprisingly long time to recover from.

There don’t seem to be enough Steve Peters to go round sport, let alone international business. I wonder how we should go about making more?

Photo: British Cycling

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