Chandra’s coma

Recent observations from NASA’s Chandra observatory that shows the enormous scope of the Coma cluster of galaxies leave the amateurs dumfounded. The features of this epic structure, spanning over half a million light years, cannot be easily explained. The marriage of at least two giant elliptical galaxies has resulted in a structure of fantastic scale, held in shape, apparently by gravity.

The observation of such structures, ironically, raises more questions than answers. The paradoxical information loss in a black hole, sometimes explained away by the pasting on the surface, leading to the possibility of the universe being a hologram, may need to be revisited. The question is whether peeking into the past is a fruitful activity – does it provide new information or just cloud already established ignorance?

It may be time to look to the future, for the past is too dull or inexplicable with available tools.

Rajan : Intellect to spare

As I walked up to the shabby building in downtown Chicago, battling the bone chilling wind from the lake in 1992, I was looking forward to Rajan’s class. I made the trip from Hyde Park in anticipation of new information and I was never disappointed. Albeit being contemporaries at IIT, my engineering path left me distinctly ignorant of economics and he gave me more than I was bargaining for.

Freshwater economics was refreshing as it provided a robust framework, not unlike the engineering I was used to. The young professor was already showing brilliance as he systematically explained traditional finance from 6 PM to 9 PM. My first peek into research was also instructive with an empirical study into decision-making in financial markets. I attempted to soak the knowledge in with unreliable results. It sounded interesting but it was unclear if managers in firms made decisions that way. Later,I would find that managers were worse, much worse.

The theory was clear – but in practice it turned out be nearly useless. Chicago’s tendency to be enamored by deterministic models is its Achilles heel, as it argued what should be without asking why it is not so. Not many make decisions discounting cash flows but most do calculate an NPV that is swept aside by decision-makers as either irrelevant or incorrect – and for good reasons. Decisions were never that simple – neither in companies nor in the macro economy.

It will be interesting to see if he can bring back an economy in shambles, driven to hell by socialistic and ignorant policies for over five decades.

Mad, fast and dumb

Recent research from the University of Miami warns that the emergence of the “ultrafast machine ecology,” – referring to algorithmic trading - may create more market crashes. This “predatory” behavior, the author argues, is reaching a stage of instability and may need to be regulated. These arguments, based mostly on an engineering view of financial markets seem to be suffering from a lack of understanding of what markets are. Assuming that regulation is the only medicine for any symptom is problematic for many reasons.

First, let’s look at what financial markets are for. They are set up for the trading of standardized paper that represent the value of real assets. Nobody is forced to buy or sell such instruments and markets fundamentally mean that anybody is able to buy and sell those at any time and ideally at any place. The rules that govern such markets are simple – everybody is allowed to analyze publicly available information and make decisions for herself. Granted, the simple rules – equal access to information, no insider trading and no preferential access to trading are not consistently implemented – but that is a different issue.

Second, application of technology to trade is an innovation – but such innovation has not resulted in risk adjusted excess returns (alpha). Nobody has cornered all the wealth in the world yet by algorithmic trading. So in spite of the mad, fast and dumb bunch that shout from the TV screens every evening, the many supercomputers and light years of cable wrapping around the exchanges and the brilliant physicists and mathematicians who fine tune the algorithms continuously – academic studies show that none of these create alpha. Finally, the presumption that “regulation” will solve these “problems” implicitly assumes that the regulators have perfect information to make the optimal rules. If the last decade is any indication, one cannot imagine regulators are that smart.

Analysis of financial markets and trading behavior based on engineering rules is unlikely to provide any insights. Further, assuming that regulation is needed over the application of emerging technologies for trading is wrong, philosophically and practically. It would be a lot better if regulators focus on implementing the rules that already exist consistently and sending the offenders to jail quickly.

An economic loss to society

The passing of Ronald Coase makes us poorer in our ability to conceptualize complex problems that affect society at large and solve them elegantly. He made two invaluable leaps in economics, while teaching law at the University of Chicago and those insights stood the test of time. “The nature of the firm",” survived through industrial revolution into information revolution providing a simple and complete framework to analyze and understand scale and scope of firms. He will repeat it again in “the problem of social cost,” with a clear articulation of the cost of blind government intervention, with normative prescriptions for auctions and allocations.

The elegance of these observations was astonishing and they left mere mortals, yearning for intellectual stimulation. It has influenced a wave of innovation in economic thinking under the umbrella of Chicago school, where frameworks based on a set of principles yielded tools with broad applications to every aspect of society. This ability to solve problems top-down, uncluttered by data and anecdotes, is a skill that is waning. In the contemporary world of “big noise,” where academics and practioners scramble to create and prove hypotheses, such insights are very rare.

A true economic loss to society - perhaps educators and policy-makers may take a moment to look back and see the brilliance.

Dropped call

As the world’s largest democracy attempt to grapple with the problems of its own creation, one has to wonder if the last decade was yet another failed start. From its recent independent beginnings, its incompetent leaders consistently made bad policies – from soft socialism to fully planned societies, with the hope that failed policies elsewhere will work in India. It should be clear by now, that they do not.

Three primary vectors have always held the country back. First, its political elite, with compassion clearly worn on the long sleeves of their home made garments, have always been corrupt – top down. Such a corrupt system simply cannot make optimal policies and a country that claims to be a democracy goes to the poll, mesmerized by a few last names as if it is in some sort of hypnotic trance, and keep electing the same corrupt and incompetent bunch. And second, the one-sided education handed out to the politicians from a few choice institutions in Europe, have sufficiently brain washed even those who may have wanted to do something good. And, finally – a disconnected set of kingdoms, packed into a country for the convenience of the World, still hoards endemic discrimination across classes, regions and sexes.

Central planning does not work, markets do. This simple idea is yet to penetrate those technocrats in charge, still burning the midnight oil to optimize resource allocation and to engineer optimal growth, as if they are the only ones who know how to drive a ship with over 1 billion people to their certain heavenly destiny. The basic idea that past performance is no indication of the future has never been explained to the entire country, that seems to cling to its illustrious past, as if godly intervention will return it to its past glory. It will not.

The prescriptions are simple – open markets, trade freely, shed cronyism, punish corruption and implement a true democracy. Opening markets means clear and consistent implementation of rules – those regulating market failures such as monopolies and those implementing fair taxation and minimal subsidies. Trading freely means it has to get stronger in areas of comparative advantages and not drive its educated populace to industries of fleeting cost advantages, afforded by a protected currency. Shedding cronyism means that it creates organizations that compete on merit and intellectual property and not those manufacturing profits by connections and handouts. Punishing corruption means that it has to get tougher on white collar crime and use powerful disincentives to remove this issue that is eating into its core. And, implementing a true democracy means that the system is able to understand available choices and elect representatives who are the best leaders, irrespective of where they come from and what their last names are.

It is a long shot.

Buggy OS

The rise of humans from available alternative biological systems has been ably aided by a robust Operating System (OS) design. The hardware, sported by the species, was never a head-turner, showing fragility, clumsiness and lack of power to move fast, climb high or lift heavy. However, the installed OS, compensated for these deficiencies, by allowing efficient use of memory, learning and pattern finding. However, on the downside, the OS appears buggy, thanks to ad-hoc evolutionary processes and random mutations.

For starters, at the core, logic processing appears volatile and seems to be prone to errors. To make matters worse, built in learning and error-correction facilities can and does go haywire, producing unexpected and unreliable outcomes. Since these issues are seen across the entire cross-section of humans, they can only be attributed to the OS itself and not the acquired applications. Early adoption of the next generation OS, perhaps thrust into the market by nature without sufficient testing, seems to have provided an edge early but the tight coupling of high level (but rather premature functionality) ended up in a less robust long-term design.

Humans may be sufficiently limited by a buggy and outdated OS. Newer and more powerful applications – education, culture and art - are unlikely to make a fundamental difference, if this is the case.

Teleported

Recent news that physicists at ETH-Zurich have successfully teleported a large number of qbits, albeit over a short distance, is welcome news for practical quantum computing and telecommunications. It appears that we are fast approaching a possible jump in the application of science, with a theoretical foundation laid down nearly a century ago – something that engineers and technologists have been waiting for many decades. Teleportation and quantum computing have the highest potential to transform the human psyche, currently lost in meaningless wars and less meaningful experiments.

Incrementalism, a disease of modern human societies, has been eating into the potential of humans, substantially lowered by ignorance, conformation, racism and politics. Only a leap in technology that can flatten the ego, wealth and timidity, has any chance of transforming the status-quo. This will not come easy as conventional education and contemporary industry favor less risky mediocrity – most propped up by connections, campaign contributions and charitable donations with tax-breaks. In this toxic pool of influence and 15-minute fame on TED talks, humanity has been held hostage by the blind and the dumb.

Only a leap in technology has any chance of freeing the mind and visualizing the future.

The puzzle

Who solves the puzzle of life, who tries and retries, who fails and starts all over again? Who understands and then forgets? Who begins and ends? Who thinks and dreams? Who starts and then stops, abruptly? Who catches the inevitable and drops it later? Who knows and is then left with the inexplicable? Who predicts and then is challenged by the unpredictable? Who sees and then is blinded by the light? Who listens and then waits for the inaudible?

Who faces adversity and grows from it? Who sees further than what can be seen? Who hears the sound of future and dreams again? Who understands the present and fight for the future? Who knows the unknowable? Who smiles and waits for the unexpected fortune? Who takes a turn and tumbles higher? Who waits for a better tomorrow and forgets a worse yesterday?

It is an interesting puzzle.