Monday, May 19, 2008

Leverage and truth III

A recent post on 7oops7 was motivated by finding a blog related to finance. That the topic is leverage tells a lot. Two earlier posts on Truth Engineering looked at this method and how it has become a central idea (Leverage and truth, Leverage and truth II).

You see, leverage (other people's money, in short) can produce wild returns. At the same time, it can kill everyone. That gaming has been accepted at the core of finance is something to ponder and to argue about. Hopefully, a more true economy can emerge.

This reliance upon wild risks would not have even come about without advances in mathematics, modeling, and computation. All of these, and related themes, are what this blog is about. The above-mentioned blog struck a chord; for one thing, the blog author is retired and not in the game; for another, the roles played by that author were business focused.

See Remarks below for some info about the Truth Engineering motivation. This will be incorporated, at some point, back into the Mission and method. In the beginning of this blog, there was no 7oops7 or WhoseNoseKnows; these developed as a means to cover the necessary bases.


04/03/2011 -- Tis tranche and trash.

11/22/2010 -- Tranching, under the guise of securitization? Silly games.

11/02/2010 -- Two years later, the message is the same, except some changes have occurred. Of real note is that the jobless rate is high; out-housing really set up for that. Also, we need to re-look at that learned from the 'vons' guys, Ludwig and Friedrich. See Near Zero.

07/23/2009 -- After the bust and the rebound, toxic assets are still a problem due to tranche realities.

12/18/2008 -- Leveraging, in and of itself, is not bad.

10/26/2008 -- Yes, things fell apart for several reasons: fiction, leverage, and more.

05/31/2008 -- Let's suppose that a blogging viewpoint can be based upon advanced educational efforts from 30+ years ago, where there was continuing education over the years in terms of specifics of modeling improvements and of the basis for mathematical advancements.

If we go back 30+ years, the 'gaming' metaphor was not so prominent, except in theory. Also, finance was the game of the few who were on the floor of the Street and at auxiliary sites, though this is not to imply that only a small set was involved.

Crashes were still possible, as history shows. However, things were different.

How different? Here is one example. In the beginning of the 401K times, companies had experts involved with the management of the assets. And, they predicted that the rewards of participation would be nice - not stating, of course, that there was a growing use of risky methods.

So, how was this handled? Well, it was in the mid-1990s when companies started to remove themselves from responsibility of handling these bucks and threw those in the plans to the wolves. So, one cannot argue that everyone ought not to know about their monies; yet, opening up a game that is not a level playing field has an impact just like we have seen evolve (growing inequity in wealth - wolves and sharks win).

Too, leverage was more verboten than not; evidently, it came back into a much greater play than was allowed after the big Crash. Betting with other people's money has always had some moral smell; how did it get to be thought of as a nice scent? By the way, that the higher-educational institutes (who are of superior membership) play the game is by no means any moral support.

Now, supposing the above-mentioned educational foci were economics and related modeling as well as the necessary mathematical frameworks. That experience, including PhD level work in Economics, involved computation (albeit, of that time) and culminated in a Master's. So that, right there, provides a comparative basis that will be explored.

Let's say the work since then of the blogger had an increasing focus on computation as it provides the basis for management decision, for science, and for engineering that operated on all platforms to within the past three years and that covered over 40 languages and related environments. As well, let's say that there was involvement in the whole notion related to artificial means for doing the above which is at the center of issues to explore.

Given the particular demands of the work, the drive over time would be oriented toward empirical prowess, with finance playing a minor role.

So, would not one with such a world view say "what the heck happened?" upon reviewing recent problems (tranching and trenching, for one) and would attempt a quick re-education especially in those realms that have been active since Chicago opened up the door to the over-the-counter madness.

So, what do we see? A scheme has emerged where brilliant moves that are lucky make oodles of money, while, at the same time, brilliant moves that are not so lucky (and this may be a factor of timing, for instance) kill the hopes of literally millions.

Considering the first, well, perhaps we ought to give those people a playpen where they can exalt in their big pockets. Considering the second, well, we cannot build the sustainable world (as we see with problems on every front) that we humans need with such techniques.

So, that brings us to the current situation where we see people making decisions that impact everyone yet they are mostly shots-in-the-dark, it would seem to some views.

That is, economics (and finance) are both dismal sciences, though some have tried to apply physical insights to these two.

But, guess what? Even the exalted realms of physics and engineering have their problems. The basis for these can be understood partly by knowing about quasi-empirical issues.

We'll be looking further at that. Too, we'll bounce around the ideas, hopefully retaining some coherence.

Modified: 04/03/2011

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