The Cheapest Substance in the World

Humility:



Tim Harford on error, the God complex, and making "good mistakes." Should be required viewing for politicians, scientists, economists, and every other subject matter "expert" out there.

Now I'm not trying to deliver a nihilistic message here. I'm not trying to say we can't solve complicated problems in a complicated world. We clearly can. But the way we solve them is with humility, to abandon the God complex and to actually use a problem solving technique that works. And we have a problem solving technique that works.

Now, you show me a successful complex system, and I will show you a system that has evolved through trial and error. (08:11)

There will be a quiz later.

(via Paul Kedrosky)

© 2011 The Epicurean Dealmaker. All rights reserved.

In Praise of the Outsider

I think the problem is not to find the best or most efficient method to proceed to a discovery, but to find any method at all. Physical reasoning does help some people to generate suggestions as to how the unknown may be related to the known. Theories of the known, which are described by different physical ideas may be equivalent in all their predictions and are hence scientifically indistinguishable. However, they are not psychologically identical when trying to move from that base into the unknown. For different views suggest different kinds of modifications which might be made and hence are not equivalent in the hypotheses one generates from them in one's attempt to understand what is not yet understood. I, therefore, think that a good theoretical physicist today might find it useful to have a wide range of physical viewpoints and mathematical expressions of the same theory (for example, of quantum electrodynamics) available to him. This may be asking too much of one man. Then new students should as a class have this. If every individual student follows the same current fashion in expressing and thinking about electrodynamics or field theory, then the variety of hypotheses being generated to understand strong interactions, say, is limited. Perhaps rightly so, for possibly the chance is high that the truth lies in the fashionable direction. But, on the off-chance that it is in another direction—a direction obvious from an unfashionable view of field theory—who will find it? Only someone who has sacrificed himself by teaching himself quantum electrodynamics from a peculiar and unusual point of view; one that he may have to invent for himself. I say sacrificed himself because he most likely will get nothing from it, because the truth may lie in another direction, perhaps even the fashionable one.

But, if my own experience is any guide, the sacrifice is really not great because if the peculiar viewpoint taken is truly experimentally equivalent to the usual in the realm of the known there is always a range of applications and problems in this realm for which the special viewpoint gives one a special power and clarity of thought, which is valuable in itself. Furthermore, in the search for new laws, you always have the psychological excitement of feeling that possibly nobody has yet thought of the crazy possibility you are looking at right now.

— Richard P. Feynman, The Development of the Space-Time View of Quantum Electrodynamics, Nobel Prize Lecture, December 1965

Tim Harford wrote a worrying piece in the Financial Times this weekend, entitled "Why there will never be another Da Vinci." His premise, which he finds plenty of data to support, is that human knowledge is becoming so vast and deep that it is likely impossible for any one human being to have a broad, multidisciplinary understanding of any of it. Breadth implies shallowness, and depth requires a level of specialization heretofore unseen in human history. Scientific literature is now produced by teams of researchers, all of whom are older and have had to study longer and deeper to contribute important work than their predecessors. Barring another Dark Age, he writes, "there will never be another Da Vinci."

He believes we can solve the problem of continued innovation via proper attention to organization, funding the big, expensive projects under government supervision and encouraging more radical innovation under the aegis of for-profit venture capital. But this scheme omits the important objective of funding ongoing fundamental research outside the mainstream of accepted science, which is something neither big scientific bureaucracies nor financially motivated enterprises are particularly good at doing. Perhaps this can be done via hands-off funding of truly independent basic research efforts by government—subject to the normal risks such potentially disruptive, politically unsponsored efforts face in any society—or via private foundations. Certainly one should take some measure of comfort that major research universities have, to date, fostered just this sort of independent foundational research. Let us hope they can preserve this deeply uneconomic—yet profoundly important—activity in an age when more and more people within and without academia question the value and purpose of its mission.

* * *

On the one hand, one can worry that the industrialization of science—like factory workers on an assembly line—raises the serious risk that no-one involved will have the knowledge or the wisdom to challenge the premises upon which the science factory works. For never forget that the fundamental mission of science is to question. The less an individual scientist knows about the factory or the materials and tools she is working with, the less she will be able to challenge what she is doing and how. Notwithstanding their stated missions, it is well known that—organizationally at least—bureaucracies exist primarily to defend, expand, and replicate themselves. Bureaucratizing existing scientific paradigms—like the tens of billions being spent at CERN to test the Standard Model of particle physics—only tends to ensure they are that much more difficult to challenge and overthrow. If it is to fulfill its social function, science cannot afford to become sclerotic. If science does not carry an institutional mandate to both allow and encourage challenging it at the root, it is no longer science. It is engineering, or product development.

On the other hand, however, one can see an upside to the dwindling breadth of knowledge of individual scientists. For ignorance of what is "known for a fact," and "how things are done" can be extremely liberating for an independent thinker. Richard Feynman accomplished as much as he did in large part because he refused to stand upon the shoulders of his predecessors and colleagues. He learned for himself, and developed truly innovative ways of thinking about difficult problems because he started from first principles. Of course, Richard Feynmann was a bloody genius, and he had the mental tools to build from scratch what 99.8% of his colleagues could only begin to take on faith and precedent.

But let's not kid ourselves. The great leaps of scientific discovery and innovation have almost always sprung from the fevered brow of some Prometheus. The rest of us—smart as we may objectively be—are simply ants in the anthill, building, foraging, fighting, dying. Our passage, if we are lucky, is marked by small improvements to the existing structure of human knowledge and society. It takes the fundamentally alien intelligence of a genius to see things we cannot see, to kick over the anthill we have devoted our lives to because it is in the wrong place.

So I cannot bemoan, with Mr. Harford, that "Wall Street and the City find it so easy to recruit disaffected young physicists." The ones who trade careers as workers in the scientific anthill for more lucrative and less demanding ones programming Gaussian copulas in the financial one will not be missed. Nor will the ones who decamp to Silicon Valley to design virtual farm animals.

Factory workers are a dime a dozen, and genius is not a numbers game.

Talent hits a target no one else can hit; Genius hits a target no one else can see.

— Arthur Schopenhauer

© 2011 The Epicurean Dealmaker. All rights reserved.

The Heart of a Woman

What lively lad most pleasured me
Of all that with me lay?
I answer that I gave my soul
And loved in misery,
But had great pleasure with a lad
That I loved bodily.

Flinging from his arms I laughed
To think his passion such
He fancied that I gave a soul
Did but our bodies touch,
And laughed upon his breast to think
Beast gave beast as much.

I gave what other women gave
That stepped out of their clothes,
But when this soul, its body off,
Naked to naked goes,
He it has found shall find therein
What none other knows,

And give his own and take his own
And rule in his own right;
And though it loved in misery
Close and cling so tight,
There's not a bird of day that dare
Extinguish that delight.

— W.B. Yeats, "A Last Confession"

Muse indeed. Enjoy your holiday weekend.


© 2011 The Epicurean Dealmaker. All rights reserved.

The Blind Men and the Elephant

A HINDOO FABLE.

I.

IT was six men of Indostan
To learning much inclined,
Who went to see the Elephant
(Though all of them were blind),
That each by observation
Might satisfy his mind.

II.

The First approached the Elephant,
And happening to fall
Against his broad and sturdy side,
At once began to bawl:
"God bless me!—but the Elephant
Is very like a wall!"

III.

The Second, feeling of the tusk,
Cried:"Ho!—what have we here
So very round and smooth and sharp?
To me 't is mighty clear
This wonder of an Elephant
Is very like a spear!"

IV.

The Third approached the animal,
And happening to take
The squirming trunk within his hands,
Thus boldly up and spake:
"I see," quoth he, "the Elephant
Is very like a snake!"

V.

The Fourth reached out his eager hand,
And felt about the knee.
"What most this wondrous beast is like
Is mighty plain," quoth he;
"'T is clear enough the Elephant
Is very like a tree!"

VI.

The Fifth, who chanced to touch the ear,
Said: "E'en the blindest man
Can tell what this resembles most;
Deny the fact who can,
This marvel of an Elephant
Is very like a fan!"

VII.

The Sixth no sooner had begun
About the beast to grope,
Than, seizing on the swinging tail
That fell within his scope,
"I see," quoth he, "the Elephant
Is very like a rope!"

VIII.

And so these men of Indostan
Disputed loud and long,
Each in his own opinion
Exceeding stiff and strong,
Though each was partly in the right,
And all were in the wrong!

MORAL.

So, oft in theologic wars
The disputants, I ween,
Rail on in utter ignorance
Of what each other mean,
And prate about an Elephant
Not one of them has seen!

— John Godfrey Saxe, The Blind Men and the Elephant

Beware, O Dearly Beloved, those endlessly multiplying pundits who propose single-method solutions to the problem of financial reform. "The" answer is not minimum equity capital requirements, liquidity controls, return on equity caps, compensation reform, leverage or size limits, portfolio risk monitoring, or even slipping saltpeter into the lattes of testosterone-addled traders so they act more like risk-averse women. The answer—pace the sexual lobotomization of traders which many in society may wish for other reasons—is likely to be a combination of all of those reforms (and more), implemented in a dynamic and flexible regulatory structure which can respond and adapt to changing conditions.

For the fundamental truth which most commentators continue to overlook is that the global financial system is much more like our illustrative friend Panic Pete than an elephant. When you squeeze Mr. Pete in one spot, the squishy gel inside his rubbery body causes his other parts to bulge out. Squeeze him in those newly bulging areas, and he will return to his original form or bulge unexpectedly in new directions. Why? Because the gel inside of him is incompressible. Squeezing the flexible outer skin does not cause the toy to shrink. It just forces it into a new configuration. Likewise, the fundamental quantity in the global financial system which we are concerned with, and which we properly wish to control, is risk. But, given any specific level of return, risk is incompressible.

If you want to achieve a particular return, you necessarily assume a commensurate and ineluctable level of risk, whether the instrument of your investment is a single stock, a capital project, an individual business operation, an asset class, or indeed an entire economy. And what does return mean in the context of an economy? It means growth, increase in productivity, and real economic returns in addition to secondary (or even potentially illusory) investment returns. Investing in a business, an industry, or an economy is risky. There is no guarantee you will achieve your aims or desired returns, whatever those returns may be. There are no guarantees, period.

* * *

So part of the conversation we continue not to have in the public domain is what kind of returns—in the broadest sense—we desire for our economy and society, and therefore what level of risk we are willing to tolerate. Sure, we could turn the entire banking industry into a regulated utility, with mandated minimum equity levels, maximum allowed returns on equity, and limits on institutional size and interconnectedness (assuming we can understand, monitor, and control such parameters, which may be a slightly heroic assumption). But what knock-on effects would that have on investors, on businesses in search of risk capital for their growth projects, on consumers, and on the economy at large? Dampen the incentives and ability of financial intermediaries to originate, take on, and distribute investment risk, and it is not clear to me that overall risk-taking (i.e., investment) in the economy will not go down.¹ But if that happens, are we not explicitly or implicitly settling for less growth and fewer wealth creation opportunities in the economy overall? ² Is that really the outcome we are seeking?

By this, I do not mean to say our current system works well, or that the level of risk inherent in the financial system is appropriate or even efficiently distributed given our overall economic return objectives. But it does mean that we need to be a little more thorough, and a little more honest with ourselves and our opponents in debate, in thinking about the consequences of individual actions or "solutions" we advocate imposing on financial intermediaries. For consequences will flow inexorably in directions we do not—and perhaps even cannot—anticipate, and we will be remiss—and even no less irresponsible than the people who allowed the recent financial crisis to happen in the first place ³—if we do not make provision to address them.

* * *

Squeezing Panic Pete is fun. It's a great stress-reliever, too. It just so happens to be a lousy regulatory reform agenda.


¹ "Go down" = become more expensive, less frequent, less available, more difficult, etc.
² I do not speak of wealth distribution here, which is another socioeconomic debate admitting of other solutions which are not necessarily connected to the measures we decide to implement in financial reform.
³ Wait. That was all of us, wasn't it? Oops.

© 2011 The Epicurean Dealmaker. All rights reserved.

The Two Beds of Procrustes

In the Greek myth, Procrustes was a son of Poseidon with a stronghold on Mount Korydallos, on the sacred way between Athens and Eleusis. There, he had an iron bed in which he invited every passer-by to spend the night, and where he set to work on them with his smith's hammer, to stretch them to fit. In later tellings, if the guest proved too tall, Procrustes would amputate the excess length; nobody ever fit the bed exactly because secretly Procrustes had two beds.

— Wikipedia, Procrustes

So, here we go again. Pandora priced its initial public offering well above the upwardly revised indicative price range. Unlike LinkedIn, however, Pandora's stock price spiked up on the day of the offering and then fell, closing modestly above the offer price. In my business, this is generally viewed as a weak but acceptable outcome.

Nevertheless, I fully expect we will be deluged with all sorts of half-baked, idiotic commentary from people who would not recognize a stock certificate at fifty paces about Pandora's underwriters' performance, integrity, motives, and competence. (Note that Morgan Stanley was left bookrunning manager—lead underwriter, to the unwashed among you—on both LinkedIn and Pandora's offerings. It will be amusing to see the critics twist themselves into knots on this one.) Rest assured that the leading conclusions (or, for the more cowardly among the peanut gallery, highly-qualified insinuations) will break down to two alternatives: either the investment bankers were devious scammers, or they are pathetic fuck-ups.

I can't be bothered to reenter the fray on this deal, so I will simply point those readers among you who would like a fact-based education on IPOs to my earlier pieces. In the meantime, I will offer a simple observation, which I think cuts to the heart of the true issue at hand, which is most certainly not whether Pandora was priced correctly:

If your world view depends on believing everyone you disagree with is either corrupt or incompetent, you are not clever.

You are a fool.


© 2011 The Epicurean Dealmaker. All rights reserved.