Monday, June 21, 2010

Keynes and uncertainty

Keynes in the 1937 Journal of Economics take another look at uncertainty.

By ‘uncertain’ knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty; nor is the prospect of a Victory bond being drawn. Or, again, the expectation of life is only slightly uncertain.... The sense in which I am using the term is that in which the prospect of an European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealth-owners in the social system in 1970. About these matters their is no scientific basis on which to form any calculable probability whatever. We simply do not know. Nevertheless, the necessity for action and for decision compels us as practical men to do our best to overlook this awkward fact and to behave exactly as we should if we had behind us a good Benthamite calculation.... How do we manage?... (1) We assume that the present is a much more serviceable guide to the future than a candid examination of past experience would show it.... (2) We assume that the existing state of opinion as expressed in prices and the character of existing output is based on a correct summing up of future prospects.... (3) Knowing that our individual judgment is worthless, we endeavour to fall back on the judgment of the rest of the world which is perhaps better informed....

The key here seems to be a vague and embryonic outline of some of the ideas of behavioural finance. How do we deal with uncertainty when there is no basis to make an estimate of probabilities? What short-cuts can the mind use to deal with these issues? One of the things that Keynes suggests here and the The General Theory is the idea that we assume that things will be rather similar to how they have been in the past. This is probably a reasonable starting point. It is conservatism. Another thing that Keynes suggests is that we look to the opinion of others. Here we get the basis for a social construction of belief.

Wednesday, June 16, 2010

Market making or trading

There is a lot post on the FT's Alphaville looking at the position of Jerome Kerviel. There is a blurring of the distinction between market-maker and proprietary trader. The fact that cash positions were carried over from one day to the next is taken as a sign that there was more than just market-making going on.

Tuesday, June 15, 2010

Run on the bank

Pepy's diary 13th June 1667, in the wake of the Dutch attack on Chatam:

I presently resolved of my father’s and wife’s going into the country; and, at two hours’ warning, they did go by the coach this day, with about gold in their night-bag. Pray God give them good passage, and good care to hide it when they come home! but my heart is full of fear: They gone, I continued in fright and fear what to do with the rest. W. Hewer hath been at the banker’s, and hath got 500l. out of Backewell’s hands of his own money; but they are so called upon that they will be all broke, hundreds coming to them for money: and their answer is, “It is payable at twenty days — when the days are out, we will pay you;” and those that are not so, they make tell over their money, and make their bags false, on purpose to give cause to retell it, and so spend time. I cannot have my 200 pieces of gold again for silver, all being bought up last night that were to be had, and sold for 24 and 25s. a-piece.

Friday, June 11, 2010

Power law

O2 indicate that the use of bandwidth is partly determined by a power law.

More here from the Guardian.
Instead, it said that a tiny number – just 1% 0.1% (corrected: incorrect figure given by O2 initially) of smartphone users – are using 36% of its total mobile data traffic, and that they needed to be encouraged to change their behaviour.