Tuesday, December 30, 2014

Financial Innovation and Risk Management

An overview of Shiller and his ideas about the way that financial innovation can be extended into fields that will help to manage and control risk.  Financial Innovation and Risk Management — Money, Banking and Financial Markets:

"Another example regards mechanisms to manage exposure to systematic income fluctuations at the aggregate level: Kamstra and Shiller have proposed that governments issue “trills” – a perpetual security with an annual coupon that pays one-trillionth of nominal GDP. For example, in the United States, that coupon would have been set at $17.60 as of the third quarter of 2014. In theory, when income growth is strong, government can afford higher coupon payments, while lower coupons would cushion the fiscal balance when the economy falters. At the same time, owning a trill would allow pension managers both to protect their clients against inflation and to benefit from the economy’s long-term growth – including the gains in both wages and profits. And, if many governments were to issue trills – with coupons related to their national GDP – savers could easily form a globally diversified investment portfolio, providing a cheap hedge against the idiosyncratic income risks of their domestic economy. So far, however, no government has issued a trill."

Useful for the ways that it can focus the discussion of the role of the financial system.

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Saturday, December 27, 2014

Statisticians in World War II: They also served | The Economist

Statisticians in World War II: They also served | The Economist: "“Peace finally returned, and the statistical scene in the United Kingdom had been completely transformed,” wrote Barnard and Plackett. “No other method would have produced these changes in only six years.” Dozens of clever young people had been taught a fast-changing new subject—and in many cases done original research. Even routine work was elevated by the urgency and camaraderie of the war effort—and even the fact that they were new to the field. “A lot of the work was statistically boring,” Sir David says now. “But the point is that I didn’t really know anything.”"

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Wednesday, December 24, 2014

Piketty’s (unintended) advice for investors | Gavyn Davies

Piketty’s (unintended) advice for investors | Gavyn Davies: "Finally, though, let us circle back to the real rate of return on capital. Can it really stay indefinitely about 4 per cent, as Prof Piketty suggests, at a time when central banks are setting interest rates at zero, and when the growth rate, g, is slowing down? Boiled right down, he himself says that this is his central claim. But in modern textbook economic models, while the rate of return on capital can remain higher than g in the long term, it is likely to decline when g declines."

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Thursday, December 18, 2014

Make policy for real, not ideal, humans - FT.com

Make policy for real, not ideal, humans - FT.com: "
ut of the crooked timber of humanity, no straight thing was ever made. This famous remark of the German philosopher, Immanuel Kant, is particularly relevant to economists. “Homo economicus” is far-sighted, rational and self-interested. Real human beings are none of these things. We are bundles of emotions, not calculating machines. This matters."

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Monday, December 15, 2014

My reading of the FT on China’s “turning away from the dollar” | Michael Pettis' CHINA FINANCIAL MARKETS

Michael Pettis' CHINA FINANCIAL MARKETS:  Michael, assesses the gloom and doom about changes in Chinese international capital flows.

"The authors provide the views of several analysts concerning the impact on the US bond markets and US economy more generally of reduced PBoC purchases of US government bonds, and these views range from neutral to very negative. I would argue however that in fact these views fail to understand the systemic nature of the balance of payments, in which any country’s internal imbalances must necessarily be consistent with its external imbalances. They assume implicitly assume that PBoC purchases only affect the demand for US government bonds, whereas in fact the flow of capital from one country to another must automatically affect both demand and supply. In fact the impact of reduced PBoC purchases of US government bonds is likely to be net positive, and while this view is probably counterintuitive, and certainly controversial, in another part of the article the authors cite a Chinese official whose statement, had they explored the implications fully, would have explained why."

Chinese current account surplus means a capital outflow.  As Michael indicates, the evidence from other major periods of capital flows:  US in the 1920s and 1950s, OPEC in 1970s, Japan in the 1980s, to which could be added UK in 1880s; suggests that it is not all beneficial to the exporter of capital.  Investment is difficult, mistakes are made. There are no many suppliers of safe, liquid assets.

Tuesday, December 09, 2014

At last the con has been taken out of econometrics

Tim Harford — Article — At last the con has been taken out of econometrics: "In 1983, Edward Leamer published an article with contents that would become almost as celebrated as its title. “Let’s Take the Con Out of Econometrics” began with an analogy that remains useful. Imagine an agricultural researcher who tests the effectiveness of a new fertiliser by dividing land into strips and spreading the new fertiliser only on a randomly chosen selection of those strips. Because of the randomisation, any effect will presumably be thanks to the fertiliser."

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Tuesday, December 02, 2014

U.S. Investment in Global Bonds: As the Fed Pushes, Some EMEs Pull

U.S. Investment in Global Bonds: As the Fed Pushes, Some EMEs Pull:  An analysis of the flow into EM bond markets.

"We analyze reallocations within the international bond portfolios of US investors. The most striking empirical observation is a steady increase in US investors' allocations toward emerging market local currency bonds, unabated by the global financial crisis and accelerating in the post-crisis period. Part of the increase in EME allocations is associated with global "push" factors such as low US long-term interest rates and unconventional monetary policy as well as subdued risk aversion/expected volatility. But also evident is investor differentiation among EMEs, with the largest reallocations going to those EMEs with strong macroeconomic fundamentals such as more positive current account balances, less volatile inflation, and stronger economic growth. We also provide a descriptive analysis of global bond markets' structure and returns."

Sunday, November 30, 2014

You Want a Bigger Paycheck? Convince Me. - Bloomberg View

You Want a Bigger Paycheck? Convince Me. - Bloomberg View: "This last fact -- the increase in capital’s share of the national pie -- is really the big mystery. Why has it happened? There are two basic competing theses: the rise of the robots and the great labor dump."

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Wednesday, November 26, 2014

Automation Makes Us Dumb - WSJ

Automation Makes Us Dumb - WSJ: The limits and limitations of automation.

"When system designers begin a project, they first consider the capabilities of computers, with an eye toward delegating as much of the work as possible to the software. The human operator is assigned whatever is left over, which usually consists of relatively passive chores such as entering data, following templates and monitoring displays."

Finding a new role for the human.

Monday, November 24, 2014

The truth about UK living standards since the crisis - FT.com

The truth about UK living standards since the crisis - FT.com:

An analysis of UK income statistics.

"Come next year’s UK election, bread and butter issues of living standards will displace Europe and immigration from the top of the public debate. The problem is that there are so many different comparisons and data sources that many contradictory claims are true. Few will be both true and fair. Here, then, is a guide to British living standards since the crisis, which avoids cherry-picking data and the cop out of saying that results are all too uncertain and complicated to conclude anything"

One additional area of interest is the contrast between the UK, the US and the Euro area.  The UK has had a fall in real wages and relatively healthy employment growth. For the US, though the economy has been stronger overall, employment and wages have been higher.  I need to look at the Euro area to complete the picture.

Sunday, November 16, 2014

Self-opinion and forecasting

Why we are unaware that we lack the skill to tell how unskilled and unaware we are:

"Dunning and Ehrlinger knew that most college students tend to hold very high opinions of themselves when it comes to abstract reasoning. It’s part of what they call a “chronic self view.” You have an idea of who you are in your mind, and it is kind of like a character in a story, the protagonist in the tale of your life. Some aspects of that character are chronic, traits that are always there that you feel are essential and evident, beliefs about your level of skill that are consistent across all situations. For most college students, being great at abstract reasoning is one of those traits, but being great at computer programming is not."

There is an experiment here that can be conducted with economic or financial forecasting.  How well do people forecast and how accurate do they think that they will be?

Saturday, November 15, 2014

Oranges and lemons — the FX scandal in perspective — Bull Market — Medium

The WM benchmark fix.  Oranges and lemons — the FX scandal in perspective — Bull Market — Medium:

"The FX settlement was announced this week, prompting a lot of editorialising about how the banks Don’t Get It, and Are Systematically Corrupt and so on. To an extent this is the default position post LIBOR, post CDO and rightly so. But I think there’s a danger in viewing everything through the prism of previous scandals. Although there was some behaviour that was clearly on the other side of the line, the regulators also made clear that lots of the practices involved were not intrinsically criminal; this was an investigation into a grey area, not a straightforward case of lying. Of course, the industry has less than zero claim to the benefit of anyone’s doubt, and people will be instantly suspicious of claims that “it’s more complicated than that”, so maybe I can explain what went on in the FX market through the medium of a series of examples, all based on someone going down to market to buy oranges."

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Friday, November 14, 2014

Trading as gambling

Management Science: INFORMS: "This paper offers evidence from three different samples consistent with investors substituting between playing the lottery and gambling in financial markets. In the United States, increases in the jackpots of the multistate lotteries Powerball and Mega Millions are associated with significant reductions in small trade participation in the stock market. California-based discount brokerage clients and German discount brokerage clients are significantly less likely to trade during weeks with larger lottery prizes in the California and German lotteries, respectively. Variation in lottery prizes affects speculative trading in more lottery-like securities such as individual stocks and options, but not trading in bonds and mutual funds. Trading that is likely associated with long-term savings motives, such as trading in retirement accounts, does not respond to lottery jackpots, either. The negative relation between trading activity and jackpots is stronger for individuals who are more likely to play the lottery."

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. . . and the Cross-Section of Expected Returns

. . . and the Cross-Section of Expected Returns: "Hundreds of papers and hundreds of factors attempt to explain the cross-section of expected returns. Given this extensive data mining, it does not make any economic or statistical sense to use the usual significance criteria for a newly discovered factor, e.g., a t-ratio greater than 2.0. However, what hurdle should be used for current research? Our paper introduces a multiple testing framework and provides a time series of historical significance cutoffs from the first empirical tests in 1967 to today. Our new method allows for correlation among the tests as well as missing data. We also project forward 20 years assuming the rate of factor production remains similar to the experience of the last few years. The estimation of our model suggests that a newly discovered factor needs to clear a much higher hurdle, with a t-ratio greater than 3.0. Echoing a recent disturbing conclusion in the medical literature, we argue that most claimed research findings in financial economics are likely false."

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Thursday, November 13, 2014

The productivity of PhDs: Lazy graduate students? | The Economist

The productivity of PhDs: Lazy graduate students? | The Economist: "But the vast majority of PhD students, even at top universities, produce nowhere near that much (see chart). The number of AER-equivalent papers of the median PhD student, six years after graduation, is below 0.2 for all universities. Yes, all—even Harvard, MIT and Chicago. The 50th percentile at almost all universities has a score of 0.1. That’s equivalent to publishing one paper in a second-tier field journal over six years. "

Thursday, November 06, 2014

Gordon Tullock, R.I.P.

Gordon Tullock, R.I.P. | Competitive Enterprise Institute:

 "Imagine making Nobel-worthy contributions to a discipline in which you had almost no formal training. It’s an amazing feat. Gordon Tullock is one of the few to accomplish it. We at CEI are deeply saddened to learn that he has just passed away. But what a life he led, all 92 years of it. That, we can celebrate. Born in 1922 in Rockford, Illinois, Tullock served in World War II. He spent some time in the foreign service in China and Korea, and pondered making a career of it. But his pursuit of a law degree at the University of Chicago changed his life—along with many others."

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Wednesday, November 05, 2014

Mergers and insider trading

Bloomberg View: discusses rules on insider trading tendering.

 "The answer, I think, is that Rule 14e-3 is not about protecting investors from informational disadvantages. It's about protecting companies from tender offers. The "warehousing" problem is not that some people might sell to Pershing Square at too low a price and then be sad. It's that Pershing Square might acquire a lot of shares and then tender them in the offer, making Allergan's management sad."

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Sunday, November 02, 2014

Keynesian rebirth

Anatole Kaletsky writes about the takeaway from six years of economic troubles?.  Keynes was right. In a crisis, fiscal policy is effective and monetary policy is close to impotent.

 "Monetarism overturned the Keynesian fiscal consensus that prevailed from the 1930s to the 1970s, by introducing one simple assumption into the models that guided governments and central banks. The case for Keynesian fiscal stimulus in deep recessions was simply assumed away by asserting that interest rates could always be reduced sufficiently to stimulate private investment, discourage private savings and so restore growth. As a result, the private sector as a whole would never suffer for long from a shortfall in spending. Therefore government borrowing would never be needed to balance inadequate private demand."

However, it appears that this is not the case when there is household de-leveraging that will not be affected by the level of interest rates and, as a result of the economic slump that ensues,  firms are too cautious to invest

The Taylor Curve

The Taylor Curve Has Two Dimensions In Both Hemispheres | Economics One:

"But more seriously, the evaluation of inflation-targeting as a strategy for monetary policy in John’s paper—the main purpose of the paper—was also misleading or at least incomplete. Rather than consider the performance of both inflation stability and output stability—as virtually all monetary policy evaluation studies have done for the past 40 years—he looked only at the first—inflation stability. To paraphrase Milton “the second is at least as important as the first.” Yes we know that inflation has been low and steady in recent years. The problem is that output or employment performance has been terrible—in the US we have had the Great Recession and the Not-So-Great Recovery. That deterioration should be part of the evaluation too."

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Saturday, October 25, 2014

Queuing theory

Dear Mona, Which Is The Fastest Check-Out Lane At The Grocery Store? | FiveThirtyEight:

"I couldn’t find much research on express lanes specifically, but one paper from Amsterdam found the reduction in wait times for express-lane customers didn’t offset the overall increase in wait times for everyone. Maybe life would be easier if the supermarket didn’t have an express lane — or, better yet, if it got rid of multiple lines altogether and had all customers join a single infinitely sprawling line where there were no winners and losers. That might sound nightmarish, but the math actually suggests it would be anything but."

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Sunday, October 12, 2014

The cosy between investment banking and private equity

The cosy between investment banking and private equity: Epicurean Dealmaker: The Privy Counselor:

"But most importantly, having M&A and industry bankers gives integrated investment banks an excuse to deliver ideas, industry and client insight, and all-important deal flow to the biggest-paying class of clients on Wall Street: private equity firms. While it is well known that private equity firms do not like paying M&A advisors for advice—usually because, rightly or wrongly, they think they know at least as much or more as bankers do about companies, deal-doing, and opportunities—they absolutely love paying investment banks to supply and arrange leveraged loans and high yield debt to finance buyouts of target companies. And banks love this too, because it is both huge and hugely profitable business. PE firms are usually happy to hire investment banks to sell their portfolio companies or take them public upon exit, too, although they tend to favor the banks which brought them the investment in the first place, financed it, and or smothered them with loving attention and juicy new buyout opportunities in the meantime."

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M&A synergies

M&A synergies and negative synergies Epicurean Dealmaker: The Privy Counselor:

"The point, in other words, is that Blackstone divesting its advisory business has nothing to do with bucking a nonexistent trend on Wall Street to add business lines like barnacles on a freighter. Instead, it has everything to do with dumping business lines that add no value, subtract value, or fail to realize their own value due to inherent negative synergies resulting from persistent structural conflicts of interest with the parent company. In other words, it is business as usual."

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Tuesday, October 07, 2014

Sorry, But Disruptive Technology WILL Kill Banks

Sorry, But Disruptive Technology WILL Kill Banks: "Allegedly, John Authers recently wrote an article in the Financial Times entitled “Disruptive technology will not kill banks“. I say allegedly because despite the article being cited and commented on by two people whose analysis and opinion I respect (Chris Skinner and Jeff Marsico), I cannot get through the FT’s phalanx of pop-up ads and paywalls to actually read it with my own eyes. By trying to open the link multiple times, I was able to spy a few words at a time before the ads obscured the subheading that read “Banking is too heavily regulated to be threatened by newcomers”"

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Sunday, September 14, 2014

Volatility concepts and the risk premium

An interesting overview of risk and volatility from the BIS.  Volatility concepts and the risk premium:

"Statistical measures of volatility are based on observed asset returns over a given time interval. This can be done in various ways. A simple, model-free approach is to compute the standard deviation of the actual returns on a given asset over a particular time window, so-called realised (or "historical") volatility. Model-based approaches have also been proposed: ARCH (autoregressive conditional heteroscedasticity) models, for example, assume that the variance of returns fluctuates over time according to a specific time series model.


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Friday, August 15, 2014

Expectations of Returns and Expected Returns

Expectations of Returns and Expected Returns: "We analyze time-series of investor expectations of future stock market returns from six data sources between 1963 and 2011. The six measures of expectations are highly positively correlated with each other, as well as with past stock returns and with the level of the stock market. However, investor expectations are strongly negatively correlated with model-based expected returns. We reconcile the evidence by calibrating a simple behavioral model, in which fundamental traders require a premium to accommodate expectations shocks from extrapolative traders, but markets are not efficient."

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Monday, July 21, 2014

Learning means that behaviour is not stationary

Stationary processes | The Leisure of the Theory Class:

"I said earlier that in stationarity environment, the point in time which we denote by does not correspond to anything about the process itself but only reflect the point in time in which we start observing the process. In this example this is indeed the case with Craig, who starts observing the coin process at time . It is not true for us. Our subject matter is not the coin, but Craig. And time has a special meaning for Craig. Bottom line: Rational agent in a stationary environment will typically not behave in a stationary way."

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Saturday, July 19, 2014


CONVERSABLE ECONOMIST: Evidence on the Samuelson Conjecture: "For a useful starting point to thinking about how the rise of emerging economies like China affect global trade, I recommend a symposium in the Spring 2012 issue of JEP. Gordon H. Hanson starts with "The Rise of Middle Kingdoms: Emerging Economies in Global Trade."  "Gains from Trade when Firms Matter," by Marc J. Melitz and Daniel Trefler, looks at the benefits of trade offers introduction to modern models of trade driven from variety, shifts toward more efficient firms, and technological gains. For an introduction to models of international trade based on by differences in relative productivity across countries--like the model used by di Giovanni, Levchenko, and Zhang--that same has a useful article called "Putting Ricardo to Work," by Jonathan Eaton and Samuel Kortum. Finally, Jonathan Haskel, Robert Z. Lawrence, Edward E.  Leamer, and Matthew J. Slaughter look at "Globalization and U.S. Wages: Modifying  Classic Theory to Explain Recent Facts." "

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Thursday, July 17, 2014

Money and Entropy — Design Matters — Medium

Money and Entropy — Design Matters — Medium: "This all sounds terribly wonkish and academic, but understanding money in a scientific sense is important given what you can do with it (and the problems a lack of it create)."

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Saturday, July 12, 2014

The real 10 algorithms that dominate our world — Medium

The real 10 algorithms that dominate our world — Medium: "The other day, while I was navigating Reddit I found an interesting post that was called The 10 Algorithms That Dominate Our World by the author George Dvorsky which was trying to explain the importance that algorithms have in our world today and which ones are the most important for our civilization."

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Friday, June 27, 2014

Pimco runs risks in turning up the ‘vol’ - FT.com

Pimco runs risks in turning up the ‘vol’

Nice overview from the F-Times of: risk to increase volatility specifically and the way that crowded trades can be build by conventions that become oversold.

"In fact, so many different kinds of investors are now “selling volatility” that BlackRock’s Dennis Stattman worried at the same conference that it had become a “crowded trade”. Sceptics worry these new players might be selling flood insurance on the cheap, just before a deluge."

Tuesday, June 24, 2014

Shadow Banking: In depth news, commentary and analysis in a series from the Financial Times

Shadow Banking: In depth news, commentary and analysis in a series from the Financial Times:

"Shadow banking covers a wide range of ‘non-bank’ institutions that perform many of the functions of traditional banks, including lending, but do so outside of deposit-taking banks. The FT examines this sector, which is reshaping how companies fund themselves"
The evolution of the financial system: the regulation and return of banks to traditional activities and the emergence of new institutions to fulfill the roles that have been abandoned.

Sunday, June 22, 2014

Frequentism and Bayesianism IV: How to be a Bayesian in Python

Frequentism and Bayesianism IV: How to be a Bayesian in Python: "I won't be so much concerned with speed benchmarks between the three, as much as a comparison of their respective APIs. This post is not meant to be a tutorial in any of the three; each of them is well documented and the links above include introductory tutorials for that purpose. Rather, what I want to do here is a side-by-side comparison which will give a feel for how each package is used. I'll propose a single relatively non-trivial test problem, and show the implementation and results of this problem using all three packages. Hopefully by seeing the three approaches side-by-side, you can choose which package might be best suited for your particular application."

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Thursday, June 19, 2014

Rules push on clearing houses poses risk to banks - FT.com

Rules push on clearing houses poses risk to banks - FT.com: "Trades not going through clearing houses will also need to be backed by more collateral. However, the LSE study argued that investors being allowed to net their portfolios in a single place dramatically reduced the changes in margin valuation. That single place could be either a single fully integrated clearing house, or a series of fully interoperable ones."

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Wednesday, June 18, 2014

Impact of Fed Tapering Announcements on Emerging Markets

Impact of Fed Tapering Announcements on Emerging Markets:

 "This paper analyzes market reactions to the 2013–14 Fed announcements relating to tapering of asset purchases and their relationship to macroeconomic fundamentals and country economic and financial structures. The study uses daily data on exchange rates, government bond yields, and stock prices for 21 emerging markets. It finds evidence of markets differentiating across countries around volatile episodes. Countries with stronger macroeconomic fundamentals, deeper financial markets, and a tighter macroprudential policy stance in the run-up to the tapering announcements experienced smaller currency depreciations and smaller increases in government bond yields. At the same time, there was less differentiation in the behavior of stock prices based on fundamentals."

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Monday, June 16, 2014

‘Yellen Index’ flashes imminent Fed tightening

‘Yellen Index’ flashes imminent Fed tightening - FT.com:

"This is the intriguing premise of a tool being used internally at BlackRock, the world’s largest fund manager, which it has nicknamed “the Yellen index”. It is a measure that suggests, on the economic indicators favoured by Ms Yellen, monetary tightening is already overdue and the Fed falls further behind the curve with every passing day."

This could be a really good additional exercise for the interest rate assignment: create a "Yellen Index".

Saturday, June 14, 2014

Reproducible research is still a challenge

Reproducible research is still a challenge: "We used knitr to implement the analysis in a literate programming style. The entire analysis, including justification of the core functions, is available to interested people. However, working with blocks of ugly data-wrangling code, or with long-running calculations, remains a challenge."

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Buttonwood: Pensions à la mode | The Economist

Buttonwood: Pensions à la mode | The Economist: A comparison of pension returns across countries.  This is an exercise in assessing the returns from a standard investment 60% in equities and 40% in bonds.

"The most important thing for the typical worker is to avoid the worst outcome, not aim for the best. Yet, understandably, few feel they have the expertise to allocate their investments accordingly. As a result many opt for what appears to be the safe option in the form of target-date funds (in America) or default funds (in Britain). These funds are certainly a lot better than the choices employees might make if left to their own devices—placing their entire portfolio in cash or in their employer’s shares, for example. Such funds generally follow a “lifestyle approach” in which the bulk of the portfolio is invested in equities when the employee is young and then switched into government bonds as retirement draws near."

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Tuesday, June 10, 2014

The VIX Is Not A Great Way to Measure Complacency - Bloomberg View

The VIX Is Not A Great Way to Measure Complacency - Bloomberg View: "This is I think roughly the way to read the notion, which my Bloomberg View colleague Mohamed El-Erian examined today, that low readings on the VIX -- an index of implied volatility in short-dated S&P 500 index options -- mean that the market is "complacent." So:

Equity volatility is basically a mean-reverting thing.2
The volatility index is below its long-run average.
Therefore volatility will go higher.
Soon and horribly.
Run, you fools!
Why are you being so complacent?"

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Chimps and games

Chimpanzee choice rates in competitive games match equilibrium game theory predictions : Scientific Reports : Nature Publishing Group:

"The capacity for strategic thinking about the payoff-relevant actions of conspecifics is not well understood across species. We use game theory to make predictions about choices and temporal dynamics in three abstract competitive situations with chimpanzee participants. Frequencies of chimpanzee choices are extremely close to equilibrium (accurate-guessing) predictions, and shift as payoffs change, just as equilibrium theory predicts. The chimpanzee choices are also closer to the equilibrium prediction, and more responsive to past history and payoff changes, than two samples of human choices from experiments in which humans were also initially uninformed about opponent payoffs and could not communicate verbally. The results are consistent with a tentative interpretation of game theory as explaining evolved behavior, with the additional hypothesis that chimpanzees may retain or practice a specialized capacity to adjust strategy choice during competition to perform at least as well as, or better than, humans have."

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How the Recession Reshaped the Economy, in 255 Charts - NYTimes.com

Info graphics - how employment has changed post recession in the US:

How the Recession Reshaped the Economy, in 255 Charts - NYTimes.com:

Number employed and earnings.

Tuesday, June 03, 2014

Hedge Fund Investors Aren't as Dumb as They Look - Bloomberg View

Hedge Fund Investors Aren't as Dumb as They Look: Though returns have been poor, there is some evidence that they can help to reduce risk.

"Why invest in hedge funds? Citi says, "since the [global financial crisis], confidence that hedge funds can outperform the underlying markets has been strained and that more emphasis has been placed on their role in controlling volatility." But investors are happy enough to pay for that. An endowment manager quoted by Citi:"

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Thursday, May 29, 2014

The demise of the bond market

The most obvious examples are governments. Greece, which returned to markets by issuing €3bn in five-year bonds in April, could have raised much more but its aim was to create benchmarks and rebuild its yield curve – the availability of a range of bonds with different maturities. 
Like Ferrari, Greece’s debt agency knows its interests lie in helping the resale market; the country’s future financing needs are considerable, to say the least. Companies looking to raise debt over a number of years think similarly.


Wednesday, May 28, 2014

Machines vs Routine Tasks

Brad DeLong reviews Summers on Piketty and returns to his theme.

"Think of it this way: Humans used to have five ways of creating economic value: through backs, through fingers, through routine control, through smiles, and through creative insight:

  1. Strong backs (usually those bathed in the steroid testosterone) could do the heavy lifting. 
  2. Nimble fingers could do the fine manipulating. 
  3. Cybernetic control loops could keep the lifting and manipulating on their proper tracks. 
  4. Smiles--in fact, an entire universe of human social interactions--could keep us as a group all pulling in roughly the same direction, playing positive-sum rather than negative-sum economic games, and could also provide the personal services from which we derive so much of our human well-being. 
  5. Genuine creative insight could think up new ways of doing things and new things to do that would be useful: luxurious or convenient, and over the course of time could transform conveniences into necessities, luxuries into conveniences, and invent yet new dimensions of luxury."

His thesis that backs, fingers and brains are increasingly substitutes rather than compliments for machines.  In some ways this is an evolution of routine tasks.  As machines become more sophisticated, what is defined as routine becomes increasingly broad. 

'via Blog this'

Tuesday, May 20, 2014

Keynes, possibility for our grandchildren

Elizabeth Kolbert: Discusses Economic possibilities in The New Yorker there is a nice overview of some of the reasons why the leisure has not arrived.  

"Joseph Stiglitz, of Columbia University, by contrast, takes a constructivist approach. People’s choices, he argues, are molded by society and, over time, become self-reinforcing. We “learn how to consume by consuming,” he writes, and how to “enjoy leisure by enjoying leisure.”"

Sunday, May 18, 2014

Noahpinion: Entrepreneurship and the pricing of uncertainty

Noahpinion: Entrepreneurship and the pricing of uncertainty:

"Uncertainty", also called "Knightian uncertainty", is like risk, but not quite the same. Risk is when you can calculate the probability of gains and losses, like when you play roulette or blackjack. Uncertainty is when you don't know the odds. Frank Knight observed that entrepreneurship involves a lot more uncertainty than risk. When you start a new business, you don't really know how to calculate the odds that your idea will succeed - whether personal computer users will embrace a graphical user interface, whether people will want to post their pictures on a social network, etc."

This is similar to a theme of my research that says that speculation is in part an attempt to deal with uncertainty. Knight argues that entrepreneurship is not about risk (as this can be quantified and insured or hedged away).  As such, the wealth of the technology entrepreneurs is a return for taking a gamble when the odds are completely unknown. As Noah Smith says, people do not like uncertainty.  They at least want to know the odds.

Smith argues that the return to uncertainty is overpriced.  He cites the discussion by Felix Salmon and Gideon Lewis-Klaus' book No Exit.  However, can this be the way to look at it?  The risk or odds are unknown. If you want to think of it this way, there should be a balance of supply and demand and, with supply of potential entrepreneurs increasing, the price should fall.  This is not the return that comes from success but the probability of being successful.  The same amount of success could be spread over more entrepreneurs but it is not clear that the amount of success is fixed.  In other places it is argued that the more the supply of entrepreneurs, the more the chances of new and successful ideas.

Saturday, May 17, 2014

A natural experiement

This gives a very good overview of a natural experiment.

British and French educational legacies in Africa | vox: "While the choice of colony was not random, the exact location of the border – up to some distance – was. In the partitioning process colonisers drew borders without accurate knowledge of the terrain, disregarding local circumstances and cutting through homogeneous geographic, cultural and ethnic entities. Thus, the drawing of borders provides a situation of a quasi-ideal natural experiment, where, by historical accident, individuals with otherwise identical background found themselves randomly divided into two groups: one subjected to French policies and another ruled by Britain."

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Wednesday, May 14, 2014

Wipe out rentiers with cheap money - FT.com

Martin Woof says Wipe out rentiers with cheap money - FT.com:  Is this a counter to the Piketty thesis?  May it suggest some way that r will be lower than g?

"This policy, however unpopular with some, is better than the available alternatives. Keynes even had a phrase for it – the “euthanasia of the rentier”. In a world of abundant savings, the available returns ought to be low; this is a consequence of market forces to which central banks are responding."

It would be consistent with a story that said with large blocks of inherited wealth seeking investment returns, the returns may fall; it would not counter the accusation that larger blocks of wealth have attractive investment opportunities that are not open to most.

Sunday, May 11, 2014

Hedge funds, fortunes and merit | FT Alphaville

Hedge funds, fortunes and merit | FT Alphaville: "Small and young hedge funds are nimble, their managers are focused, and they can concentrate their capital in a small number of good ideas without moving prices or attracting attention. One study by Barclays found that funds under two year’s old, and managing less than $100m typically make better investment returns than their larger older peers."

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Friday, May 09, 2014

What Timothy Geithner Really Thinks

Geithner explains how the "bail out" has made money.

"He paused and looked out at a crowd that, it’s safe to say, probably did not fully appreciate how intense the anger around the financial bailouts had been and how close the country was to the precipice of a full-on depression. “We are going to earn, all in, a couple hundred billion dollars,” Geithner said. And six years after the bailouts, the too-big-to-fail banks and the insurance giant A.I.G. have since repaid the money they took from the government. Even the rescues of Fannie Mae and Freddie Mac, the mortgage-lending companies that once had to borrow $187.5 billion, have turned profitable. “Much of the dominant view about the strategy,” Geithner said, “is the inverse of the truth."

The Fed is filling a market failure.  The myopia and high-level of risk aversion mean that the government is the only institution that can provide liquidity to the system in exchange for assets that have value but are not valued at present.  The demand for liquidity is so great that additional liquidity must be provided.

Thursday, May 08, 2014

Nobel economist Gary Becker showed that Mike Milken was history’s greatest feminist - Quartz

Nobel economist Gary Becker showed that Mike Milken was history’s greatest feminist - Quartz: "Gary Becker, who passed away this week, was a man who changed the field of economics. Before Becker, economics was the study of buying and selling things. But Becker realized that economics was really about tradeoffs, and that there are a lot of tradeoffs in the world that don’t involve money—or don’t only involve money. (For example, instead of writing this article, right now, I could be learning hip-hop dancing or starting a biotech company.)"

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Tuesday, May 06, 2014

About that AstraZeneca bid defence … | FT Alphaville

FT Alphaville:  

"According to Eroom’s Law, the number of drugs you can get to market per $1bn of R&D spending halves about every nine years and has done since 1950. Spiralling R&D costs and a failure rate at Phase I trials of about 90 per cent mean the economics at the sharp end of that law don’t make much sense, even for the biotechs. Better to leave the really experimental stuff to university spinouts and single-punt MBOs. Then, if their success looks plausible, the bigger pharma companies can in-licence, partner and acquire outright to lever scale on their own specialisms in areas such as imaginative trial design and patent evergreening."


Friday, May 02, 2014

Chromebooks: Not much room for competition

Chromebooks: Not much room for competition.  Its all about price.

"Major laptop makers are paying attention and are adding Chromebooks to their product lines. They require basically the same production methods as their Windows laptops, so it's a low-cost effort to build them. The Chromebook doesn't require big hardware, so the component inventory is not too heavy."

Product life cycle and perfect competition.

Win-Vector Blog » Learn Logistic Regression (and beyond)

Win-Vector Blog » Learn Logistic Regression (and beyond):

 " Logistic regression is often a winning method and we will use this article to discuss logistic regression a bit deeper. By the end of this writeup you should be able to use standard tools to perform a logistic regression and know some of the limitations you will want to work beyond."

Lovely overview

Sunday, April 27, 2014

10 reasons to switch to ggplot | Mandy Mejia

10 reasons to switch to ggplot | Mandy Mejia: "Making plots is a necessary and useful task for anyone who works with data. While making the standard plots is a pretty straightforward task in most statistical programming languagues, including R, when it comes to using R‘s base graphics to make custom plots (the plots you actually want to make) things can get complicated. As with many of life’s problems, Hadley Wickham comes to the rescue."

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Friday, April 18, 2014

Why UPS Trucks Don't Turn Left

Why UPS Trucks Don't Turn Left: To reduce fuel use and accidents. Confirmed by Myth-busters.

"Mythbusters likely failed to save time on the route by following the rule even more stringently than UPS. While the no left turn rule has an appealingly simple and algorithmic quality to it, you will see UPS drivers take left turns on occasion, especially in residential neighborhoods without much incoming traffic. Asked how often UPS drivers turn right, a driver told ABC:"

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Monday, April 14, 2014

Smart beta

Is ‘smart beta’ the latest magic money tree? - FT.com: discusses passive investment with a "twist".

"The typical twist is to substitute the standard market capitalisation weighting of an equity index with an alternative weighting, such as dividends or earnings. This is claimed as a smarter approach as market cap indices will inevitably overweight expensive stocks and underweight cheap ones."

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Friday, April 04, 2014

Sampling bias and sampling error

Tim Harford FT.com: is a discussion of "Big Data" looks at sampling bias and sampling error.

"The Literary Digest, in its quest for a bigger data set, fumbled the question of a biased sample. It mailed out forms to people on a list it had compiled from automobile registrations and telephone directories – a sample that, at least in 1936, was disproportionately prosperous. To compound the problem, Landon supporters turned out to be more likely to mail back their answers. The combination of those two biases was enough to doom The Literary Digest’s poll. For each person George Gallup’s pollsters interviewed, The Literary Digest received 800 responses. All that gave them for their pains was a very precise estimate of the wrong answer."

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Thursday, April 03, 2014

The cost of acquiring information

Streetwise Professor discussed Michael Lewis’s HFT Book: and highlight an application of the Grossman-Stiglitz idea that there will be an equilibrium where the cost of acquiring information will be equal to the benefit of obtaining that information.

 "Moreover, it’s not so clear that order flow information is “non-public”.  No, not everyone has it: HFT has to expend resources to get it, but anybody could in theory do that. Anybody can make the investment necessary to ping a dark pool. Anybody can pay to get a faster data feed that allows them to get information that everyone has access to more quickly. Anybody can pay to get quicker access to the data, either through co-location, or the purchase of a private data feed. There is no theft or misappropriation involved. If firms trade on the basis of such information that can be obtained for a price that not everyone is willing to pay, and that is deemed illegal, how would trading on the basis of what’s on a Bloomberg terminal be any different?"

Wednesday, March 26, 2014

IS-LM vs. Minsky | LARS P. SYLL

IS-LM vs. Minsky | LARS P. SYLL:  The limitations of mechanical IS-LM"

IS-LM is typically set in a current values numéraire framework that definitely downgrades the importance of expectations and uncertainty — and a fortiori gives too large a role for interests as ruling the roost when it comes to investments and liquidity preferences. In this regard it is actually as bad as all the modern microfounded Neo-Walrasian-New-Keynesian models where Keynesian genuine uncertainty and expectations aren’t really modelled. Especially the two-dimensionality of Keynesian uncertainty — both a question of probability and “confidence” — has been impossible to incorporate into this framework, which basically presupposes people following the dictates of expected utility theory (high probability may mean nothing if the agent has low “confidence” in it). Reducing uncertainty to risk — implicit in most analyses building on IS-LM models — is nothing but hand waving."

There is no uncertainty.

Sunday, March 23, 2014

Shadow rate

Summarizing monetary policy | Econbrowser and the use of the shadow rate.

 "A recent paper by Dora Xia, a UCSD graduate student who expects to complete her Ph.D. this spring, and Cynthia Wu, a former UCSD student who is now an assistant professor at the University of Chicago, makes several contributions to this literature. First, most previous applications of the shadow rate model have involved arduous numerical simulations to calculate its full predictions. By contrast, Wu and Xia develop a very simple closed-form expression that gives a very good approximation to the predictions of the model for the yield of any maturity. Here is a graph showing the estimate of the shadow rate that comes out of their approach. Up until 2009, this basically coincides with the observed fed funds rate, but since then, the implied shadow rate has been quite negative."

This can be used to assess whether monetary policy is appropriate and can be utilised to make forecasts about interest rates.  This could be a supplement to the Taylor Rule.

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Thursday, March 20, 2014


Surprise and Digression | The Leisure of the Theory Class:  An interesting area.  What is a "surprise"?  When thinking about economic expectations, the surprise is something that is unusual, it is something that is not expected.  Does this mean that it is at the tail of the probability distribution?  Does it mean something outside of that distribution?  Is it possible to use insights from other fields to get of a handle on this and assist in the understanding of crash risk?

"They propose that surprise be measured by the Kullback-Liebler divergence between the prior and the posterior. As with many good ideas, Itti and Baldi are not the first to propose this. C. L. Martin and G. Meeden did so in 1984 in an unpublished paper entitled: `The distance between the prior and the posterior distributions as a measure of surprise.’ Itti and Baldi go further and provide experimental support that this notion of surprise comports with human notions of surprise. Recently, Ely, Frankel and Kamenica in Economics, have also considered the issue of surprise, focusing instead on how best to release information so as to maximize interest."

Wednesday, March 19, 2014

James Surowiecki for Democracy Journal: The Dismal Art

James Surowiecki reviews the history of forecasting and quotes.

"Its fitting that Friedman’s book starts with a financial crisis, namely the Panic of 1907, which he argues in some sense gave birth to modern forecasting. That panic began with a failed attempt by the financier Heinze brothers, Otto and Augustus, to corner the copper market. The collapse of their scheme drove institutions that had lent money to the Heinzes into bankruptcy and created a climate of fear that led to massive runs on New York banks and a series of bank failures, even as the Dow fell by almost half. More important, the crisis on Wall Street spilled over into the real economy, with industrial production taking a major hit and economic growth falling sharply. The crisis was shocking both because major panics were thought to be a thing of the past, and because the economic consequences of the crash seemed out of all proportion to the causes. And while there had obviously always been people on Wall Street trying to predict the future, the panic fueled people’s appetite for any information that could insulate them from market turmoil."

It sounds so like 2007...

Wednesday, March 05, 2014

New York Law

Felix-Salmon discusses why hedgies would rather Porta Rico's bonds were issued in New York than elsewhere.

So when you see hedge funds demanding that their new Puerto Rico bonds be issued under New York law, don’t kid yourself that they particularly value the protections that New York law gives them, or that they think that New York courts will allow them to recover most of their money in the event of default. Rather, they’re just hoping that Puerto Rico won’t bother defaulting on those bonds in the first place. And they might well be right about that.

It is more trouble (and expense) to default on these bonds than others.

Saturday, February 22, 2014

Why Rational People Can't Succeed as Economic Forecasters - Justin Fox - Harvard Business Review

Harvard Business Review takes a look at economic forecasting.  One comment,

"Is there a risk that you get overconfident because of that? One of the things that happened in the ‘20s is that things kept going so well, and the forecasters who predicted a continued boom were right again and again. If you get very confident that government knows what it’s doing and can manage the economy well, does that increase risk at all?"

This is consistent with the ideas that trends can generate positive feedback that encourages overshooting and complacency.  This make it all the more likely that a bubble will ensure.  The difficulty is that it starts with something real and becomes over-extended.  Where do the two meet?:

Tuesday, February 18, 2014

Barclays’ bonuses give the City a say on banking values - FT.com

FT.com makes the Rooney analogy:

"It is the Wayne Rooney answer. Weekend reports say that the Manchester United football star is negotiating an extended, improved contract even though the team is enduring the worst season for years. His employers could respond to poor results by cutting wages but would then lose their star players, have to pay nearly as much for replacements who are not nearly so good and risk falling into a downward spiral. So it is in investment banking, where the worst of all possible worlds is to have an A-grade cost base and B-grade revenue potential. Thus, while Barclays sticks to its big league investment banking strategy, it has little choice but to pay up."

Tuesday, February 11, 2014

David Graeber: Play at the heart of everything

What’s the Point If We Can’t Have Fun? | David Graeber | The Baffler:

 "It’s hardly surprising, then, that this aspect of Kropotkin’s argument was ignored by the neo-Darwinists. Unlike “the problem of altruism,” cooperation for pleasure, as an end in itself, simply could not be recuperated for ideological purposes. "

It is a lot more interesting than that quote.

Monday, February 10, 2014

James Surowiecki: The End of Brand Loyalty : The New Yorker

James Surowiecki: The End of Brand Loyalty : The New Yorker:

The internet, the free flow of information and the decline of brands.  If  brand delivers the same product each time, that can be valuable.  However, when experience becomes more valuable and the cost and availability of information plummets, brands lose value.

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Tuesday, February 04, 2014

Viral math | Felix Salmon

Felix Salmon on the math of going viral on Facebook.

As a result, the important formula isn’t S·F·C; rather it’s S·F·FBT·C, where FBT is the probability that the article you’re sharing is going to actually appear in your friends’ feeds. In recent months, Facebook has been taking its foot off the throttle quite dramatically — but no one knows how long that’s going to last.

I am not sure what Facebook does to Facebook does to affect this process.  However, the model is one of chaos where changes in the initial condition (S, F, C etc) can have dramatic effects and can be adapted to other situations.

Thursday, January 16, 2014

It Cost JPMorgan $1.5 Billion to Value Its Derivatives

Bloomberg assesses the accounting for derivative contracts.  The cost of funding a position that is in the money.

"But that's weird too, because not every bank has the same funding cost. It would be odd if, say, JPMorgan (5-year CDS in the 60s) was willing to pay more to do a derivative trade than Goldman Sachs (high 80s), just because it funds more cheaply. Presumably that sometimes happens,6 but mostly people trade based on market prices, and in theory at least there should be one market price. How do you calculate that market price? Probably you can take your own credit spread into account, but presumably also there are some disconnects. So if "the market" charges 50 basis points of FVA, and your own funding costs blow out to be, say, 200 basis points, then the value of the derivative receivable to you is less than its market value."


Monday, January 13, 2014

A history of macroeconomic thinking

Roger Farmer: My Economic Window: Neo-Paleo-Keynesianism: A suggested definition:

"There has been a lot written on the blogosphere in recent weeks about the microfoundations of macroeconomics. Tony Yates argues in favour of micro-founded structural models. Adam Posen is sceptical of micro-foundations and Simon-Wren Lewis, Noah Smith and Nick Rowe call for a more eclectic approach. For those looking for a neat summary of these debates, Paul Krugman traces the history of macroeconomic ideas.  Responding to a  piece by Brad Delong, he argues that there has been a recent resurgence of what he calls “neo-paleo-Keynesianism”.  This is very useful concept and I have much in common with the ideas expressed in Paul's piece. This essay offers a novel definition of the term that Paul coined and an invitation to fellow academics to join me in pursuing an agenda based on this definition."

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Thursday, January 09, 2014

What's That You're Calling a Bubble? - Justin Fox - Harvard Business Review

What's That You're Calling a Bubble? - Justin Fox - Harvard Business Review:

"So maybe we should tweak the second sentence of Brunnermaier’s definition, to something like: Bubbles arise if the price far exceeds the asset’s fundamental value, to the point that no plausible future income scenario can justify the price. A little clunky, and of course “plausible” is a judgment call. But it does get at the idea that we shouldn’t be calling every last rise in P/E ratios a bubble."

The bubble in bubbles and the difficulty of calling bubbles before the event relative to how easy it is after the event.

Wednesday, January 08, 2014

Scholarship: Beyond the paper

Scholarship: Beyond the paper : Nature : Nature Publishing Group:

"Henry Oldenburg created the first scientific journal in 1665 with a simple goal: apply an emerging communication technology — the printing press — to improve the dissemination of scholarly knowledge. The journal was a vast improvement over the letter-writing system that it eventually replaced. But it had a cost: no longer could scientists read everything someone sent them; existing information filters became swamped."

The future of academic publishing (maybe).


Learning about social learning in MOOCs: From statistical analysis to generative model:

"We study user behavior in the courses offered by a major Massive Online Open Course (MOOC) provider during the summer of 2013. Since social learning is a key element of scalable education in MOOCs and is done via online discussion forums, our main focus is in understanding forum activities"

Why do people drop out?

Saturday, January 04, 2014

Risk, money illusion and new financial assets

Worthwhile Canadian Initiative: Nominal-loss-aversion and its consequences:

"Suppose some promoter comes along with a new financial asset. The promoter promises that you will never lose money if you invest your savings in this new financial asset. Even better, he promises that he will buy back that financial asset at the issue price any time you ask him to. And suppose all the people who suffer from nominal-loss-aversion take him up on his offer, and buy the new financial asset."
There is clearly some political power involved here. However, this is not the whole story.  The safe assets are being swallowed up by overseas central banks as a parking space for US dollars accumulated as a result of foreign exchange intervention.  This means that the return on the safe asset is not longer a compensation for real losses (it does just about cover nominal loss). As such there is a demand for a safe asset with a higher return. It may be impossible, but where there is demand, there is supply.

Mind and Machine - logistics

Unhappy Truckers & Other Algorithmic Problems - Nautilus: The scheduling problem.

"Powell’s biggest revelation in considering the role of humans in algorithms, though, was that humans can do it better. “I would go down to Yellow, we were trying to solve these big deterministic problems. We weren’t even close. I would sit and look at the dispatch center and think, how are they doing it?” That’s when he noticed: They are not trying to solve the whole week’s schedule at once. They’re doing it in pieces. “We humans have funny ways of solving problems that no one’s been able to articulate,” he says. Operations research people just punt and call it a “heuristic approach.”"

  Machine optimisation vs the controller.

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