Reading this piece general public piece on conditional probabilities brought me back more than 17 years ago back when in my senior year in college I was being introduced to conditional probabilities. Indeed in the manner it was taught it was seen as impenetrably daunting and really hard to relate to anything practical. But overtime as I have assimilated the theoretical and practical use of conditional probabilities, I must say the formal approach, once assimilated is very mechanical in helping produce accurate estimations. What is often confounding in making estimates based on conditional probabilities, is that the language used corrupts thoughts. That is why examples such as the Monty Python one and the Mammogram results interpretation are so confounding to educated and otherwise intelligent people.
It seems to me educational curriculums should focus on teaching the intuitive and formal approaches simultaneously and move towards pointing out when the intuitive approach finds its limitations and must be overtaken by the more formal one.
I also realize how BICs as extensions and generalizations of the concept of conditional probabilities must be patiently taught to be better understood over time
References:
Chances Are, By Steven Strogatz. Opiniator piece in the NY Times 04/25/2010
BICs
The Wider Scope of BICs
Tuesday, April 27, 2010
Sunday, April 18, 2010
BEWARE WHAT YOU WISH FOR: Goldman Sachs, Fabrice Tourre, Derivatives Clearing
As I read the story of the SEC case against Goldman Sachs and one of its employees, I could not help but say to myself, BEWARE WHAT YOU WISH FOR, and this for two reasons:
1)The financial industry has been lobbying very hard against the requirement to settle all derivatives trades through a clearing house, essentially to protect the money making business of structuring customized deals for investors and various hedge funds and other market participants. What Goldman finds itself in the hot seat for is essentially for having brokered synthetic trades, the abacus deals between investors and a hedge fund that allowed the hedge fund to be short the real estate market on a large scale. If all such trades had been cleared through a clearinghouse, such an issue might not have arisen. Goldman seems to have made $15M on the deal and may have done hundred such deals, but now the stock price lost more than 12.5% and more than 12B in market cap on Friday and its reputation is seriously damaged.Is it worth it?
2)The second thought is about the trader Fabrice Tourre a product of the french mathematical education system who just as me straight out of college went to Wall Street. In many respect he is the perfect overachiever who did best on the path he was led onto without questioning too much its foundations. Now he is out there hanging. The guy is about six years younger than me and he helps me feel more secure about my choice in developing BICs of not going with the flow, even if it means in the short term paying a heavy price.
References:
http://www.nytimes.com/2010/04/17/business/17goldman.html?fta=y
WSJ Op-ed:Clearinghouses Are the Answer
Complex derivatives should be regulated like commodity futures.
1)The financial industry has been lobbying very hard against the requirement to settle all derivatives trades through a clearing house, essentially to protect the money making business of structuring customized deals for investors and various hedge funds and other market participants. What Goldman finds itself in the hot seat for is essentially for having brokered synthetic trades, the abacus deals between investors and a hedge fund that allowed the hedge fund to be short the real estate market on a large scale. If all such trades had been cleared through a clearinghouse, such an issue might not have arisen. Goldman seems to have made $15M on the deal and may have done hundred such deals, but now the stock price lost more than 12.5% and more than 12B in market cap on Friday and its reputation is seriously damaged.Is it worth it?
2)The second thought is about the trader Fabrice Tourre a product of the french mathematical education system who just as me straight out of college went to Wall Street. In many respect he is the perfect overachiever who did best on the path he was led onto without questioning too much its foundations. Now he is out there hanging. The guy is about six years younger than me and he helps me feel more secure about my choice in developing BICs of not going with the flow, even if it means in the short term paying a heavy price.
References:
http://www.nytimes.com/2010/04/17/business/17goldman.html?fta=y
WSJ Op-ed:Clearinghouses Are the Answer
Complex derivatives should be regulated like commodity futures.
Saturday, April 3, 2010
On Financial Reform :Regulation Vs. Size of Banks, A false dichotomy?
The debated on financial reform as summarized by Krugman in his latest piece in the NYT seems to have boiled down to the Volker position of limiting the size of financial institutions so that they do not reach a too big to fail size or the position of Krugman of tight and generalized regulation of Banks and shadow banks.
It seems to me that both analysis miss the simple but central ingredient needed to secure the financial system while not impending economic growth and that is a centralized clearing of all trades. Centralized clearing by nature remove a lot of the incentives in the buildup of too big to fail financial entities, it brings a level of transparency that all times gives regulator a clear picture of the dangers in the positions taken by financial/ economic actors.
A simple example to illustrate the power of centralized counterparty on trades. When you go online to buy an item or at the to a store and you use a credit card, that transaction is facilitated and secured by the existence of a centralized counterparty who keeps track of your assets and liabilities and authorize the transaction only when you have enough credit. No party to the transaction takes credit risk on the other and the system is robust. If the same worked among financial trading institutions the same efficiency and security would be gained, eliminating much of the systemic risks that are the source of current concerns.
See:
http://www.nytimes.com/2010/04/02/opinion/02krugman.html?src=me&ref=general
The Holistic Theorem
It seems to me that both analysis miss the simple but central ingredient needed to secure the financial system while not impending economic growth and that is a centralized clearing of all trades. Centralized clearing by nature remove a lot of the incentives in the buildup of too big to fail financial entities, it brings a level of transparency that all times gives regulator a clear picture of the dangers in the positions taken by financial/ economic actors.
A simple example to illustrate the power of centralized counterparty on trades. When you go online to buy an item or at the to a store and you use a credit card, that transaction is facilitated and secured by the existence of a centralized counterparty who keeps track of your assets and liabilities and authorize the transaction only when you have enough credit. No party to the transaction takes credit risk on the other and the system is robust. If the same worked among financial trading institutions the same efficiency and security would be gained, eliminating much of the systemic risks that are the source of current concerns.
See:
http://www.nytimes.com/2010/04/02/opinion/02krugman.html?src=me&ref=general
The Holistic Theorem
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