Tuesday, October 18, 2005

ON DANGERS OF BEING AN INSECT WITH WINGS AND A MYSTERIOUS INSTANCE OF MASS MAILING

http://www.livejournal.com/users/dpodbori/1369.html

Have you ever wondered why various winged insects (such as moths or nocturnal butterflies) tend to behave as if they are attracted to artificial light sources? Isn't it harmful, and often suicidal, mode of behavior? After all, what is in it for them? Why waste time and energy on clumsy bumbling about a lamp or a candle, visible to all predators, in the company of other equally hapless creatures, and risk an untimely death by burning your delicate wings with a characteristic "Zap!"?

It turns out that this behavioral anomaly is largely well understood by biologists (although there is still scientific debate about details going on). It turns out that flying insects have built-in navigational systems based on the notion of light sources (e.g., stars and the moon) being far, far away -- an infinity away, as far as each insect is concerned. If such an insect needs to fly in a certain direction in the face of adversities such as winds and obstacles, all it needs to do is to strive to maintain a constant angle to one of such convenient light sources. This has been an invaluable and reliable navigational technique for more than 99.99% of the insects' evolutionary history, as the notion of a light source that is not, for all practical intents and purposes, an infinity away simply did not exist.

With the entrance of human-made light sources into the scene the situation for winged bugs changed dramatically. As each burning lamp or candle within a moth's view is clearly not an infinity away but only maybe some minutes or seconds of flight away, by maintaining a constant angle the moth will spiral towards the light source until it bumps into it, with all of the above-mentioned unpleasant consequences. It can be said that the notion of non-infinity, or finality of distance (to the light source) wreaks havoc with the sophisticated navigational system perfected over hundreds of millions of years and leads many a moth to their untimely demise.

For the purposes of this essay, I would like to slightly transcend the conventional terminology and propose that the moths are driven by, and fall victims of, an ideology of infinity, through which they view the world. After all, what is an ideology if not a way of looking at things, a word view (Weltanschauung) which serves the purpose of mapping the incredibly complex multi-dimensional reality into something more simple and manageable, at the expense of completeness. Any ideology purports to describe the world through a precanned systems of patterns and regularities. Without it, the vast randomness surrounding creatures and societies would remain, well, a vast randomness. Living creatures tend to fool themselves that by forcing complexity of reality into simplicity of ideologies they gain some control over the infinity of Tainterian challenges the Universe is presenting them with. Living creatures are, in fact, being fooled by randomness (for more treatment of this topic please see "Fooled by Randomness" by Nassim Taleb).

[Note that any ideology presupposes a fair amount of rigidity and inflexibility and is linked to the conditions under which the past generations of carriers of the ideology, and the ideology itself, have evolved. Without being rigid and past-oriented, there is really no ideology, as it would probably morph into something far less binding, such as tradition. The English language, for example, is nuanced enough to differentiate between, say, a religious ideology, and a religios tradition. The former presupposes projection of the the world view and the mode of behavior from the past into the future, in a fairly rigid way. The latter acknowledges the conditions under which the entity has evolved, but leaves enough flexibility to not to presuppose any fixed mode of behavior for the future.]

Thus, for the purposes of this essay, we can say that the moths are afflicted by ideology, and a fairly rigid one. (To those insisting on scientific rigor in every statement: please don't indict me for excessive anthropocentrism just yet. You don't think that it's the moths who I really have in mind when writing this, do you?).

I wonder what a moth could tell about its experience as it diligently followed the signals coming from its infinity-based navigational system processed by ideological centers in its brain. Moth's main indicator of direction, as we know, is the angle that it is able to maintain to the lamp. So, as it sufficiently approaches the lamp, it starts to decend down to it in a sort of a "mortal spiral". However, as it circles closer and closer, it will have to resist ever-increasing centrifugal forces, which must appear to the moth as an external force (such as the wind) attempting to blow it off-course and prevent it from maintaining the right angle. The moth's answer to this circumstance is quite logical, from its ideology's perspective: to overcome the adversal force it needs to redouble its efforts, increase its wing power, flap its wings ever more frantically and do its best to maintain the sacred angle until the burning sensation felt during the impact with the lamp's glass does not evoke some other kind of response.

The lengths to which I am going to describe the trials and tribulations of lowly insects in a blog mostly dedicated to the members of a different biological class may be surprising to some readers. After all, how is their plight relevant to ours? Ok, it's true that insects, to borrow a phrase from the famous biologist Richard Dawkins, the author of The Sefish Gene, are "highly tuned pieces of survival machinery", and it is also indisputable that over their hundreds of millions of years of history on this planet they have seen many different creatures (some of whom may have initially shown a lot of promise) come and go. But don't we have a key advantage over them that we are basically, much, much smarter, and are capable of learning? We evolve techniques, they don't. We invented industrial agriculture, representative government, professional boxing, telemarketing and credit derivatives. They just keep on flapping their wings as they did a hundred million years ago.

Yes, all of this is true, but I believe that we have lessons to learn from the butterflies (that would only be fitting for creatures professing to be capable of learning).

One of the lessons is that if we interpret reality through some sort of an ideological lense, then our adaptations to reality are only as good as that lense. Whatever signal makes it through the lense, distorted or not, it IS our reality -- up to the point until we feel the burning sensation in our wing area accompanied by "Zap!". The lenses many of us wear are surprisingly rigid. Jim Kunstler often talks about the psychology of the previous investment -- the phenomena preventing living organisms (not just people) to assess the value of objects independently from the organisms' own history with these objects, including the amount of pain and suffering -- literally and figuratively -- that the organisms incurred to acquire the objects in question. From this immediately follows that our value system is highly, to use a mathematical term, path-dependent, and that decisions made at points of bifurcation (the forks on the road) get immediately elevated to the status of "it was the right thing to do".

Well, then, the corollary of the above blather is that the conditions of the past form the lenses through which we view the future. The key difference between us and earlier generations is that the finality of our "distance to the lamp" is getting harder and harder to ignore. If you are a moth and the lamp is a mile away, then your navigational error compared to the lamp being a light year away maybe small enough to ignore. But what is the cutoff point? How close do you need to get to the lamp before you say to yourself: "I am very greatful to the moth Gods who equipped me with a navigational system which reliably allowed me to travel thus far. But I am even more greatful that they created me with the courage and the wisdom to recognize that this navigational system is no longer adequate for my current location in space and time. Thus, I hereby announce my plan to stop relying on that system and commence a transitional period during which I will mobilize myself to create a more fitting one"? You can see that the term "creeping normalcy" and the Aesopean tale about a frog who failed to recognize the gradual temperature increase of water in the pot and who found itself cooked maybe relevant here.

* * *

I fancy myself someone who pays attention to the issues related to the economics and finance, and thus don't hold the great Efficient Markets Hypothesis (which forms the foundation of the modern finance) in a particularly high regard (those who read my criticism of the authors of Freakonomics with respect to their public stance on Peak Oil will not be surprised by this my view). Make no mistake -- the modern financial theory, and mathematics it is expressed in, is supremely beautiful, elegant and remains one of the crown achievments of human intellect; it the assertions or assumptions that it adequately describes reality that we live in that I consider dangerous in their cluelessness.

It has to be further differentiated, however, between the dynamics in the markets of abstract financial products and the markets of commodities available in finite quantities, such as petroleum.

Devastating blows have been dealt to the Efficient Markets Hypothesis as it applies even to highly abstract financial constructs such as financial derivatives and fortunes have been made exploiting various cracks and holes in it (see above-mentioned book by Nassim Taleb, who is a practicing hedge fund manager, for example). George Soros, a long-time critic of EMH, who has made many billions of dollars trading commodities and currencies while at the helm of his Quantum fund over decades betting AGAINST the prevailing financial theory, catalogues its inadequacies in great detail in his book "The Crisis of Global Capitalism". Many people are familiar with the brief history and collapse of the Long Term Capital Management in 1998 which almost caused the world economy to tank; however the following irony (which can be described as delicious) maybe lost on some people:

* The LTCM founders included famed financial theorists who were awarded Nobel prize for the theoretical breakthroughs on which the modern financial theory is based; the chief assumption of the MFT, of course, being the Efficient Markets hypothesis;

* The charter of the LTCM was to exploit market abberations and deviations from EMH for fun and profit; the assumption apparently was that those who made a spectacular career deriving financial theory from EMH would be best-qualified to understand where and how it doesn't correlate with reality;

* This their understanding of shortcomings and inadequacies of their own theory was ruthlessly tested by merciless reality yet again when their assumptions about their theory's inadequacies turned out to be non-realistic and led to the fund's spectacular collapse; the financial crisis of the US and world economy was averted, however, by Alan Greenspan's decidedly non-free market move, specifically by "persuading" the heads of US largest banks and financial institutions to make multi-billion dollar capital injections the into sinking LTCM's market positions (for more details, read "When the Genius Failed", the financial journalist Roger Lowenstein's account of LTCM's history and collapse).

However, regardless of its basis in reality, I hold that purely financial storms in the ocean of the world economy are relatively harmless. Ultimately, the real question of any financial instrument is the question of value and risk, both expressed in purely monetary terms, i.e. how much "a rational agent" should pay for the right to acquire this asset, and what risk the owner of the asset could incurr in the case of adverse market conditions. Expressed in purely monetary terms, incorrect value assessment mechanisms will result in "rebalancings", plain and simple, as money would be changing hands as markets would reevaluate the "real" value of the assets. Some savvy people and institutions would find themselves in this scheme richer -- at the expense of reckless or miscalculating others. But ultimately, the money stays within the sea of the economy, only ebbs on one shore and flows to the other, in a tide-like pattern. Moreover, with entities like Federal Reserve chartered with maintaining the optimal for the economy level of water in the sea, it will be all but insured that no shore will find itself dangerously dry: one of the raisons d'etre of the Fed is to maintain liquidity in the economic sea. In fact, the sea will be perenially expanding as prodigious amounts of liquidity are constantly being pumped into it.

Thus, it is important to stress that our "financial" value system is entirely based on the notions of infinity and continuity, as it projects monetary expansion (underpinned by the economic growth) indefinitely into the future. For example, given the projected rates of monetary expansion (expressed in interest rate curves) markets routinely ask, and answer, questions such as -- if someone promises to pay me one thousand dollars in 2045, how much would I pay for this promissory note today, in 2005? Infinity and continuity is the very fabric from which the "modern finance"-based value system is created. The recognition of its own finality, of discontinuities lying ahead, is not something that modern financial theory is capable of -- no more than a butterfly maintaining the proper angle to the light source is capable of distinguishing between finite and infinite.

[Another example comes to mind -- for those familiar with classical Euclidian geometry and Einstein's General Relativity. Imagine someone attempting to describe galaxy-scaled systems based on Euclidian geometry, to which an infinite straight line is a very fundamental notion. However, the space itself is being warped by massive objects, such as planets, stars, and black holes. The latter, through their exhorbitant mass, create discontinuities in space-time. Thus, a notion of a straight line, as exhibited, for example by a ray of light, is meaningless without taking these discontinuities into account. Modern financial theory is like Eucliadian geometry based on infinite straight lines and purporting to describe reality, but ignoring a massive black hole easily observed in the neighborhood.]

As lakes of ink have already been spilled over the economic impact of peak oil, I will avoid providing yet another speculation-ridden analysis here. However, from the above it may be concluded that the modern financial theory and the modern financial practice will find themselves to be less and less correlated with reality -- just like the navigational system of a moth sufficiently close to a light source -- as their infinity-based value assessment mechanisms will be ever more warped by the increasingly "unbearable finality of being".

In the ensued turmoil, alternative valuation schemes will be experimented with, new valuations will be assigned to the presently existing portfolios, new notions of financial risk and new methods of calculating it will emerge, and new financial theory will be developed. However, the process may not be orderly. One of the prominent economists of our time, Paul Samuelson, described the process of knowledge acquisition thus: "funeral by funeral, the theory advances" (which fits well into the "ideological lenses" observations in the first part of this article). I imagine, however, that some big discoveries in what constitutes and what doesn't constitute value, and how it should and should not be assessed, may be made in the coming months and years by the present, not some future, generation of economic theorists and practitioners.

* * *

I was still entertaining the thought of the possibly stark contrast between the current and the future ways of assessing value as I came across an article in Boston Globe describing ongoing debate between the architects, urban planners, and other interested parties regarding the future of suburban development.

The article, titled "The Virtues of Sprawl" and subtitled "Sprawl isn't what it used to be, some experts contend. Is it time we stopped worrying and learned to love the subdivision?" -- was published on October 2nd, 2005 and can be viewed here:

http://www.boston.com/news/globe/ideas/articles/2005/10/02/the_virtues_of_sprawl?mode=PF

The journalist who wrote the article did his best to present the views expressed by different schools of thought in a fair and balanced way; clearly, however, he wanted to finish on an optimistic note, as he concluded with remarks by this expert:

"Ultimately, says [Joel] Kotkin, author of ''The City: A Global History" (2005), ''The problems of sprawl have to be solved within the context of sprawl. You're not going to stop it. You can't reengineer society by getting everyone to move back to Boston. Forget about it. It's not happening."

As I was reading these remarks, I imagined the following letter mass-mailed by some mysterious unknown sender simultaniusly to many politicians, economists, business leaders, urban planners and other powers that be:

Dear [name withheld]:

I regret to inform you that I have decided not to extend into the future the conditions under which your present living arrangements have evolved.

Please be advised that the negotiations regarding your future living arrangements are currently underway. I would like to emphasize that your participation in this negotiation process is not, strictly speaking, required.

However, I hereby inform you that your continued absence from the above negotiation process will result in that your future living arrangements will be decided for you.

Please let me know if you have any questions.

With best wishes,
Your Reality.

Will the addressees open the envelope or consider it junk mail?