The Nash Files

The free market and regulation could be friends

noreply@blogger.com (Adam Smith) — Thu, 27 Aug 2009 11:33:00 +0000

In the aftermath of the financial crisis, voices have been raised to regulate the economy more tightly. Contrary to the current right/left political jargon, regulation per se is not the left wing enemy of free markets. Protectionism and barriers of entry are and often regulation is used as a stealthy vehicle to achieve these ends.

Any society needs rules and regulations both for social interaction and economy or we would see web sites for assassination services or similar, which would make economic sense but are not desireable. Good rules and regulations create an even playing field boosting innovation and competition. Regulations should preferrably be global to extend the playing field even further. Good regulation deal primarily with the "what" and not with the "how".

When some incumbent is crying for more regulation to prevent unknown, and in particular new (disrupting) ways of working, extreme caution should be exercised because this regulation is probably not good for the economy as a whole. Often this is disguised as "business friendly" from right wing sources too fool us economic liberalists into believing that the best interest of the economy is being served. Politicians, don't fall into this trap (unless that is what you are paid to do :()

A man's best friend - E-coli

noreply@blogger.com (Adam Smith) — Sat, 18 Apr 2009 18:57:00 +0000

According to Dr Sharon Moalem, in her book "Survival of the Sickest", every person is really a small ecosystem of thousands of species. Bacteria of all conceivable kind and other microorganisms evolve together with the host, competing and cooperating in a wild evolutionary dance.

The evolution in micro-organisms (and viruses for that matter) happen at a speed several orders of magnitude faster than in any mammal. How on earth is anybody still alive when these buggers can outrun (actually outbreed) any defences?

The answer must be that it is beneficial for most of these species that the host is alive providing the habitat. Those microorganisms that don't benefit from the host being alive and kicking and that actually would take the host down will not only have to immediately fight the immune system of the host but also have to face the other species of the habitat in a longer term evolutionary battle. So without E-coli and his friendly neighbors we would most likely already be extinct.

Precisely wrong

noreply@blogger.com (Adam Smith) — Tue, 07 Apr 2009 15:37:00 +0000

The Black Swan by Nicholas Taleb is an impressive book, indeed. It has totally convinced me of being wrong. The main premise of the book is that very few processes are normally distributed and most of the randomness in real life comes from totally other distributions we can only guess (and why we shouldn't believe any forecast or risk measures built on the normal distribution).

We use the normal distribution because we know how to calculate with it. Mea culpa, I'm one of them. I never realized what I did when I wrote the ill boding words "assuming that the variable is normally distributed" in my Master's thesis of economics. In fact it simply means that the whole thesis is plainly wrong about currency hedging.

This is how he convinced me of the rareness of the normal distribution. The normal distribution is built up from discrete events, like coin flips. This binominal distribution, when the number of flips approach infinity, will form the bell curve.

Well, there are two assumptions behind this, none of which hold true for currency rates, or really any other real life event for that matter. Firstly the coin flips should have no memory, that is, a previous flip does not influence the next. We know that currency rates tend to overshoot. Bang - the first hole in the edifice. Secondly all outcomes should be of the same size, meaning that when you flip tails, it counts as only one tails, not 20 or 100. Clearly the up or down movements in currency rates are not of the same size every time. Bang, bang - the whole thing comes crashing down.

It was either to assume normal distribution or not to write anything about optimal hedging, I just did not know that then.

The Memetic Swan

noreply@blogger.com (Adam Smith) — Sat, 28 Mar 2009 07:58:00 +0000

I'm reading the Black Swan by Nicholas Taleb. I haven't even finished it but feel compelled to comment on it right now.

The Black Swan event, according to Taleb, is a very improbable event with enormous implications, a far outlier in the Gaussian sense. One of my first posts in this blog was about links and nodes of networks and based on that my conjecture is that black Swan events can arise in nonlinear environments but not in linear. Linear events, where the output is proportinal to the input, pile up a Gaussian curve statistic but in a network the same trigger can either fade away or blow out of proportion through the many nonlinear feedback loops.

I conjecture that all memes are potential Black Swans. The memetic network is like a excited laser, feed in the wrong frequency and nothing will happen but with the right input the whole energy is released in one go.

The point

noreply@blogger.com (Adam Smith) — Mon, 16 Mar 2009 09:46:00 +0000

I got some comments about my previous post. It was pointed out that the capitalism of big corporations is a meritocracy. This is, of course, true and I realized that the main point implied in the artice was not spelled out clearly enough.

Any stable order is a meritocracy given the parameters of the system. My point was that the capitalism of big corporations will not bring about the meritocracy that the Enlightment thinkers and the Founding Fathers of USA had in mind. These thinkers envisioned a society with free individuals, all having an intrinsic human value and where their starting point in life would not be an impediment for the pursuit of happiness.

In a system where the incumbents can tweak the rules in their favor, this will not happen.

Capitalism and the American Dream

noreply@blogger.com (Adam Smith) — Sat, 14 Mar 2009 13:12:00 +0000

I saw a video clip about Milton Friedman defending capitalism against critics.

He is right that other systems have not been able to deliver the goods as well as this system and in this way is better for its citizens, but he is dead wrong when he lets us understand that capitalism equals free markets and free competition.

Capitalism, as commonly understood today, is the capitalism of corporations. Corporations loathe free competition - they do everything within the law (and sometimes beyond) to achieve a monopoly of sorts, because that can deliver the highest profits. Basically they like competition when it allows them to move in on somebody's turf but cry foul when it is done unto them.

As my pseudonym indicates, I'm no lover of monopolies. It does not matter do they come from corporations or trade unions. It is the same idea, to monopolize the market of a certain good and create barriers of entry.

Capitalism as of today left unchecked is not a good idea since it will not increase the chances for the challengers of the world, bringing in the full competition and innovation that humans can muster. However, the allocation mechanism of "the market" is unsurpassed in its efficiency and should be kept going at maximum speed but that does not mean that it can be left unchecked either, as we have learned in the near past. Its allocation efficiency will not be hampered even if it has strict rules and full transparency. Capitalism with not easily manipulated checks and balances is probably the optimal system that we can achieve.

Americans have been conned from birth into believing that today's capitalism equates to the "The American Dream" where Scrooge McDuck relying on himself only and his skill and his hard work, can work himself up during his lifetime from being the shoddy immigrant at Ellis Island into the richest duck in Ducksburg. With fewer barriers of entry driven by the incumbents and the helpful governments, we would have more Scrooges. The American Dream is much better served by full competition (even foreign) underwritten by the government. Regulation is actually needed to bring this about.

I see the main economic role of governments to make sure that the playing field is level, this will not emerge. Not that I believe it to happen any day soon, since political parties are organisations driving their own particular monopoly with no love lost for actual competition regardless of the color of the banner they fly.

A totally level playing field would actually equal to meritocracy. That is a scary thing since you can not be so sure you are the best, can you?

Heads - I win, tails - you lose

noreply@blogger.com (Adam Smith) — Thu, 26 Feb 2009 16:37:00 +0000

I read an interesting book, "The Return of Depression Economics" by Nobel laureate Paul Krugman. I found this book very readable offering a explanations to those events I really never understood when following the world news with investor eyes during the last 15 years.

I think he is right on by claiming that moral hazard is central stage to the bubbles that eventually bust with more or less devastating effects. As he says that anything that performs banking functions and is so crucial that it has to be bailed out in times of crisis, then such an entity also have to be regulated like banks. I think this is good advice for the future. Free markets are all good and true until somebody can play the game described in the header on a massive scale.

The catch is - it is not very easy to see which entities perform banking functions, that is entities borrowing from some and lending to others and trying to make a profit in between (by taking more risk) and at the same having to be able to satisfy the liquidity needs of the creditors for the market mood not to go haywire. These come in all shapes and forms and will, most likely, not be recognized in time until they pop.

El World Change

noreply@blogger.com (Adam Smith) — Mon, 08 Sep 2008 05:59:00 +0000

Hi I'm back. It took a bit longer than expected.

Last weekend I was playing a Facebook game called "Word Challenge". The aim is to find as many anagrams as possible from seven letters within a set period of time.

In this game there is really no time to think, you have to "see" the words and that is why I think this has a lot to do with creativity, to connect the dots instantaneously on a subconscious level. When is the brain working the smoothest in its parallel processing beauty? A perfect set up for a little home made science experiment on my brain.

I tested some circumstances and below is what I found. The reference is a normal day after work when I was consistently getting scores between 2000-3000 points (however the game calculates them).

Wake up in the morning - hardly any scores beyond 2000
Tired in the evening - scores around 2000
Just after hard physical exercise - barely got scores of 1500
30 minutes later - scores like the reference, 2000-3000
After two beers on Saturday evening - my top scores 4000-6000
After 3 beers - dramatically falling back to around 2000-3000
After more beers - even lower scores

Nothing revolutionary here, the interesting thing being that how you can put a number on what is intuitively known. Alcohol definitely has a very powerful positive albeit short term effect.

Software architecture and renovation - a world in common

noreply@blogger.com (Adam Smith) — Thu, 20 Mar 2008 21:52:00 +0000

The renovation project is proceeding. What does a renovation project have in common with sw architecture?

In a short time space many decisions have been made concerning the bathroom, walls and fireplace. Like sw architecture, once an architectural decision has been made and implemented it will be very costly and difficult to change, just imagine wanting to replace the IP protocol. The point is that you just want to make it right - or flexible enough to reverse it when the time comes. Literally (since it is a renovation project), only carve in stone the things you have to carve in stone.

In order to be able to make a lot of decisions quickly I had to rely on something familiar. My internal guide for these decisions were drawn from good sw architecture - open interfaces and no hard coding. All old cupboards made from brick were torn down - because then the door is hard coded. They will be replaced with wooden cupboards that can be put wherever. The old brick fireplace was removed and replaced in such a manner that the floor and the wall will remain intact even if the fireplace is changed once again. In the bathroom the old bathtub was thrown out and replaced with a stand alone bathtub for the same reason, etc..

If this philosophy would be pushed to the limit it would mean that I would have to tear down all brick walls and lay one floor first and then build the walls in a changeable manner. However I will let this impurity remain before I run out of all my funds.

Parallel and serial - separated only by one quantum collapse

noreply@blogger.com (Adam Smith) — Sat, 09 Feb 2008 20:55:00 +0000

I have always prided myself to juggle a large and diverse set of threads simultaneously. My progress philosophy in brief is that if I can visualize the future I want materialized, then as long as I'm involved in a large number of activities (not so important which) the future I envisaged will eventually evolve. The activities themselves do not really matter because I also think that every activity is just a different aspect of the same reality and the important "cusp" interconnecting moments will emerge where your decision will tilt the direction of the development in an irreversible way. Maybe I'm a renaissance man born in the wrong century.

The opposite of this was demonstrated with clarity by a house renovation project of my own. Suddenly my attention was required to great many details of a one single project and I felt like a quantum function collapsing. I have pretty much been incapable of being involved in any parallel activities at all while the serial one does not wan't to materialize either. I'm definitely most effective in parallel but I can not predict how.

The market price called hormone

noreply@blogger.com (Adam Smith) — Sat, 29 Dec 2007 21:27:00 +0000

Read another book during the holidays - "The Truth about Hormones" by Vivienne Parry. The basic point was that the body has two ways to communicate internally, either quickly via the nervous system or more slowly distributing chemicals via the blood.

The book described in great length the interaction of the glands and the different substances released but failed in my opinion to give a fundamental explanation to the different ways of communications and to the fact that why totally different levels of hormones are needed for "normal" people to keep the bodily functions in balance.

Maybe the answer is evident. The nerves do not reach all cells, while the circulatory system does and that would also explain why hormones are involved in large scale developments in the body - growth, starvation/times of plenty, internal clock synchronization to daytime, sexual maturity and decline, menstruating cycles etc. The hormone levels in the circulatory system would be the new "market prices" to which all cells have to adapt one way or the other. These things would be very difficult to coordinate like a centrally planned economy giving orders to each cell. The radically different levels of hormones of different people considered healthy would then just be the "market" level managing to strike the balance in that individual and since all individuals are - individuals - with different nutrition and circumstances then there is no reason why everybody's "markets" would be the same.

The odd man out is adrenaline, which also messes with the nervous system allowing the synapses to let through more stuff.

Scarcity challenged

noreply@blogger.com (Adam Smith) — Thu, 20 Dec 2007 21:25:00 +0000

Just finished a book "The Undercover Economist" by Tim Harford. I read it with mixed feelings.

See, the whole reason for my pseudonym is my firm belief in the market mechanism to solve allocation problems via the communication of a price (with a spice of game theory and externalities) and Tim has put it so elegantly and concisely in his book. It is exactly how I would have liked to put it and how I have been arguing the issue over the years. Read the book, not my blogs!

I see this mechanism as one of the most fundamental laws of nature, well demonstrated in traditionally non-economical fields as biology and evolution as well as in information theory. The world revolves around creating scarcity and fighting scarcity. All seemingly other conflicts are just dressed up differently.

The selfish meme - victory over chemistry

noreply@blogger.com (Adam Smith) — Wed, 14 Nov 2007 10:40:00 +0000

The Jokela incident would indicate that Susan Blackmore is on to something in her book "The Meme Machine".

According to her, since we can imitate, humans are conduits for memes. However, analog to Richard Dawkins, who wrote "The Selfish Gene", she claims that the memes are selfish and care for nothing else than their own propagation. Genes in this respect would be a subset of memes, a subset that are chemically encoded in DNA and not by the linking of synapses.

It would not be possible to explain any premature ending of your days by evolution especially when there is no genetic offspring involved that could benefit from leaving early. Memetically it is possible. The idea will live on for what it is worth even if the genes of the individual lost out.

Jokela, Finland

noreply@blogger.com (Adam Smith) — Sat, 10 Nov 2007 07:43:00 +0000

A few days ago the world had the bad fortune of having to experience another high-school shoot-out, this time in Jokela Finland.

A few questions immediately come to mind:

1) Why does somebody do this?
2) Is there a trend? If yes, what is it?

The piece of the puzzle that does not fit is the the innocent by-stander. I can somehow understand the mechanism of hate crimes. You hate somebody so much that you want to see that person dead even at the price of your own life. But the targets in the school shoot-outs were not singled out individuals but rather individuals who happened to be in range. The school, however, was singled out and potentially some teacher or headmaster.

Throughout history some people have chosen to end their days prematurely. Plain suicides occur. All sorts of anarchists, martyrs and radicals have been fighting for their causes against their perceived enemies with their life at stake. What is new in the high-school shoot-outs? Columbine and Jokela were advertised in advance. Does it mean that there is a cause worth dying for? If so, I can not think of any other that Andy Warhol's 15 minutes of fame even if the person would not live to see it. Maybe that is the trend. If this is the trend, take the YouTube trailers seriously.

The attention economy, attention to the economy!

noreply@blogger.com (Adam Smith) — Wed, 31 Oct 2007 12:53:00 +0000

Recently I listened to a lecture on a current phenomenon labeled "the attention economy". The idea basically is that anything linking a (person) profile to some content is valuable. It does not matter how trivial the linkage is when these bits and pieces are amassed by the million.

Some good examples of this are Second Life, social bookmarking applications, any Facebook application and for instance microblogging linked to geography.

Obviously this information is collected for commercial purposes mainly for more targeted advertisements.

As long as the profiles are all anonymous then the attention has an equal value. When the person is identified the value goes up (especially if you happen to be somebody). I wonder what this will do to privacy since the temptation to use the person instead of the profile will be stronger as more bang would be got out of the buck. The economy of the attention economy may have a really bad effect on privacy.

Learning to write

noreply@blogger.com (Adam Smith) — Sun, 07 Oct 2007 06:48:00 +0000

My son is learning to write. It must be a fascinating experience to fix some thoughts on paper for the first time.

I noticed that the output is a long string of characters - mostly consonants, sporadically vowels and no spacing between words. Is it so that he intuitively uses the signs that carry most information value first? Is this how the brain works?

The Clash of Civilizations - the meme wars

noreply@blogger.com (Adam Smith) — Fri, 21 Sep 2007 06:34:00 +0000

Read an interesting book, The Clash of Civilizations by Samuel P Huntington. He makes a powerful case for a new world order based on culture and claims that the world looks much more like the worlds when I play Sid Meier's Civilizations than anything resembling the old cold war division. According to him it is most useful for policy purposes to see the world as composed of 5-7 civilizations that play their own game and shifting allegiances whenever suitable without a stable friends & foes division.

He mentions specifically that the most dangerous clashes will come from Western arrogance, Islamic intolerance and Sinic assertiveness. He is probably right about that. These three cultures have all long history and are all convinced of the "correct way of life" both on an individual and on an institutional level.

It seems that the strongest memes are cultures.

Which memes survive?

noreply@blogger.com (Adam Smith) — Mon, 10 Sep 2007 07:37:00 +0000

Continuing the previous post this is my best guess to answer which memes disintegrate and which not.

In telecommunications there are two main ways to get a message through intact via a noisy channel, redundancy or checksum/error correction.

The same would apply to memes so one way would be to keep the message short (minimize the possible mutations) and repeat it often. The other method would be to build in some error correction into the message, for instance in forms of rhymes and verse to minimize the possible mutations that still would fit the schema and that still would make sense.

During the time when oral tradition was the only way to carry stories forward, most (if not all) stories that have survived to this day use a strict form of verse as a method of error correction. The other stories disintegrated.

Memes and networks

noreply@blogger.com (Adam Smith) — Thu, 06 Sep 2007 06:36:00 +0000

Memes, the information equivalent of genes, are either successful or not so successful depending on how well they replicate in a network.

Is a weak meme finding the central nodes more efficient in spreading than strong memes finding the peripheral ones?

Which memes disintegrate into Chinese Whispers and which stay intact? What are the characteristics of a successful meme?

Possible applications:
Computer viruses
Viral marketing
Fashion
Reputation in social networking
Political messages
Word of mouth

The intangible asset of the firm

noreply@blogger.com (Adam Smith) — Mon, 03 Sep 2007 10:47:00 +0000

Isn't so that the innovation value of the company is directly correlated to the number of links, not the number of nodes?

Nodes and links

noreply@blogger.com (Adam Smith) — Wed, 29 Aug 2007 16:50:00 +0000

The web = nodes and links
Google = nodes and links
MySpace = nodes and links
LinkedIn = nodes and links
Facebook = nodes and links
Your work organization = nodes and links
Your offline life = nodes and links
The map = nodes and links
Your project plan = nodes and links
Your brain = nodes and links

What is not nodes and links?
Are the nodes different? Are the links different?

Should your brain cells avoid bad neighbourhoods to get top rankings?

Stone, scissors, paper all over the place

noreply@blogger.com (Adam Smith) — Mon, 27 Aug 2007 19:55:00 +0000

Saw an amazing presentation today by an experienced hacker. Internet has become an ecosystem where evolution is happening at a breakneck pace. For every solution there is a crack, for every crack there is a solution and on it goes ad infinitum. For every intended use of any solution there are several unintended - helpful, harmless or harmful.

This in itself is not new. What is new is that so many persons multitask at it - soon a significant percentage of the human brainpower.

When will the attraction of brainpower stop? Maybe it goes in the same direction as stock exchanges, at some point in time there is really very little arbitrage to be made except by automatic microsecond decisions so humans lose interest. On the other hand, human interactions form a complex marketplace of different individual desires so maybe there is no end.

Time to get started

noreply@blogger.com (Adam Smith) — Fri, 24 Aug 2007 19:44:00 +0000

Wow, the new found power to blast opinions without scrutiny by anybody else. I wonder whether this is why blogs are so popular. Does anybody else than immediate peers read them (who were told to)?

I guess you either tackle topics that are immediate and personal or general and philosophical. The rest has no relevance to anybody - unless you are fishing for in-links to your web site.

Not much of an initial post, but it will have to do.