Month: June 2013

Here’s a post from mathbabe:

Most people just use stuff they “know to be true,” without having themselves gone through the proof. After all, things like Deligne’s work on Weil Conjectures or Gabber’s recent work on finiteness of etale cohomology for pseudo-excellent schemes are really fucking hard, and it’s much more efficient to take their results and use them than it is to go through all the details personally.

After all, I use a microwave every day without knowing how it works, right?

I’m not sure I know where I got the feeling that this was an ethical issue. Probably it happened without intentional thought, when I was learning what a proof is in math camp, and I’d perhaps state a result and someone would say, how do you know that? and I’d feel like an asshole unless I could prove it on the spot.

Anyway, enough about me and my confused definition of mathematical ethics – what I now realize is that, as mathematics is developed more and more, it will become increasingly difficult for a graduate student to learn enough and then prove an original result without taking things on faith more and more. The amount of mathematical development in the past 50 years is just frighteningly enormous, especially in certain fields, and it’s just crazy to imagine someone learning all this stuff in 2 or 3 years before working on a thesis problem.

What I’m saying, in other words, is that my ethical standards are almost provably unworkable in modern mathematical research. Which is not to say that, over time, a person in a given field shouldn’t eventually work out all the details to all the things they’re relying on, but it can’t be linear like I forced myself to work.

And there’s a risk, too: namely, that as people start getting used to assuming hard things work, fewer mistakes will be discovered. It’s a slippery slope.

I don’t have much comment to make on the substance of the post, which I really liked, but it made me think of a few things.

With basically no formal math training since high school I spent a fair bit of time failing actuarial exams (the harder math ones, anyway) until I finally got out the damn textbooks and learned proofs. There’s a difference between ‘knowing’ something and knowing something, which is a distinction I only thought I understood a few years ago. I’m an advocate of deep understanding.

Thinking in terms of business, a consequence of a relatively efficient economy is that returns can mostly be attributed to luck. This can be interpreted in many ways. Consider YCombinator’s strategy of incubating dozens and dozens of startups by concentrating on the drive and focus of the founders and building a support system to nudge up the probability of success. That’s a strategy designed to maximize exposure to luck and be ruthless about recognizing and pursuing it when it strikes.

Then again, some people just screw something up, make a big financial bet on something they don’t understand, and win.

The point is that, entrepreneurially speaking, deep understanding can paralyze. There aren’t many business ideas that make a lot of sense to domain experts.

Most of us aren’t pursuing that kind of grand goal, though, and there are lots of homes for smart nay-sayers. Most organizations deliberately employ them to keep a lid on new ideas. Because they’re mostly stupid.

From the NYT:

Tell me about the first time you saw a T-shirt cannon. In 1996, I was at a San Antonio Spurs game, and their mascot had one. It looked like it came from World War II — so big and bulky. I thought: Oh, my gosh, I’ve got to have one of those. I bet I could build one. So I went home and called up a friend of mine who was a welder, and by the end of the day we had a cannon that would fire about a block away.

A block!?

In my business, good accounts are sticky. Every client often has an ‘alpha’ broker that does most of their business and these brokers are normally pretty senior folks.

Junior brokers often look up at those great accounts an think to themselves: “well that guy (they’re usually dudes) is like 60 and I’m 30. I can wait him out and grab that account”.

Well have a look at this:

Some 74 percent of professors aged 49-67 plan to delay retirement past age 65 or never retire at all, according to a new Fidelity Investments study of higher education faculty. While 69 percent of those surveyed cited financial concerns, an even higher percentage of professors said love of their careers factored into their decision.

“While many would assume that delayed retirement would be solely due to economic reasons, surprisingly 8 in 10 — 81 percent — cited personal or professional reasons for delayed retirement,” said John Rangoni, vice president of tax exempt services at Fidelity.

For people who are the best at what they do, retirement is a banishment. They’ve made countless sacrifices to get to where they are and aren’t going to give it up. They have status, money, purpose. Everything everyone wants.

If you want to eat their lunch you’re going to have to take it from their warm, live hands.

From the always excellent Mark Suster:

So the buying company usually wants to pay $0 for the company. And wants to structure a huge payout for the employees that will remain. That way investors (dead money for the buyer) and founders (flight risk) don’t get all the spoils while the faithful staff who will stick around get nothing.

and…

You have been at Google, Salesforce.com, Yahoo! for years. You have worked faithfully. Evenings. Weekends. Year in, year out. You have shipped to hard deadlines. You’ve done the death-march projects. In the trenches. You got the t-shirt. And maybe got called out for valor at a big company gathering. They gave you an extra 2 days of vacation for your hard work.

And that prick sitting in the desk next to you who joined only last week now has $1 million because he built some fancy newsreader that got a lot of press but is going to be shut down anyways.

What kind of message does that send to the party faithful who slave away loyally to hit targets for BigCo?

I’ll tell you what is says.

It says if you want to make “real” money  – quit.

Much as I enjoyed the piece, I feel my contrarian hackles rising.

It’s incredibly fashionable to write passionate pieces about how culture should be central to any company’s strategy. It makes us feel good. It makes us think “hey, my feelings DO matter and I deserve to be heard. I’m frustrated. If they don’t watch out I’ll show ’em”

And I believe it, of course, and I believe my firm does a pretty good job of protecting culture. But we need to fess up to something, people.

Most large successful companies you can think of today got that way via acquisitions.

The dirty reality of growing businesses is that it is effing hard to do. Shortcuts are always welcome. There are lots of dirty ways to grow your firm via acquisition and profit from it, let’s call it Druckiavelli’s* list.

1. Buy out your competition and lobby regulators to raise barriers to entry
2. Develop one hotshot product and mask the outrageous profit margins by squandering the money on acquisitions or underpricing complementary products, driving competitors out of business or into your arms. Then do #1.
3. Float a minority share of your company and use the proceeds (other people’s money) to buy everything you can get your hands on.
4. Run a mutual insurer and instead of returning profits to policyholders dump them into acquisitions and corporate jets (related to #2).

None of these are taught in business schools. Because they’re mean. But they work.

*A portmonteau of Peter Drucker and Machiavelli

I don’t necessarily endorse this, but it’s interesting:

1. Social networks are free, or at least bundled with things like work, family, school and housing.
2. We’d never pay for technology that supports a new network.
3. Facebook’s investors gave us another free network but without being able to make money on the bundle.
4. It therefore takes something from us that we don’t value very much (private information) and sells it to others.
5. The day may come when we regret this.
6. Then again, maybe that information is actually worthless.

Inspired in part by a recent Econtalk.

 

Tad Montross recently tried to throw some cold water on the cat bond party:

“With interest rates being where they are, I don’t think it’s a surprise that a cat bond with a yield of 350 or 500 basis points over Libor looks attractive. People are drooling for those.”

“What happens after the $150 billion earthquake, when Nevada is basically coastline to the Pacific? This whole issue that it’s a non-correlated asset class, which makes it so attractive as people look at their risk-return profiles, is one that really needs to be thought through very, very carefully.”

More plus commentary here.

So here’s a chance to think a bit about all kinds of issues.

Number 1, and most importantly, Montross is biased. Incredibly biased. He competes against cat bonds. If his comments move their marginal prices up he can make more money.

So beware, Dan Kahneman teaches us that we systematically underestimate the effects of bias on others. I could (should?) end the post here because all of his comments should be interpreted as naked self-interest even if it’s not consciously intended.

Number 2, correlation is a brutally simple statistic that glosses over a lot of complexity in risk management. At the link, Steve Evans makes the point that many investors are too sophisticated to actually take the “non-correlation” line at face value with cat bonds. Or any other asset class for that matter.

But I’ll try to make a stronger stand. Low correlation is real and here to stay. Forget sophistication, if you have a portfolio of cat bonds diversified by region and peril, even if a 150bn EQ hits, ripping California from the mainland or whatever ridiculous sci-fi fantasy you want, your cat bond portfolio will vastly outperform every other asset class. It’s diversified, people. There’s US wind, there European perils, Japan, etc, etc. The general economy, on the other hand, would be toast.

Which takes me to point 3: the ONLY source of meaningful correlation to other assets is through the holding portfolio of treasuries or Money Market Funds. If these tank, cat bonds follow. This got found out in the financial crisis where some bonds got into real trouble because Lehman stuck the assets into garbage “AAA” mortgage CDOs. Luckily it was a small subset and we got a chance to learn the lesson (allow me to say that all collateralized deals we did pre-crisis used super-safe assets and didn’t blink in the crash).

Anyone can imagine a sufficiently unlikely scenario where all assets correlate (asteroid destroys earth and it’s correlation city: all assets go to 0). The key is that you need to tie it into your own risk management system. On a 1-in-100 portfolio basis tresauries are still liquid and as risk-free as possible and so cat bonds are non-correlating. End of story.

For his soccer tournament:

I also have a network of friends and buddies who are doormen around the city. They tell me who’s around. That’s how it falls into place.

Awesome.