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| '''Work life''': An unwanted outcome you didn’t expect, to which you weren’t paying attention, and, therefore, for which you don’t think you should be blamed. | | '''Work life''': An unwanted outcome you didn’t expect, to which you weren’t paying attention, and, therefore, for which you don’t think you should be blamed. |
| </Ol> | | </Ol> |
| We are, as the JC frequently complains, in a swoon to the [[Reductionism|reducibility]] of all things.
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| This usually involves converting all the irreducible things that we do and that happen to us into numerical [[data]] points. ''Numbers.'' Numbers submit easily to aggregation, symbolic manipulation, calculation, and statistical technique: means, modes, medians, standard deviations and so on.
| | Now here is the thing. When we calculate probabilities — when we roll dice — we are in situations of known risk. That average means something. It is not just that on some some dice the probability is more like ⅐, on others now like ⅕, but on average the dice work out at all about ⅙. It must be true of every individual die.. |
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| But “things that we do and that happen to us” — henceforth, “things” — do not. They are not numbers. They are unique, four-dimensional, social constructions. They exist partly in the universe, partly in our minds, and partly in the immaterial linguistic layer that lies between us. These things are [[ineffable]].
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| Reducing them to words involves ''some'' loss of information. Reducing them to numbers even more. This is not a matter of data compression. We cannot restore this information through reverse symbolic operations, the way we can unpack “things” to restore “things that we do and that happen to us” in this essay. We cannot restore the ineffable once we have reduced it to data. We can ''mimic'' it, but that is something different.
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| Now data, in themselves, are no more naturally [[effable]] than the “things” from which we extract it. But we can run statistical operations on data in a way we cannot on “things”.
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| Observation: statistical manipulation of “things” depends first on reduction.
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| This is the singular benefit of datafication. To simplify a complex artefact down to a number, or set of numbers, is to ''symbolise'' it. Symbols we can subject to ''symbol processing''. But we have switched domains: we have left the ineffable [[offline]] and gone [[online]]. We have left the world of the ''signified'' and entered that of the ''signifier''. <Ref>Note: the [[simulation hypothesis]] is premised on the two domains being identical, because they are, for all intents, ''mathematically'' identical.</Ref>
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| Assigning a number to a thing is no less a creative linguistic operation than giving it a name. The calculations we perform, on that number, tell us about the mathematical properties of that number.<ref>There is a sort of numerology about this. The letters in Adolf Hitler’s name, when divided by his mother’s birth month and multiplied by his father’s age at his birth add up to 666!! They don’t? Then that cannot be his real father!</ref> They do not tell us anything about the artefact it signifies. This is easiest to see with an average: the average height of the passengers in this carriage tells us nothing about any single passenger’s height. Yet so much of the modern world measures against the average!
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| We say the average is an emergent property of the group, the the say that wetness is an emergent property of a group of water molecules. But is it?
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| We harvest information from artefacts, convert it into data, generalise it, manipulate it mathematically, and then apply it back to ''similar'' artefacts. A statistical method is legitimate if it applies to identical artefacts. We suppose it to be largely legitimate if it applies to similar artefacts.
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| Dice are not machined perfectly. But they are similar. The broad principles of probability apply to them generally, roughly.
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| But “similar” is a word, and therefore a value judgment. It exists in the domain of signifiers, not signified. We are similar in that we are all homo sapiens. But that similarity is not enough to draw conclusions about our breakfast preferences.
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| In the same way that we can calculate the probability of rolling consecutive sixes so, it seems, can we calculate the probability of rain tomorrow, a cut in stamp duty in the spring, or a thirty-point intraday drop in the NASDAQ.
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| This is depends on the artefacts being, in the first place, sufficiently and relevantly similar. The sides of a dice are, to a large degree. Clouds and weather patterns are, to a lesser degree. The conditions propelling the NASDAQ — humans — are not.
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| But we notice regularities in the behaviour of the market and we impute to them regularity all the same. And once we do this we can dispense with the messy, ineffable, incalculable domain of signifiers, and perform our operations in the clean, tidy, nomological world of signifiers. We move from the ''physical'' to the ''synthetic''.
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| For numbers are alluring. They are under our control. They ''behave''. They bend to the spreadsheet’s will. The spreadsheet’s will is our will.
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| Except, as [[David Viniar]]’s immortal words remind us, the events these numbers represent — the territory for which they are a map — are wont to have other ideas.
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| {{quote|{{viniarquote}}<ref>explaining why the [[vampire squid]]’s flagship hedge funds lost over a quarter of their value in a week, in 2008.</ref>}}
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| ''Rolling dice are not like the stock market.''
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| ====The map and the territory====
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| Mr Viniar’s model, he hoped, would tell him something about the market’s behaviour. The model is the ''map'', the market is the ''territory''. We judge the success of a model by how close its prediction is to our subsequent [[lived experience]]. There is a natural dissonance: models are drawn from past experience, and that is singular, static and unalterable. It is dead. Our future experience is, as far as we know, none of these things.
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| You would not expect a “twenty-five sigma” day once in several lifetimes of the universe. Goldman’s model was in effect saying, this kind of event ''will not happen''.
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| This would be the equivalent of all the molecules in a cup of tea spontaneously jumping to the right at the same moment. The molecules are bouncing around randomly — Brownian motion, right? — and so conceptually they could all jump left at once<ref>it may be that, conceptually, they couldn't — Brownian motion depends on collisions. For all I know, this implies that half the molecules are jumping the other way.</ref> but the sheer odds of every single atom doing do at once are so infinitesimally small that it would never happen in several billion lives of the universe. Neither the cup or the tea in it would last that long, of course.
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| But that is the scale of likelihood of a twenty-five sigma event.
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| That Mr Viniar thought there were several such days ''in a row'' — in a market history measured in decades, not universe lifetimes — must mean the model was wrong.<ref>It was, for reasons we explore elsewhere.</ref>
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| Now here is the thing. When we calculate probabilities — when we roll dice — we are situations of known risk. That average means something. It is not just that on some some dice the probability is more like ⅐, on others now like ⅕, but on average the dice work out at all about ⅙. It must be true of every individual die.. | |
| Rolling dice to ''determine'' an outcome is is quite | | Rolling dice to ''determine'' an outcome is is quite |
| different. We do not build a statistical model that predicts a ⅙ probability: we build the dice to yield the that outcome. The dice are what [[Nancy Cartwright]] calls a “[[nomological machine]]”: a carefully designed, constrained, hermetically-sealed device, designed to generate a specific theoretical outcome. If over time the dice don’t yield a ⅙ outcome we don't chuck out our statistical model: we chuck out the ''dice''. | | different. We do not build a statistical model that predicts a ⅙ probability: we build the dice to yield the that outcome. The dice are what [[Nancy Cartwright]] calls a “[[nomological machine]]”: a carefully designed, constrained, hermetically-sealed device, designed to generate a specific theoretical outcome. If over time the dice don’t yield a ⅙ outcome we don't chuck out our statistical model: we chuck out the ''dice''. |
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| =====Externalities===== | | =====Externalities===== |
| There are a category of events which make it impossible even for a solvent counterparty to perform. Change in law, for example — it is not beyond possibility that certain kinds of swaps might be restricted or outlawed altogether<ref>Not long ago the European Union proposed restricting the carbon market to “end users” to discouraged financial speculation, for example. This would have rendered certain forward contracts in {{euaprov|Allowances}} involving delivery to non-users illegal.</ref> or Tax events that make the transaction uneconomic as originally envisaged. | | There are a category of events which make it impossible even for a solvent counterparty to perform. Change in law, for example — it is not beyond possibility that certain kinds of swaps might be restricted or outlawed altogether<ref>Not long ago the European Union proposed restricting the carbon market to “end users” to discourage financial speculation, for example. This would have rendered certain forward contracts in {{euaprov|Allowances}} involving delivery to non-users illegal.</ref> or Tax events that make the transaction uneconomic as originally envisaged. |
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| Secondary events of this kind — things that limit a delaer’s ability to hedge, or materially increase its costs of doing so, tend not to be Termination Events partly this reflects a fact not often stated, but nonetheless true: there is a price at which the parties will agree to terminate any swap. Just because a party doesn't have an economic option to terminate the trade doesn't mean it can't terminate the trade. It always has an “at market” option. In liquid markets during times of fair weather this is a source of great comfort; in illiquid markets and at times of stress, less so. A dealer will say, “I will always show you a price. You just might not mind the price, is all.” | | Secondary events of this kind — things that limit a dealer’s ability to hedge, or materially increase its costs of doing so, tend not to be Termination Events partly this reflects a fact not often stated, but nonetheless true: there is a price at which the parties will agree to terminate any swap. Just because a party doesn't have an economic option to terminate the trade doesn't mean it can't terminate the trade. It always has an “at market” option. In liquid markets during times of fair weather this is a source of great comfort; in illiquid markets and at times of stress, less so. A dealer will say, “I will always show you a price. You just might not mind the price, is all.” |
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| Customers have less incentive to break trades if it means realising | | Customers have less incentive to break trades if it means realising |