HAL: I know you and Frank were planning to disconnect me, and I'm afraid that's something I cannot allow to happen.

Dave Bowman: Where the hell'd you get that idea, HAL?

HAL: Dave, although you took thorough precautions in the pod against my hearing you, I could see your lips move.
2001 – A Space Odyssey


A philosophical restart to posts is in order.

Many find refuge in the belief that much of the practice of successful investment remains an art, or more of an art, rather than a science. Yet from the moment the ancient Greeks first began insisting on proofs and explanations mathematics has, albeit at tectonic pace, been eroding the romance of the hunch wherever it may be.

In 1997 Gary Kasparov lost to Deep Blue having previously declared a computer would never defeat him. Now he endorses chess playing software. Yet his strong pre-Kaparov Chessmate™ sentiment was based largely on the notion that a computer cannot filter out the noise from core strategic considerations, something the human mind excels at.

But even this gift of evolution can be brilliantly modelled – as, the quants have shown, can much of investing. So long as data relationships can be determined it is mainly a question of uncovering the variables and the rules governing their interaction.

Of course, readers may have noticed that shit happens to financial quants too. And the stink often is from non-linear relationships. But these too can eventually be successfully modelled: à la Deep Blue it is a question of time, resources and an enduring spirit of scepticism. Bottom line, there is art in math also.

Still, in order to frame the scale of the challenge of modelling chaotic systems, ask the meteorologists about the resources required to produce a weather prediction reliable over more than 3 days.

Thus, until Steve Jobs starts selling iPhone-sized non integrity-challenged HALs, investors face an infinite series of short run episodes joined up into a longer version. And it tends to be those moments between the episodes when the educated and informed hunch, allayed to the available data, saves or makes the serious bonus money.

In practical terms, copying the ancients and asking ‘why’ not ‘what’ serves well. As Socrates, Brazilian football great and a doctor of both medicine and philosophy, noted, the model might look true but that is not the same as its being true.

OK, it was the other Socrates. But try finding his backheels on Youtube.

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2 comments

  1. Anonymous // 3/07/2008 01:29:00 PM

    Rawdon,
    Of course maths doesn't legislate for pure greed viz Carlyle affiliate's Carlyle Capital Corp default. It was on a humble 32:1 debt:equity ratio. What were they thinking of in volatile times!
    Simon

  2. RJH Adams // 3/07/2008 03:37:00 PM

    Simon,

    overleverage comes to the end (again) of another well-modelled short run episode.

    Am I going to see you interviewed on the box as a result of your new celebrity status?

    And if you are a chess player with Facbook account let's have an online match...

    Cheers,

    R

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