In Fed and Out, Many Now Think Inflation Helps ( New York Times )

In Fed and Out, Many Now Think Inflation Helps ( New York Times )

October 27, 2013 at 7:30pm

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http://www.nytimes.com/2013/10/27/business/economy/in-fed-and-out-many-now-think-inflation-helps.html?pagewanted=1&_r=0&nl=todaysheadlines&emc=edit_th_20131027

By BINYAMIN APPELBAUM

Published: October 26, 2013

( Page 1 of 2 )

WASHINGTON — Inflation is widely reviled as a kind of tax on modern life, but as Federal Reserve policy makers prepare to meet this week, there is growing concern inside and outside the Fed that inflation is not rising fast enough.

Some economists say more inflation is just what the American economy needs to escape from a half-decade of sluggish growth and high unemployment.The Fed has worked for decades to suppress inflation, but economists, including Janet Yellen, President Obama’s nominee to lead the Fed starting next year, have long argued that a little inflation is particularly valuable when the economy is weak. Rising prices help companies increase profits; rising wages help borrowers repay debts. Inflation also encourages people and businesses to borrow money and spend it more quickly. The school board in Anchorage, Alaska, for example, is counting on inflation to keep a lid on teachers’ wages. Retailers including Costco and Walmart are hoping for higher inflation to increase profits. The federal government expects inflation to ease the burden of its debts. Yet by one measure, inflation rose at an annual pace of 1.2 percent in August, just above the lowest pace on record.“Weighed against the political, social and economic risks of continued slow growth after a once-in-a-century financial crisis, a sustained burst of moderate inflation is not something to worry about,” Kenneth S. Rogoff, a Harvard economist, wrote recently. “It should be embraced.”
The Fed, in a break from its historic focus on suppressing inflation, has tried since the financial crisis to keep prices rising about 2 percent a year. Some Fed officials cite the slower pace of inflation as a reason, alongside reducing unemployment, to continue the central bank’s stimulus campaign.

Critics, including Professor Rogoff, say the Fed is being much too meek. He says that inflation should be pushed as high as 6 percent a year for a few years, a rate not seen since the early 1980s. And he compared the Fed’s caution to not swinging hard enough at a golf ball in a sand trap. “You need to hit it more firmly to get it up onto the grass,” he said. “As long as you’re in the sand trap, tapping it around is not enough.”
All this talk has prompted dismay among economists who see little benefit in inflation, and who warn that the Fed could lose control of prices as the economy recovers. As inflation accelerates, economists agree that any benefits can be quickly outstripped by the disruptive consequences of people rushing to spend money as soon as possible. Rising inflation also punishes people living on fixed incomes, and it discourages lending and long-term investments, imposing an enduring restraint on economic growth even if the inflation subsides.
“The spectacle of American central bankers trying to press the inflation rate higher in the aftermath of the 2008 crisis is virtually without precedent,” Alan Greenspan, the former Fed chairman, wrote in a new book, “The Map and the Territory.” He said the effort could end in double-digit inflation.
The current generation of policy makers came of age in the 1970s, when a higher tolerance for inflation did not deliver the promised benefits. Instead, Western economies fell into “stagflation” — rising prices, little growth.
Lately, however, the 1970s have seemed a less relevant cautionary tale than the fate of Japan, where prices have been in general decline since the late 1990s. Kariya, a popular instant dinner of curry in a pouch that cost 120 yen in 2000, can now be found for 68 yen,according to the blog Yen for Living.
This enduring deflation, which policy makers are now trying to end, kept the economy in retreat as people hesitated to make purchases, because prices were falling, or to borrow money, because the cost of repayment was rising.
“Low inflation is not good for the economy because very low inflation increases the risks of deflation, which can cause an economy to stagnate,” the Fed’s chairman, Ben S. Bernanke, a student of Japan’s deflation, said in July. “The evidence is that falling and low inflation can be very bad for an economy.”
There is evidence that low inflation is hurting the American economy.
“I’ve always said that a little inflation is good,” Richard A. Galanti, Costco’s chief financial officer, said in December 2008. He explained that the retailer is generally able to expand its profit margins and its sales when prices are rising. This month, Mr. Galanti told analysts that sluggish inflation was one reason the company had reported its slowest revenue growth since the recession.
Executives at Walmart, Rent-A-Center and Spartan Stores, a Michigan grocery chain, have similarly bemoaned the lack of inflation in recent months.

(Page 2 of 2)



Many households also have reason to miss higher inflation. Historically, higher prices have led to higher wages, allowing borrowers to repay fixed debts like mortgage loans more easily. Over the five years before 2008, inflation raised prices 10 percent. Over the last five years, prices rose 8 percent. At the current pace, prices would rise 6 percent over the next five years.

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Inflation Fails

“Let me just remind everyone that inflation falling below our target of 2 percent is costly,” Charles L. Evans, the president of the Federal Reserve Bank of Chicago, said in a speech in Madison, Wis., this month. “If inflation is lower than expected, then debt financing is more burdensome than borrowers expected. Problems of debt overhang become that much worse for the economy.”
Inflation also helps workers find jobs, according. to an influential 1996 paper by the economist George Akerlof and two co-authors. Rising prices allows companies to increase profit margins quietly, by not raising wages, which in turn makes it profitable for companies to hire additional workers. Lower rates of inflation have the opposite effect, making it harder to find work.
Companies could cut wages, of course. But there is ample evidence that even during economic downturns, companies are reluctant to do so. Federal data show a large spike since the recession in the share of workers reporting no change in wages, but a much smaller increase in workers reporting wage cuts, according to an analysis by the Federal Reserve Bank of San Francisco. There is, in practice, an invisible wall preventing pay cuts. The standard explanation is that employers fear that workers will be angry and therefore less productive.
“I want to be really careful about advocating for lower wages because I typically advocate for the other side of that equation,” said Jared Bernstein, a fellow at the left-leaning Center on Budget and Policy Priorities and a former economic adviser to Vice President Joseph R. Biden Jr. “But I think higher inflation would help.”
The Anchorage school board, facing pressure to cut costs because of a budget shortfall, began contract negotiations with its 3,500 teachers this year by proposing to freeze rather than cut wages. The final deal, completed last month, gives the teachers raises of 1 percent in each of the next three years.
Teachers, while not thrilled, described the deal as better than a pay cut. But it is likely, in effect, to cut the teachers’ pay. Economists expect prices to rise about 2 percent a year over the next three years, so even as the teachers take home more dollars, those dollars would have less value. Instead of a 1 percent annual increase, the teachers would fall behind by 1 percent a year.
“We feel like this contract still allows us to attract and retain quality educators,” said Ed Graff, the Anchorage school district superintendent.
In June, Caterpillar, the industrial equipment maker, persuaded several hundred workers at a Wisconsin factory to accept a six-year wage freeze. The company described the workers as overpaid, but it did not seek direct cuts.
The slow pace of inflation, however, minimizes the benefits. Seeking further savings, Caterpillar has since laid off almost half of the workers.

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The Butterfly Effect

The Butterfly Effect

Scientists during the posts war prosperous years of the 1960s were puzzled about certain dynamic systems such as the weather and fluid turbulence because of their inability to predict the behaviours of such systems. They reasoned that if science could predict the exact dates for the return of Halley's Comet many times over and right to the dot ( Halley's Comet has a circuitous cycle of 76 years ) there should not be any reason why such earthly thing as the weather could not be understood. It turned out that the marvel of a new and universally applicable theory was surprisingly born out of the chaos of the weather. This is a fine example of ' order out of chaos '.

Edward Lorenz was a mathemathician graduated from Dartmouth College in 1938. During World War Two he served in the Army Air Corp as a weather forecaster. He remained working in the field of meteorology after the war. Back in the 1960s even meteorologists treated weather forecasting as educated guesses. So much so that the European Centre for Medium Range Forecasts made the suggestions to scrap weather forecasting altogether to save billions of taxpayers' hard-earned dollars. The centre considered that beyond three days even the world's best forecasts were purely speculative and beyond a week such forecasts would be without any value. Luckily, the appearance of the modern day computer invented by John von Neumann came to the rescue by making rudimentary weather forecast modelling viable. So, the meteorologists kept their job.

There was one Archilles' heel in the scientific method and that is all scientific theories ignore small influences which are supposed to have only insignificant effect on the validity of the predictions of any theory. This method of approximation can easily be seen in the working of the all important mathematical tool of calculus invented by Newton. Small incremental steps are approximated to form a continuous mathematical function. While science is renowned for its logic and precision, it is, in fact, full of approximations and only projects an image of perfection. This is an Archilles' heel because small influences can only be ignored in classical systems which are dominated by linear relationships. In the case of complicated systems with non-linear relationships and feed-back loops and interacting variables even slight changes in their initial conditions can lead to unpredictable results. Such systems which are very sensitive to extremely minute variations in their initial conditions have been called chaotic systems since the introduction of the concept of chaos by Edward Lorenz.

Returning to Lorenz's theory, it was discovered by him in 1961 almost by accident but due credit must be given to him for his shrewd observation and sharp instinct. He was working on his weather forecasts modelling on his first generation computer with a low processing speed. Even with the help of computer modelling, there was no breakthrough. One day during 1961, Lorenz was trying to reproduce just one section of specific data corresponding to a particular time period for further analysis away from the office. Instead of reproducing the data for a whole month from the beginning, he decided to take a short cut by just feeding in the data of the week he wanted based on old printouts. All hardware and software in his computer remained unchanged. To his complete surprise, he came back from his coffee break to find a totally different result from the original printout copy. He immediately took the cue, for a chaotic system like the weather, the final results depended on each and every step of its past history and even seemingly negligible changes in its initial conditions would lead to unpredictable final positions. This was the beginning of the Theory of Chaos with a little kind help from serendipity.

The slight variations in the initial conditions that lead to the final unpredictable chaos and turbulence are commonly known as the Butterfly Effect meaning a sensitive dependence on initial conditions. It is so called because it is said that in theory the flapping of a butterfly's wings in South America can ultimately lead to a hurricane in the Carribbean. This is how it is supposed to happen. When a butterfly flaps its wings this can create a slight depression in the atmosphere around the butterfly. Here is the key concept. When the surrounding conditions are right this small depression will grow into an atmospheric depression that may move out to the ocean to pick up more energy from the evaporating water upon their condensation in the upper atmosphere.This energy originates from the latent heat released by the water vapour when it changes from its gaseous state back to liquid form as rain in the upper atmosphere upon condensation. When the differential between the pressure distributions in the ocean and land mass are big enough a huge turbulence can be formed in the depression as a result of cooler air from high pressure regions with higher density rushes into the depression to fill up the relatively low density areas in an attempt to even out the differences. You must have seen the formation of a turbulent eddy when you try to empty a bath tub by pulling the stopper plug at its bottom. The drain pipe under the plug is the low depression area because it is hollow and provides the space for the water in the tub to go under gravity. As the huge body of water in the tub as compared to the relatively small drain hole scrambles for exit towards the drain pipe, a huge turbulent swirl of water is formed on the water surface above the drain hole. This is a comparable feature to the hurricane. Therefore, the Butterfly Effect represents the small change in the initial conditions of a chaotic system which in conjunction with the numerous existing appropriate conditions including the peculiarities of the past history in the system working in synch in a very complex and unpredictable manner to give rise to the resultant chaotic turbulence such as a hurricane. Not every flap of a butterfly's wing will result in a hurricane but when the conditions are right a hurricane can be born of the flutter of a butterfly's wings. 

Recently, there was a new movie in the cinemas called “Butterfly Effect”. It is a sci-fi story dealing with changes in a person's past history and their strange effects on the present. It gives a completely erroneous concept of the Butterfly Effect as applicable to the science of Chaos. I just feel that this is a fair warning to the readers in case they have been misled. The Theory of Chaos is, in fact, an attempt to identify the signs and to understand the working characteristics of chaos. In other words, it is a theory to discover the order in chaos ! 

Thoughts to You from Yours Truly - ( TYYT ) - ( 97 ) - Theory of Chaos and Complexity

Thoughts to You from Yours Truly - ( TYYT ) - ( 97 ) - Theory of Chaos and Complexity


The most complicated of all structures in this universe is undoubtedly the human brain which consists of over 100 billion cells. The circuitry is so intricate with numerous feed-back loops that it can be considered as a classic example of a chaotic system. The human brain is the motivating force behind human behaviour and by analogy the grand motor of society. Therefore, the Theory of Chaos and Complexity is the most useful of all scientific theories in predicting behaviour in social and economic systems. Let us try to apply the theory socially and economically.

The significance of the theory in human behaviour lies in the fact that human beings are typical chaotic systems being very sensitive to changes in the initial conditions of the inputs affecting their behaviour. As mentioned above, the brain is such a huge chaotic machine with multiple feed-back loops that the predictions of the end results in terms of human behaviour are nearly impossible. However, the theory can predict the trend towards the possiblities of certain behaviour when certain key indicators reveal themselves in the behavioral patterns. An overall note of caution derived from the Theory of Chaos as applied to human affairs is, of course, to take absolute care before initiating any specific action. A corollary from this warning is not to take any action without thinking over its possible consequences.

The key to applying the rules of chaos in human behaviour in a group is to look for tell-tale signs of the key features of a chaotic or turbulent system which are :- the sink, the source, the saddle, the limiting cycle and the bifurcation point. Whenever there is a group of people there are bound to be different types of personalities present. There may be people who are centres of attraction for other people in the group. May be it is the result of their flamboyance or strong personalities. These are comparable to the concept of the sink. Then there may be those who are very keen to initiate some actions in the group. These are comparable to the concept of the source. Others are very often indecisive in their actions and sway between different opinions. These are comparable to the saddle. Still, there are some who prefer to form a small group on their own within the larger group and uphold the interests of the their own small circles. These are comparable to the limiting cycle where no successful policy can be implemented due to a fragmentation of the opinions and conflicts of interests arising between the smaller and the larger group. Finally, the most important feature to note in a small social group like a trade association or a social club is the bifurcation point. There may be some special events like an election of the governing body of the group that may trigger some upheaval such as a struggle for power and control. This situation is comparable to the emergence of the bifurcation point. Extra care should be taken to prevent the situation from deteriorating into a full blown chaos which may have serious ramifications on the stability and peaceful existence of the group as a whole. With different personalities and personal interests and values, it is very often a volatile situation. Any slight changes in the moods and preferences of the individual members of the group can gives rise to different initial conditions that can lead to chaotic and unpredictable results. That is why the Theory of Chaos has been successfully applied to social and economic phenomena.

Similar analytical procedures are applicable to financial and economic behaviour. Investment activities in the stock market and other financial instruments are as unpredictable as the weather because they are all chaotic systems. The traditional methods of predicting trends in stock prices based on past data are less than reliable because very minor changes in the conditions at any particular point on the stock prices graph can lead to unpredictable results on account of the chaotic nature of investor behaviour. There was a remarkable story from a well known sharebroker firm on Walls Street in New York City. A competition was held between two brokers to predict which shares will rise in prices and which shares will fall in prices. One broker was allowed to use the high-tech program in a computer for prediction while the other simply used the primitive method of random chance by throwing a dart onto a list of shares printed on a sheet of paper glued to the office wall. The results from predicting 100 different shares on the market using these two radically different methods came out to be more or less a draw. It almost sounds like a big joke. There are simply too many illusive and related factors with multilateral feed-back loops to allow a comprehensive and reliable forecast in the financial market. The Financial Times newspaper once said that :- “ It is a conventional joke that there are as many different opinions about the future of the economy as there are economists.”

Having revealed the unpredictable nature of the financial market, there is still some saving grace that is bestowed by the Theory of Chaos and Complexity and that is “ Order in Chaos.“ Let us see how this can come about in the present example. While it remains generally true that economic or financial forecasts are at best guesstimates, there are a few rules which can point us to the right direction. Although a simple projection of the past results to a predicted future trend is not feasible and unreliable, we are reassured by the theory that Past History in the system under prediction is of paramount importance. This is rule number one. In fact, this is where social or behavioral sciences are different from the physical sciences. The latter are not affected by history as you will recall Einstein's all important postulate on the validity of the laws of physics in all frames of references. Secondly, the effects of this past history very often obey a set rules known as the Power Law. Mark Buchanan explains this quite convincingly in his book, “ Ubiquity “ that this Power Law is at work from earthquakes, forest fires, epidemics to money markets which are our present concern. Moreover, this Power Law is the manifestation of Scale Invariance which is the essential element behind the concept of Complexity as revealed in natural phenomena such as the snowflake, natural coastlines, leaves and clouds.

Rather unexpectedly, Mandelbrot also tried to apply his scale invariance concept to price changes in the stock market. He found a very important fact which is contrary to the prevailing beliefs of almost all shareborkers and investment consultants regarding share price changes. It has been a firm traditional belief that price changes greater than some typical size ought to be very rare. This is also in line with our common sense but Mandelbrot had found otherwise. In the 1990s, scientists conducted numerous exhaustive computer research into fluctuations in the stock and foreign exchange markets all over the world and have definitively confirmed that the power rule is actually at work in such systems. To be more specific, one such illuminating research was conducted on the

New York Stock Exchange in 1998 by Gene Stanley of Boston University based on price fluctuations of all the shares included in the Standard & Poor's 500 stock index. Stanley and his team studied prices recorded every 15 seconds over a period of 13 years from 1984 to 1996. There were a total of 4.5 million readings taken for his graph depicting this 13 years' trend showing very complicated and irregular ups and downs. The researchers found an underlying Power Rule behind all these crazy fluctuations. What they found was that price changes became 16 times less likely each time one doubles the size of such price changes. This applies to the New York Stock Exchange only while other markets may be governed by power rules of different magnitudes. As mentioned above, as far as the power rule goes it is not the number or quantitative side that is important. Rather, it is the qualitative aspect that is critical. The clear conclusion to be drawn from this lack of qualitative differences between the large and small fluctuations is that the power rule inevitably implies that there is no such thing as a typical fluctuation and, hence, no reason to assume that the larger fluctuation can be considered as abnormal. This is because there is no such thing as normality in any chaotic system. In the technical terms of Chaos and Complexity, there is Scale Invariance in the Stanley's graph depicting the share price changes meaning all fluctuations whether large or small are ultimately made up of similar patterns just like when you are magnifying the finer details of the coastline. All coastlines in the world are composed of bays and inlets separated by headlands. Scale invariance as applied to the stock market can be translated to mean that the investor should not be surpised by sudden huge upward or downward fluctuations in share prices for no apparent reasons at all. The simple reason is that large fluctuations can be expected in the same way as a small fluctuation since there is no such thing as normality in the market. The fact that you occasionally guess correctly on the price increase or fall based on all available market information ( there is, of course, no perfect information as there is no perfect market ) is merely a matter of serendipity. From the foregoing, you may now appreciate why the throwing of darts and the use of a computer program to predict share price changes can come out even handed. Further analysis of investor behaviour will be forthcoming in the next chapter on the Science of Networks. Meanwhile, let us proceed to other seemingly eccentric applications of the Theory of Chaos and Complexity.

The key concept and the most useful one revealed by the theory is “ Order in Chaos “ which is the crowning glory of this scientific theory. It has an almost universal application because chaotic systems are all over the place in our society. Without going into the details of the particular scientific research, we are given to understand that the following power rules apply to various natural phenomena as indicated. For earthquakes as measured by the Richter Scale, scientists have discovered that for earthquakes with twice the energy level of another it has 4 times less likelihood of occurring. It appears to be a square rule. Furthermore, the longer one waits for an earthquake to occur the longer one seems to have to wait for the next. Although this seems to be against our common sense yet this has been borne out by the Omori Law in seismology which has established that the waiting time for an earthquake is 2.6 times more if the period of non-occurrence is doubled. Finally, the initial movement in the earth's crust leading to any particular quake is usually irrelevant to the end results. That means a catastrophic earthquake can start as a minor tremor. The catastrophic result depends on the appearance of Critical State ( similar to Bifurcation Point ) which in turn is dependent on the Past Histrory of the build-up of the seismic tension in the related rock strata. Any system that obeys the Power Rule has no normal or typical behaviour. In other words, they are all chaotic systems.

Another example is forest fires. Based on over 4000 fires in national parks between 1986 and 1995, the US Fish and Wildlife Service found a fairly reliable power rule. Every time the area covered by a fire doubles, it is about 2.48 times less likely to happen. This power rule holds true for fires varying in sizes to a million fold. The qualitative indications of this rule seems equally stunning. The layout of trees in any particular park appear to organize themselves into a Critical State in which the next fire might be of any size that can lead to a big disaster or even total destruction of the area.

One final important example of the amazing predicting ability of the Power Rule is the KT Event that caused the distinction of the dinosaurs. This mass extinction event took place some 65 million years ago. KT comes from the words Cretaceous ( in German, Kreide ) and the later period of Tertiary.It was caused by a huge meteor 's impact on our planet. Apart from KT there were 4 big extinction events in earth's natural history so far. Going backwards in time, they happened 210, 250, 365 and 440 million years ago. The power rule they revealed is this. If you double the size of the extinctions the disaster is 4 times less likely to happen. This regularity holds true from extinctions involving just a few species to the worst event destroying thousands. The rule does not tell us when just how often with no numerical data in terms of years.

These three examples are just a few among the numerous ones including more mundane things such as magnets, sand pile avalanches, potato shards experiments, epidemics, population growth and even population distribution, etc. Despite the lack of prediction in absolute quantitative terms, concepts such as Order in Chaos, Past History and Citical State do testify in favour of the existence of Universality and Ubiquity in our universe. This alone sends us a very important message and that is, this miraculous world of ours is ultimately comprehensible to a great extent. One word of caution is in order. My personal opinion regarding certain mathematical models used to simulate the emergence of life is that they are as yet rudimentary and have a long way to go before I am convinced that it was the actual course taken by life on this planet of ours if life originated on Mother Earth at all. Einstein once said :- “Things should be made as simple as possible, but not simpler. “ No other comment can describe the Theory of Chaos and Complexity more aptly. The theory gives us qualitative trends and indicators to follow but the Golden Rule is nothing but a qualitative Power Rule and here lies the real revolutionary nature of the theory. Ever since the establishment of modern science in the Age of Reason some four hundred years ago everything about science and scientific theories have been nothing but quantitative. Finally, we are offered a qualitative approach to science through the Theory of Chaos and Complexity. This has not only broadened the scope of the discipline by making illusive phenomena accessible to science but has also provided a very powerful tool to analyze complex human behaviour and social phenomena. 

Thoughts to You from Yours Truly - ( TYYT ) - ( 96 ) - Logical Positivism

Thoughts to You from Yours Truly - ( TYYT ) - ( 96 ) - Logical Positivism


This branch of philosophy of logic had arisen during the 1920-30s and is closely linked to the Vienna School of philosophers. Briefly stated, Logical Positivismi is one of the most dominant branches of philosophy in the Twentieth Century which requires strict and objective proof of every statement made and each theory proposed regarding any discipline of learning. It has positively affected the thinkings of reseachers and theorists alike in various branches of science and philosophy. It would not be an exaggeration to say that logical Positivism has created a new paradigm in both the science and arts disciplines in their theoretical as well as practical aspects. It all started with the ideas of Ludwig Wittgenstein, a Viennese philosopher who went to war in the Austrian army during World War One. Wittgenstein not only fought bravely for the Austrian emperor but also created a whole set of logical thoughts while serving in the army. In his great classical work Tractatus Logico- Philosophicus he set forth in meticulous details his philosophical views on language, thoughts and reality which became the corner stone of the paradigm shifting school of philosophy known as Logical Positivism. 

His ingenious insights succeeded in forging a sound philosophical connection between the inner world of our thoughts through our language with the reality. It is a brilliant piece of original inspiration enshrined in a comprehensive set of working principles touching every aspect of the world of knowledge, our inner world of thoughts and our world of communication that is our language. The basic rationale for his philosophy is his idea that there must be something in common between the structure of a sentence and the reality that the sentence is referring to. Representation of the reality in our thoughts is made possible by logic but logical propositions themselves are not the true reality ( this is reminiscent of Einstein's comments on mathematical logic quoted in the last chapter ). Therefore, logic is the necessary but not sufficient condition for describing objective reality (OR). This argument is equally applicable to our language which follows the same set of logical system as our thoughts. His demonstration of this argument through his “picture theory of language“ is most convincing. He likened logical propositions to pictures reflecting OR. They are only approximations but can never be 100% of the real thing. Different logical symbols are just like different colours and images in different pictures. They may be able to mimic OR to a very great extent but can never be perfect. The same is true of language which uses a different set of symbols to describe OR. Both logical propositions and language symbols may bear remarkable resemblance to OR they represent but only to certain limits.

Based on this rationale, linguistic statements are only meaningful when they can be related to OR and only observations can prove if such statements are true or false. Furthermore, there can only be two types of statements. First, there are analytical ones which have no empirical contents meaning that they cannot be verified against OR because they do not refer to OR or any objectively observable facts. These are also known as tautologies. For example, the statement :- “ The poor are poor because of their poverty” is a tautology. It is analytical in the sense that it does not refer to anything outside of itself. In other words, it has no empirical content. All the other statements that are not analytical are empirical statements which refer to OR and some objectively observable facts. These are the only meaningful statements because they can be proven right or wrong by reference to the fact that they allege to assert. The above rigid but practical rules make Logical Positivism a very powerful tool in all fields of knowledge including scientific research. It is the logical positivist's motto that if you cannot prove what you say by empirical evidence, you have effectively said nothing. Other Vienna School philosophers built upon this basic theory of Wittgenstein and subsequently formalize the principles to form the Logical Positivism school of philosophy.

The huge impact of Logical Positivism on all aspects of early Twentieth Century science and philosophy had become a big challenge to Cartesian Dualism which had the support of organised religion since the Seventeenth Century. Logical Positivism had unintentionally became the vanguard and a powerful weapon for Monoism. However, there is still some weaknesses in Logical Positivism insofar as it still has to rely on the Verification Principle in proving its case empirically, and therefore, is still restricted by the inborn weakness of the Theory of Induction. Take the inductionist approach in verifying a scientific fact like the sun always rises in the east. Scientists are said to have proven their case with regard to this scientific fact because in the whole of human history up to the present the sun has always risen from the east. Their case is said to have been proven empirically thousands upon thousands of times but it only takes one case of falsification to shoot down the above scientific statement. This is the inherent weakness of the induction method. Of course we know in this incident that the sun will only cease to rise from the east in about 500 million more years' time when its nuclear fuel burns out. There is an informative story about the inductionist method. Once there is a farm full of happy little pigs which are all inductionists. They consider themselves to be smarter than all other pigs in the world because these little pigs know how to predict the future using the induction method. Every morning they are very happy to see their master who opens the gates to feed them. They enjoy life to the full because the pigs only eat and do not have to work. According to their inductionist analysis based on past experience they figure that seeing their master is the greatest joy in the lives. One day as usual, their master comes to open the gates. They greet him with all the usual happy grunts only to find out that they are bound and led to the abattoir to be slaughtered. So, those poor pigs' inductionist predictions did not save them from certain destruction. Therefore, there is no foolproof reliability in the inductionist method and so is the case for any method of prediction. 

This unavoidable weakness in the Theory of Induction has prompted one of the most promising young philosophers of the 1940s called Karl Popper to pioneer his own set of principles in the learning process and scientific research. Popper based his philosophy on what he called the conjecture and refutation procedure. Instead of asking the scientists to prove that their theories are true to empirical observations and experimental results, Popper requires them to concentrate on devising procedures to prove that their theories on conjectures are wrong. This is Popper's famous conjecture and refutation procedure. According to his reasoning, if a certain theory or conjecture has more ways of being refuted it is to be preferred over one which has fewer. By his presumption of the negative results of any scientific theory or conjecture, Popper places tremendous onus on the scientists to prove their case and, thereby, achieving a higher standard for scrutinizing any scientific theory. I do not intend to go into his philosophy in depth but suffice it to say at the present juncture that it does have its weaknesses such as what is known to the philosophy circle as the Problem of Auxiliary Hypothesis. For example, when a conjecture is refuted for any reason it can always be saved by the proposer on the ground that some of the underlying background assumptions that are at fault and not the main body of the conjecture. This will imply that the same conjecture can still survive the “ conjecture and refutation procedure “ after amending its background assumptions. For example, there is the often cited Red Ferrari Hypothesis which states that all Ferraris are red. It can be refuted easily if you see a white one. However, the proposer of the hypothesis can always say that you must have mistaken a white Lamborghini for a Ferrari. There are lots of possible excuses such as someone must have modified the original red paint to white and so on and so forth. So, you will see that no system is totally infallible. 

Thoughts to You from Yours Truly - ( TYYT ) - ( 95 ) - Fuzzy Logic and Bi-Valent System

Thoughts to You from Yours Truly - ( TYYT ) - ( 95 ) - Fuzzy Logic and Bi-Valent System

Under the traditional reductionist approach no allowance is made for fuzziness. Everything is either black or white, right or wrong. There is no room for may be. This kind of value system is also kwown as a Bi-Valent System whereas the oriental holistic approach is more flexible and acknowleges gray areas. The latter system is what logicians called a Multi-Valent System and more akin to the Buddhists Philosophy. Both these schools of thinking accept the concept of A and Not-A and all the possiblities in between these two extremes. When A equals Not-A it represents the mid-point of the two extremes values such as 0 and 1; black and white; right and wrong. This unique position is just like the delicate balance or equilibrium exhibited in the black and white Yin and Yan sign found in the great chinese philosophy text of I-Ching ( Ching literally means bible in the western sense ) which is full of profound wisdom. Fuzzy Logic is a philosophy of compromise while the Bi-Valent system is one of the extremes of either black or white and right or wrong with nothing in between the two extremes. This is a polarizing and confrontational approach. This really rings a bell and reminds us of the current American President George w. Bush's famous declaration on his policy relating to the infamous Iraq War which goes like this :- “ If you are not with us, you are against us ! “ What about the middle-of-the-road opinions ? Must there only be either friend or foe ? There need not only be just A and B but also A and Not-A. An uncompromising attitude makes unnecessary enemies. May be applying a little Fuzzy Logic would reduce much of the undesirable tension between USA and the rest of the world.

Some scientific minds feel that the Muti-Valent System is more appropriate for the real world which is full of imperfections and should also be used in scientific endeavours if scientific theories are to be applied to the real world and not just the scientists' world of mathematical perfections. Later on in the chapter, we shall see how he applies this Muti- Valent Concept in everyday technologies. However, there is a price to be paid for flexibility and practicality and that is the sacrifice of vigour and clear cut distinction between the positive and the negative aspects of any given problem. To be clear on this point, supporters of the Muti-Valent System do not see this so much a sacrifice as a fact of life that everything is a matter of degree. Since scientists are renowned for their exactness in all aspects of their “trade” so, Kosko becomes a rebel in scientific research. That is why I call him the odd man out.

A very simple example will illustrate the essence of the Multi-Valent System. Once, Kosko told the audience during his lectures that just by asking two questions he could give a vivid picture of this system. First, he asked ;-” How many of you are married ? “ There was no hesitation among the audience and some hands were raised instantly. Then, he asked a second one :- “ How many of you are happy with your marriage life ? “ Some of the married ones raised their hands but after a while a few lowered their hands while others who did not raise their hands before did so gingerly. Then, there were others whose hands were up previously who now tried to withdraw them. It was a confusing scene. Suddenly, everyone nodded their heads in acknowlegement because they finally realized that in life there are many issues that cannot be resolved by a simple yes or no just as there can be no straight forward right or wrong as implied by the Bi-Valent System which can only reflect the man-made perfection of the mathematical world - the preferred language of the scientists. Einstein once said of mathematics as follows ;-“ So far as the laws of mathematics refer to reality, they are not certain. And so far as they are certain, they do not refer to reality.“ For more than 2000 years since Aristotle, the western culture has always been based on the binary system ( including our indispensable digital computers ). Everything is based on the discrete values of 0 and 1. There is nothing in between. It is just like the gambler's slogan :-” All or nothing.” The mere fact that Fuzzy Logic is totally founded on a completely revolutionary Muti-Valent System is sufficient reason to raise eye brows among all conventional theorists, hence, the animosity and suspicion from the scientific community at large. 

Thoughts to You from Yours Truly - ( TYYT ) - ( 94 ) - Information Cascades and Externalities

Thoughts to You from Yours Truly - ( TYYT ) - ( 94 ) - Information Cascades and Externalities 

What makes a network tick is nothing but information. Therefore, we must gain an in depth understanding of the nature and characteristics of this illusive and intangible entity we call information before we are able to appreciate the essence of the Science of Networks. Firstly, information is useful and orderly signals. Secondly, some signals can be information to certain recipients but “ noises “ ( useless signals or disturbances ) to others. It depends a lot on the user. For example, the irritating sounds created in a mahjong game are noises to the bystanders but very pleasing and orderly signals to the players participating in the game because the sounds signal the start of another round of play which can bring them winnings.Thirdly, life itself is all about information. Molecular scientists have come to the conclusion that the purpose for life to perpetuate is to pass on the human genes which are, in fact, coded information. It does not matter to the genes if the individual messengers like you and me die so long as the genes in our bodies are passed on to the next generation. This natural calling as we all know has given rise to the noble phenomenon of parental love and care for our children and also the greatest all time human theme of true love between a man and a woman which can be both inspiring and destructive. Even on a lower level of human affairs such as our daily routines, information can mean a world of difference. What are the winning lottery numbers for tonight ? What are the signs for a killer disease like cancer ? What are the best jobs for a fresh gradute ? What are the best buys for a family car ? What makes a good partner in marriage ? So, you will see that all aspects of our life whether they be financial, social, biological or even emotional operate on useful information. Fourthly, information once given cannot be retrieved. It possesses a lot of Externalities. That is why we should be most careful about how we handle rumours.

Returning to the Science of Networks, scientists have discovered that there are many external effects or simply called Externalities in the propagation of information within a given network. The technical term for this phenomenon is an Information Cascade. For those who are not students of economics, an Externality is a situation in which a person's economic activity is affected by things happening outside the transaction itself. For example, the costs of operating a radio station do not increase with the increase of additional listeners because the radio signals are on the airwave anyway and everyone can tune in without affecting the signals broadcast. This is called an external economy while pollution created by undisciplined industries is known as an external diseconomy. The costs of pollution are ultimately borne by society as a whole although the original polluting act was committed by the undisciplined industries with a greedy profit-making motive. These special conditions will call for unusual measures and regulations in order to ensure the efficient use and distribution of resources which are always scarce in the economic sense because there are an infinite amount of human needs while available resources are always finite in amount. This is the cardinal reason for studying economics in the first place.

A simple description of an Information Cascade is this one thing leads to another until the situation runs out of control and creates a self-perpetuating phenomenon in its own right like a continuously thundering and unstoppable waterfall, hence the term Information Cascade. This phenomenon appears to be highly paradoxical because human beings are supposed to be rational in their decision making as our common sense would traditonally indicate and are, therefore, not expected to act irrationally like the flock of frightened sheep. Contrary to our common sense, the Science of Networks has conclusively proven in numerous experiments that when people interact in a network they stop behaving like rational individuals and would act more like a collective entity. Remember the dictum “more is different”. For this particular reason, an Information Cascade can sometimes become a full-blown pandemic. 

In the 1950s, social psychologist Solomon Asch conducted an experiment to prove what he called Coercive Externalities in the propagation of information. In effect, people can be forced to make a wrong decision against their own rational judgment if they are put under strong enough peer pressure. The experiment was conducted in the following manner. Asch showed seven participants in the experiment a flash card showing a single vertical 10 cm line on the left side of the picture and another group of three other vertical lines of 10cm, 12 cm and 14 cm, respectively on the right side in close formation. The participants were asked to point out which of the line on the right side had the same length as the single line on the left side. They were to shout out their answers aloud in turn. The first six participants were, in fact, dummies who were specially requested to give the same wrong answer which was the 12 cm line on the right side. The seventh participant who was the real subject of the experiment thought that what he presumed to be six other rational people could not have been wrong so he gave the same wrong answer against his own better judgment. He only confessed his true opinion at the end of the experiment when the identities of the other six dummies were revealed to him.

It is not just peer pressure alone that causes the Information Cascade to occur. In fact, acting in one's own rational interest can equally contribute to the cascade. The reasoning goes like this. In most real life situations, it is more often than not a case for a guessing game from the perspective of most decision makers because there is no perfect information as there is no perfect intuition. This is especially true when people act collectively as a group or network. One's own judgment counts as much as the judgments of others in the group. If I cannot be sure about what I think is right, I may as well look for some signs of other people's judgment on the common sense assumption that the majority should have a better chance of reaching the right decision. This is also known as Contingent Decision Making which means our decision can be dependent on that of others. This is also an important contributing factor to the cascade phenomenon. Thus, you can see how even following our common sense instincts can lead to a chaotic situation. However, this should not be taken to mean that we should not rely on our common sense. This may be the only decision making tool available to us in most everyday circumstances.

An Information Cascade does not automatically occur even when all the above factors are present in a particular network. We have to look to another concept borrowed from the Theory of Chaos for the ultimate reason of its emergence. This is the matter of history in the system in question. All cases of Information Cascades contain the above initiating factors but those factors do not always lead to the occurrence of cascades. They are the necessary but not sufficient conditions for the phenomenon. The sufficient condition lies in the attainment of the Critical Threshold or the Critical State which depends on the entire history of the system developing up to that particular point in time. Even as we are attributing the sufficient condition for the occurrence of an Information Cascade to the History of the system, we must not forget the fact that history itself is not some independent element that is self-created. Instead, it is definitely the product of multilateral human interactions between themselves and their social environment which is in turn created by the collective actions of the humans themselves. This myriad of interacting units that form the complex web of life is a stunning structure of the highest complication. It is a case of the most sophisticated form of non-linear interactions in the universe. That is why Karl Marx exclaimed that :- “ Men make their own history, but they do not make it under circumstances chosen by themselves.” 

Thoughts to You from Yours Truly - ( TYYT ) - ( 93 ) - A Network View of History

Thoughts to You from Yours Truly - ( TYYT ) - ( 93 ) - A Network View of History

 

Under the enlightenment of the Science of Networks, one may view the world, and especially, world history rather differently. First of all, it is traditionally assumed that the great successes in history must have been proportional to the efforts or merits of the makers. This may not be so. Instead, it is very often a question of being at the right place and at the right time. For example, the thirteen weeks of mass demonstrations in Leipzig, the then East Germany in 1989 that very quickly led to the dismantling of the infamous Berlin Wall on 10th November, 1989 is a case in point. The repressive communist regime in the former East Germany had been in power for over four decades since the end of World War II. There had been a number of far more violent rebellions that did not succeed in even rocking the regime. The fact that the Leipzig mass demonstrations ultimately succeeded merely pointed to the fact that the time was right for a change within the larger political climate in Europe resulting from Gorbachev's political reforms in the then USSR.

Secondly, the purpose of studying history is to learn from past mistakes to prevent future recurrence and, if possible, to improve on the ways things are to be done in future. Therefore, it is not enough just to examine the materialized portion of history but also to assess what could have happened to explore other better alternatives. From this analysis, we will appreciate that there is an existing bias in favour of the actual historical outcomes. The reader will be given a deeper analysis on this later in chapter (x), in the section- Of Destiny and Destination. It is always easy to be wise after the facts. Such lopsided view of history has to be modified in the light of the useful researches produced by the Science of Networks. This is because of the importance of the initial conditions or sum of history of the system up to a particular point in time. Slight changes in the initial conditions at any point can radically alter the subsequent course of history of that system. The reader should recall Edward Lorenz's weather systems which led him to the discovery of the Theory of Chaos.

Thirdly, the concept of Information Cascades leads us to the conclusion
that initial conditions that may not be very conspicuous can have a dramatic effect on the outcomes of an evolving system when viewed in hindsight . As a result, all factors under examinination should be assessed in the context of the structural conditions of the network as a whole. In other words, special attention should be paid to the existence or imminent appearance of Critical Thresholds or Synchronized States.

Before history has come to pass, it is rarely possible to predict the outcome of any given set of circumstances. It is the general consensus reached by the collective opinions of the majority that will win over the day. Owing to this only reliable rule, people usually base their own decision on the perceived majority view ( their perceived reality or PR as explained in chapter (viii) later on ). Hence, the results of collective decision making under a democratic process is notoriously difficult to predict because of the possibility of the cascade effect. It is a process involving both personal opinions of the individuals as well as observing the opinions of others in the system together with non- linear interactions between these two elements that determine the final outcome. And so is history. That is why sometimes history does not make any sense.

How was it possible that many German people maintained that they did not know, and worse still, some even claimed that they could not believe that the Holocust had actually taken place. Luckily, the German people as a whole together with their elected government ultimately had the courage and wisdom to admit their older generation's mistake and had taken remedial actions accordingly to enable the healing process to come about. Unfortunately, the same cannot be said of the Japanese government which, even now, still cannot face up to its historic responsibility regarding the Second World War and continually attempts to cover up past mistakes of their older generation by changing the history text books for their young. This is really a very alarming as well as morally disturbing trend. Apart from preventing the healing process between Japan and its neighbours and, thus, disqualifying itself from playing a positive role in world affairs, such an ostrich attitude could ultimately lead to a possible repeat of the aggressive national policy that ended in Japan's total humiliation and unconditional surrender in the Second World War.

People tend to attribute this stubborn refusal to accept past mistakes to the so-called hero syndrome which is a long standing tradition of the samurai spirit- rather die than surrender implying that to accept that one is wrong also amounts to a surrender of one's initial position. A closer examination of this misguided spirit will easily reveal its logical fallacy. To accept one's mistake takes a lot of courage and courage is the defining hallmark as well as the bench mark for a true hero. To be a hero does not mean that you should not be afraid of anything but rather being very much afraid of it and still do it because it is the right thing to do. Therefore, to refuse to accept one's past mistakes is tantamount to the behaviour of a coward who dares not face the truth. Conversely, accepting your past mistakes ( in this case the mistakes of their older generation ) and facing up to the consequences will require tremendous courage. To undertake such a difficult act of contrition is undoubtedly a very heroic deed. My simple logic runs like this. If you have the guts to do it, you should also have the same guts to admit it. If my older generation had committed acts of atrocity, I would not hesitate to denounce such crimes vehemently and distance myself from such behaviour. It is both irrational and against the Natural Law to close rank with any wrong doers of heinous crimes. By so doing, it makes one an accomplice. A supporter or sympathizer of any heinous crime is in a even worse position than the perpetrator because the criminal had to face up to the consequences of his deeds somehow and runs the risk of punishment while the supporter only does the perpetrator lip service without even paying a price.

There is absolutely no fundamental differences between anybody or anything in this universe because all people and all things have ultimately originated from the same humble beginning that is stardust as explained in chapter ( ii ). No special favours should be done to your own race or even your own flesh and blood at the expense of natural justice. In the long run, justice and fairness to all will prove to be the only sensible way to maintain good order in society as well as the universe. So, please heed my warning. It is up to the younger and more open-minded generation of the Japanese citizens to do their part in keeping their own government in line with the prevailing moral standards and not to repeat the painful mistakes of the past generation. It would seem to me that in today's global village the more appropriate idea on the identity of inhabitants of this village is the concept of harmony with one another and more importantly with our environment. To this end, the idea of world citizenship is far superior to the narrow perspective of individual nationalities, races or religions. May John Lennon's ideas of world peace and harmony as expressed in his well known song “Imagine” carry the day. 

Thoughts to You from Yours Truly - ( TYYT ) - ( 92 ) - Network Tolerance

Thoughts to You from Yours Truly - ( TYYT ) - ( 92 ) - Network Tolerance

In the research conducted into many real world complex network systems, scientists have discovered one very crucial point about any network. This point is, in fact, a very pessimistic conclusion. Regardless of how meticulous designers have been in the installation of safety devices in the most sophistcated of all networks such as national defence computer networks or electricity grids that span entire continents, there are bound to be some weak spots in any system that cannot be revealed until disasters strike. Put it in another way, accidents of some unforeseeable nature may happen no matter how hard scienitists try to anticipate and prevent their occurrence. 

Nowadays, most networks have the highest possible tolerance against breakdowns. Despite this high standards in their design, it is a foregone conclusion that accidents could and will happen. In his book called “ Normal Accidents “, the social scientist Charles Perrow came to the same pessimistic conclusion based on the cascade effect which shows the inherent unpredictability in any system. The case studies supporting his conclusion ranged from the Three Mile Island nuclear accident to the Challenger Space Shuttle disaster. 

In fact, a simple example will illustrate how inconspicuous some risk factors for a potential disaster can be. A few years back, there was a strange phenomenon that had boggled the minds of the United Kingdom electrical grid engineers for over a year after they had updated and improved their supply network. The problem was this. During certain days in the week the then newly updated electricity supply grid encountered some overload problems during off-peak hours in the evening with apparently no good reasons at all. So much demand for electricity arose during just 20 odd minutes that the grid engineers had to switch on the reserve units. At first, the engineers suspected a design fault in the computer program that runs the grid. After millions of dollars had been spent on reassessing the computer software they found no bugs. Then one shrewd mind in the middle management noticed that all these electricity supply crises mostly occurred during the soccer season. 

Finally, a mundane reason was found to be the culprit. During the time out after the first half of every match the T.V.viewers started to scramble to put on their electrical kettles to make themselves a cup of coffee. This mad rush to make the best use of the time out led to a synchronised state being precipitated among the viewers that ultimately caused the cascade effect. A disastrous electrical blackout could have occurred resulting in great economic losses or even possible injuries to human life. Such seemingly inconspicuous reasons could hardly have come across the minds of the computer software program engineers during the designing stage of the electricity supply grid. 

This real life episode has demonstrated beyond reasonable doubt that life is complicated and that no amount of planning is capable of providing an absolute guarantee against all possible contingencies. This is also a wake up call for arrogant complacency. Remember the Titanic disaster and the Uncertainty Principle in Quantum Theory. This latter mystical principle is sometimes applicable to the macro-world as well as the subatomic realm and has a lot of philosophical implications for our daily lives as well as in politics and
economics ( e.g. the impossible task of planned economies ). 

Thoughts to You from Yours Truly - ( TYYT ) - ( 91 ) - Erratic Investor Behaviour

Thoughts to You from Yours Truly - ( TYYT ) - ( 91 ) - Erratic Investor Behaviour

Most notorious stock market crashes such as th Wall Street Crash of 1929 and 1987 did not betray themselves with any extraordinary signs before the disasters struck. Once the price falls started, they snowballed at lightning speed and became a cascade in the blink of an eye. Analysts can always attribute specific and concrete reasons and factors to the disasters with the benefit of hindsight. Many of their elaborate reasons were eagerly accepted by the investment community because as Friedrich Nietzche said :- “ First principle : any explanation is better than none.” For the October, 1987 crash, most analysts attributed the disaster to computerized trading which was subsequently restricted. Could the drastic fall of 22% of the market value in a single day be so easily explained by just one lone factor ? Again, the 1929 crash was explained by excessive borrowing at the time. Are the real reasons that simple ? Everybody knew that financial institutions routinely lent money to borrowers. Otherwise, how else can they make a profit with all the money in their hands deposited by their account holders ? Financial analysts have no choice but to insist that the investors are rational beings because they are the very reason for the analysts' own existence. The market trends are subject to some basic dynamics capable of expression in some laws thus making any forecasts meaningful. Of course, both of these assertions must be true or there would not be any need for the analysts in the first place. So, they keep on upholding the assertions. But do these assertions stand up under vigorous scrutiny ? I am afraid the answer is no. The scientist Alfred Zauberman has his own sarcastic law about any economy in general. It goes like this :- “Zauberman's Law : The worse the economy, the better the economists.”

For the same reason as the example given above where the throwing of darts and applying high power computer analysis on share prices come out even handed, I totally support the views proposed by the Theory of Chaos and the Science of Networks concerning unpredictability and information cascades.There cannot be any hard and fast rules for predicting investor behaviour. Now let us look at some reliable scientific research on the subject of investor behaviour to see what the results can tell us.

Everyone agrees that our personal opinion can be influenced by other people and additonal information even though the latter may be purely promotional in nature. Take going to the movies for example, we seldom have a completely independent choice. Most of us usually know which one to see before we actually go to see it. Through advertisements in the media and comments from our friends who have already seen the same movie, we have most probably come to a definite opinion on the movie before going to watch it in the cinema. This is a decision based on our emotions and impulse rather than a rational and systematic decision making process. Of course, there is the Coercive External Effect at work. If everyone else has seen the movie and is talking about it, how can I afford not to see it for fear of being isolated socially. Therefore, it is easy to realize how human beings can influence one another irrationally in their decision making process.

In 1999, the economist Thomas Lux of The University of Bonn and the engineer Michele Marchest of the University of Cagliari conducted a reaserch into investor behaviour to investigate the validity of the orthodox investment theory of rational investor behaviour based on changes in the economic fundamentals. Their alternative theory was fluctuations in share prices were mainly the results of “mutual interactions of participants “. The researchers' model was a very simple stock market with just one kind of stock and a population of investors who buy and sell the stock. The population was divided into three different categories of investors. The first group were the Fundamentalists who were the rational ones basing their decisions on economic fundamentals as proposed by the Orthodox Investment Theory. The second group were the Optimists who believed the market was on an upward trend purely by blind faith and wanted to buy. The third and last group were the Pessimists who consistently felt that the market was at a down turn and wanted to sell.

The researchers also put some authentic value on the stock and tied it to some basic economic fundamentals. The price changed as the fundamentals changed. As in real life, it was the interactions between the different groups and the changes in the fundamentals that finally determined the price. So far, the scheme followed the orthodox view of the stock market. However, the researchers added one more assumption to enable them to test their own theory and that was the participants could influence one another. This new parameter proved definitively to be the volatile factor that rocked the whole boat. The minds of both the Optimists and the Pessimists are not fixed permanently so that changes in the moods of some members of one group can lead to a overall inclination of the market towards either camp. This will result in the optimistic and pessimistic outlooks being propagated throughout the market on a cycle of swings between the two moods. The researchers also found that these two groups very often organised themselves until they reached the critical state for the system as a whole when slight changes in the moods of just a few of its members could lead to a change of the overall optimism or pessimism in the market. Once such a point was attained, a cascade could easily occur in the market trend towards one mood or the other so that huge fluctuations of varying magnitudes would ensue. These upheavals would continue in a self-perpetuating chain of actions and reactions until it came to an end and then the trend could reverse itself and so on. 

What happened to the fundamentalists in this model ? Well, they did the best they could in using past data and changes in the economic fundamentals to make their investment decisions. They were understandably frustrated because their so-called rational behaviour was upset by the erratic mood changes caused by the other two groups. Decisions based on the orthodox method mostly turned out wrong as common sense was not allowed to operate freely because of the presence of irrational moody behaviour of the Optimists and Pessimists. Finally, even they, the rational ones had to succumb to market pressure and had to go along with whatever mood that was influencing the market at a particular time. Particularly, when the cascade effect took hold of the market even the Fundamentalists acted in accordance with the prevailing mood. So in effect, the Fundamentalists were eventually converted to either the Optimists or the Pessimists by the end of the game through Coercive Externalities of other members of the network. Only during very calm and gentle ups and downs in the market could the Fundamentalist sentiment be detected. There were bulls and bears or runs and rallies and moods just like the real world scenario where slight glimpses of hopes and doubts can be magnified totally out of proportion to the apparently insignificance initial disturbances in the market. Such minor disturbances can be real like some changes in the economic fundamentals or simply rumours like the impending resignation of the CEO of certain big corporations. The researchers had conclusively proven that the biggest volatility in the stock market arises not on account of the basic economic fundamentals or rational investor decisions as predicted by the Orthodox Investment Theory. Instead, it is the inherent unpredictability of the “ mutual interaction of the participants “ that is the main driving force behind this market volatility.

If all these sound familiar, it is because we have come across such phenomena in the Theory of Chaos and Complexity in connection with the occurrence of natural disasters like earthquakes and forest fires which follow the Power Rule. It will be recalled that for systems where the Power Rule applies there are no such things as typical behaviour in any aspect of the networks or systems in question. In other words, there is no such thing as a normal peak or normal trough in the investment graph. In short, there is no normal fluctuations, period. This may seem to be both a sarcastic and pessimistic view of the investment market but such conclusion is justifiable by research results as well as sound scientific theory. Does this imply that we should not invest in the stock market ? The answer is a resounding negative. So long as we are aware of the ultimate unpredictability and volitility of the system and not to put all our eggs in one basket in terms of the form of investment, we should be on home ground. The smart thing to do is to diversify into different forms of investment other than equity while holding only a fraction of your stakes in stocks as an aggressive component of your portfolio for growth and to beat inflation. However, you should be psychologically prepared and not to feel devastated should disaster really strike for no apparently good reason.

Sometimes, you cannot ask why ? This is equally true with life. It serves you better to rally your efforts and find the courage to start all over again in life than to lament over your misfortunes. Why waste time in re-living your painful moments by trying to ask why it happened over and over again whereas, in fact, there may not even be any sensible answers. Very often, one thing leads to another and all the causes and effects are madly jumbled up. There is this telling historical question. What killed Abraham Lincoln ? The short answer is, of course, the assassin's bullet. This is only the immediate reason. The broader analysis would have to include the political situation, the misguided racist view against negroes, the technology that led to the invention of the assassin's pistol and so on and so forth. The true and complete answer is all these and other unknown factors working in unison in a Network that is the human society up to that fateful moment in history that killed the great and honourable President Lincoln. It is the complicated mechanics ( mostly human in this particular case ) working under various principles of the Science of Networks that actually killed the great man. So, as the saying goes :-“ Don't cry over spilt milk.“ Whatever tragedy hits you, it is to your advantage to look at it as a challenge and learn something from it. Bring out the Mr. Q's attitude within you and face your tragedies with humour and, if possible, defiance. That is how you can manage to win in every instance in life. If tragedy actually strikes, there is no way you can prevent it. This is a fact of life. Rather take an indifferent view, if you can, because lamenting over it would only weaken your resolve to combat the tragedy. It is an uneconomic proposition because it represents a waste of resources and energy. Life has been and always will be an uphill battle against the odds. We have already learned this in chapter (ii) on the origin of life. However rich and powerful you are age will inevitably catch up with you. Tragedy of one kind or another will and must strike. Therefore, be positive and have faith in yourself. Look forward to your future, with a little help from luck and you will be alright. A positive attitude cannot ensure your success but a negative one can surely guarantee your failure. After all, what better can you do if you have already done your best !

The kind of lucrative returns we usually obtain from investing in equities precisely reflect the workings of one of the most sacred laws in the investment market. This golden law, so to speak, is that risks and return always go hand in hand. The greater is the expected return the higher are the related risks. What we have learned from the Science of Networks regarding investor behaviour is that when disaster does strike do not blame yourself on your bad judgment as everyone traditionally does because there is no sure way at all to read the ominous signs as there may not be any. If there really were observable signs and viable predictions based on past trends the computer would have been king of the investment jungle ! 

Thoughts to You from Yours Truly - ( TYYT ) - ( 90 ) - Small World

Thoughts to You from Yours Truly - ( TYYT ) - ( 90 ) - Small World

The Small World Concept is derived from the notion that in this vast and complicated world there are bound to be some common threads that link people and things together through some underlying connections which may not be obvious at first glance. These subtle links will reveal themselves if we observe the system from the right perspectives and the Science of Networks will provide us with the tools to carry out such observations and analysis.
In 1967, a US social psychologist called Stanley Milgram conducted a strange experiment. He sent a number of letters to various unrelated persons in the Mid- West . He explained in his letters that each letter was, in fact, intended for one of his sharebroker friends who lived in the Boston area whose address he had mislaid. The recipients of his letters were asked to try their best to assist him in forwarding the letter to this friend of his with just the details of his friend's name and profession. As if by divine intervention, most of his letters reached the hands of his sharebroker friend in Boston in something like six steps. This was the birth of the now famous phrase - “ Six Degrees of Separation “ after which a movie was made. As unlikely as it may sound, it is claimed that all people on earth are connected to every other person only by a personal link of no more than six people. This is the origin of the Small World Concept. We are actually more closely connected than we would at first realise.

To understand this idea better, we must first know some basic facts about networks in general. There are three main kinds of networks for expressing the relationships between different variables. The first kind is a random network, the second one is the fragmented network and the third is the small world network. The first kind, as lts name implies, does not have any connections or feed-back loops among its constituent parts while the second kind contains connections among each local module but not as a whole. The third kind is the most interesting and useful one. Such a configuration means that there are shortcuts in the access routes between different parts of the small world network that can be exploited to increase the effeciency in communications among these divided regions of the network. These are the subtle connections, so to speak.

It is easy to visualise how the small world effect can come about in just a few examples. Let us look at some of these in turn. Suppose you are an accountant and your circle of friends are mostly accountants. Then, suppose your wife is a doctor and most of her circle of friends are in the medical profession. Normally, accountants and doctors have no frequent and necessary contact with one another but because of the relationship between you and your wife these two seemingly separate groups of people are subtly linked and may very well develop social and professional contact through you and your wife. Due to the multiple capacities each person must necessarily assume, each person's social and professional networks of friends may cover vast and complicated groups of seemingly unconnected people. If you add the blood relationships and in-law relationships of each person to his or her lists of possible groups of people they will interact, you can easily build up an extensive and colourful social network for each person. You may not realize the potential connections but they are there and can be very useful for you when you need them. For social networks, the significance of understanding such connections will be advantageous in terms of potentials in friendships, business development, personal assistance, job opportunities and exchange of important information when you need it. However, if the small world effect is applied to other phenomena such as epidemics, its proper understanding can save precious lives.

The most vital and rewarding characteristic of the small world effect that scientists have discovered is that subtle or informal connections may be even more important and decisive in the functioning of any particular network in which the effect is present. The following example will illustrate this point. The formal communication network in a big corporation is, of course, the local area network of computers but before any policy is finalized and approved by the management it has to be discussed. Therefore, any hints of a forthcoming administrative policy will not come from the formal information system. In fact, management scientists have conclusively discovered that the most sensitive information system for capturing intelligence on upcoming company policy decisions exists in the informal circle of the secretaries of the various department heads during their coffee break gossips. This finding is the absolute truth and not a joke ! The chatting and gossiping of a group of secretaries is actually the medium for the propagation of the small world effect in any big corporation. The subtle link in the present example shows how the various parts of a big corporation can be connected by an informal sub-system and that remarkable shortcuts can be found in the corporate network's information system outside the mainframe computer. This, once again, is the same lesson taught us by the Science of Networks as in other theories to be meticulous in our observations and not simply following our instinct of paying attention only to the conspicuous facts. In many cases, it is the inconspicuous details that make the vital difference.