Tuesday, October 29, 2013

Debt: A deceptive calm - The Financial Times

Debt: A deceptive calm - The Financial Times

http://www.ft.com/intl/cms/s/0/f00a16fc-3c94-11e3-86ef-00144feab7de.html?siteedition=intl#axzz2j3mlG7uv

October 27, 2013 7:55 pm

Debt: A deceptive calm

By Ralph Atkins in London

Investors are wary that the tranquility in eurozone bond markets could breed complacency

James Carville, an adviser to former US President Bill Clinton, wanted to be reincarnated as the bond market, complaining that it was more powerful than presidents or popes. “You can intimidate everybody,” he moaned.

He should have moved to Rome. This year, Italy has had an inconclusive election, a government often on the brink of collapse and an economy struggling to leave a deep recession. But the bond markets have been noticeably quiescent.

ON THIS STORY

ON THIS TOPIC

IN ANALYSIS

Rather than Rome’s borrowing costs rising as investors worried about the security of Italy’s public debt, the difference – or “spread” – between the yield on 10-year Italian and German government bonds has fallen to levels unseen since the eurozone crisis hit the country more than two years ago.

“I don’t recall [prime minister] Enrico Letta mentioning the word ‘spread’ in any of his official speeches,” says Alessandro Tentori, strategist at Citigroup in London.

It is a similar story in other stressed parts of Europe’s monetary union. Apart from a few weeks in May and June, when borrowing costs spiked globally, eurozone yields have followed a downward trend this year.Spain’s long-term borrowing costs are level pegging Italy’s; Irish government yields are even lower.

Whether this new phase in the eurozone crisis is sustainable or simply the calm before the next storm will help determine the eurozone’s future. The stability reflects market confidence in the eurozone’s prospects – and the fact that fickle international investors fled at an early stage of the crisis. But overreliance on domestic investors has thrown Europe’s economic integration into reverse and may prove dangerous. While the calm may provide breathing space – lower bond yields cut financing costs – it could breed complacency.

Eurozone leaders are in the midst of far-reaching reforms to strengthen the continent’s financial system. “The danger is that without market pressure, the whole process of eurozone reform slows – and these are the reforms that are required to secure the eurozone’s future,” says Myles Bradshaw, senior European portfolio manager at Pimco.

The euro’s launch in 1999 was the biggest achievement in Europe’s post second world war drive to bring together the region’s economies. The impact on sovereign bond markets was dramatic. During the late 1990s yields converged as investors began to think in terms of a single eurozone market. The risks of a country defaulting, or exiting the eurozone, were ignored.

The complacent mood was shattered in 2009 when the escalating debt problems ofGreece erupted into a crisis. Soaring “spreads” on the debt of governments in the eurozone “periphery” – southern Europe and Ireland – threatened the sustainability of public finances. They prompted sweeping changes by policy makers, including the launch of an emergency government bailout fund.

Bond market pressures remained relentless, however, until July 2012, when theEuropean Central Bank finally stepped in. Mario Draghi, ECB president, declared it would provide a backstop for sovereign debt markets. To back his pledge to do “whatever it takes” to save the euro, he unveiled an “outright monetary transactions” programme allowing unlimited ECB intervention if necessary in eurozone bond markets.

The OMT programme removed eurozone “tail risk” – a low probability event that would have had catastrophic consequences. The ECB did not state, however, what yields it would deem appropriate in Europe’s monetary union. Its vagueness was deliberate: it did not want markets to test at what point it would intervene.

A danger now is that eurozone bond markets have been lulled into a false sense of security by Mr Draghi. The ECB president saw OMTs only being activated in a fresh emergency – which has not yet happened. But Laurent Fransolet, head of fixed income research at Barclays, argues that markets are fully aware of the programme’s limitations.

“It was like central bank intervention in foreign exchange markets,” says Mr Fransolet. “Everybody was betting one way – being short Europe and extremely negative on everything. Draghi came in and said ‘that’s it’. But we haven’t had any details about OMTs and it is clear the ECB does not want to use them. Do you really think he wants to use them to help Italy?”

Instead, many bond market experts argue this year’s falls in eurozone periphery bond yields are consistent with the progress made towards ensuring the future financial stability of member states and the monetary union.

“The markets see Mr Draghi as a very strong and stabilising figure, and in the driving seat, but they are also looking at governments and seeing some good execution track records – Spain is a good example,” says Spencer Lake, the global head of capital financing at HSBC. “Markets are looking at all that and saying, ‘we’ve probably reached or are near the bottom’.”

Monday, October 28, 2013

Public speaking, private fears - The Financial Times

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October 7, 2013 4:34 pm

http://www.ft.com/intl/cms/s/0/cd88d16c-2b8d-11e3-a1b7-00144feab7de.html#axzz2h6VEFRPW

Public speaking, private fears

By Rhymer Rigby

©GettySpeech therapy: once you master it, public speaking is something you no longer need to worry about

The comedian Jerry Seinfeld once joked about a study that suggested people’s number one fear was public speaking: “Go to a funeral, you’re better off in the casket than doing the eulogy.”
There is no shortage of research suggesting that the fear of public speaking – otherwise known as glossophobia – enjoys a prominent place in most hierarchies of dread.

ON THIS STORY

The right medium is part of the message
How to have a conversation
Michael Skapinker The keys to chairing a conference
My First Million Going for gold on the speaking circuit

IN MANAGEMENT

“It is significantly outside the average person’s comfort zone,” says Michael Crom, chief learning officer of Dale Carnegie Training. “You need to be prepared for anything.” He recalls giving a talk to a medical conference: “I was the last speaker. It was late and the person before me ran over and they were starting to shut things down. So I suddenly had no PowerPoint or visuals.”
For many people, losing the crutch of PowerPoint in front of an audience itching to get away would be an occupational nightmare come true.
Geoff Church of Dramatic Resources, a business training company that uses techniques from the stage, notes that people’s reluctance when it comes to public speaking can lead to ridiculous situations: “You see people work for a month on a presentation and then they decide who is going to speak in the cab on the way over to the client.”
“Stage fright comes from all sorts of sources, but mainly a lack of experience,” says Paul Edwards, a professor at the school of information and department of history at University of Michigan. “One of the [other] reasons people are bad is that they see bad models – other poor speakers around them – and they learn bad habits and patterns.”

Good and bad business speaking

Most bad business speeches are not howling gaffes or stage deaths, they are just dull – so dull that people forget about them. In fact, many of what are thought of as awful speeches are decent speakers saying the wrong thing.
One high-profile speaker who has been mocked for his oratory is Steve Ballmer, Microsoft’s outgoing CEO. Onenotable incident was a presentation in which he jumped around the stage before declaring his love for the company. Another strange moment was his tearful farewell this year – although the audience was largely sympathetic (perhaps because it was a farewell speech).
Sadly for Mr Ballmer, his rival, the late Steve Jobs, was largely rated as a very good speaker, as he showed with his 2005 Stanford Commencement speech.
Sheryl Sandberg, Facebook’s chief operating officer, took her place among the great and popular business speakers with her speech to the TED conference in 2010 about why there are too few women leaders.
Other well-regarded business speakers include Warren Buffett, famous for his folksy style, and the surprisingly amusing and sharp Ben Bernanke.

Also, because most people have to to do it infrequently, they tend to view public speaking as children view exams – as an ordeal to get over, rather than an opportunity to shine.
Another problem is that businesspeople tend to view themselves as good communicators. They often are good in meetings or social situations but these are not the same as public speaking.
Nick Smallman of Working Voices, a communication and presentation skills consultancy, says few people do anything to tackle their fears because they fail to appreciate fully the value of good speaking. “They don’t think about the good PR it generates,” he says.
Mr Church recommends asking yourself what someone looks like when they are up on stage, commanding an audience. “People assume that if you can speak well you are a leader, regardless of whether you are or not. It’s quite unfair really.”
Done well, public speaking also offers an opportunity to look impressive in front of people you do not normally encounter.
Moreover, Prof Edwards notes that the rewards are likely to grow because the proliferation of online video presentations and things such as TED talks means we are moving towards a more oral culture.
Mr Smallman likens the skill to learning to ride a bicycle: “You just need to retrain your brain. You need to practise, but once you learn, you never fall below that line – and it’s something you no longer need to worry about.”
Furthermore, because most people are so bad at it, you merely need to be OK in order to shine. “There’s a kind of conspiracy of mediocrity,” explains Mr Church. “You put the slides in the right order and people will say it’s fine. But it’s not, really – and so if you actually do it well, people think you’re brilliant. The rewards are entirely disproportionate to the effort you put in.”
When it comes to improving your public speaking skills, the basics break down into two categories: what you say and how you say it. While these two things play off each other, it is the former that is considered more important. Bearing that in mind, here are some tips to help you prepare for a talk or speech:
● Make sure you know your audience and then write with them in mind. “Sentences which are good on paper are often bad when spoken as they can be long and complex,” notes Prof Edwards.
● Think in terms of narrative, such as personal stories that bring subjects alive, and repetition. Most people will only take away three points from your speech, so there is no point covering nine.
● Prepare more material than you need. This will make you confident and will come in handy if there is a Q&A afterwards.
● Practise – whether alone or in front of colleagues and family. It is the best way to deal with nerves. Bob Etherington, author of Presentation Skills for Quivering Wrecks says: “When practising, videoing it can be a good idea, but don’t practise in the mirror as watching what you’re doing while you’re doing it can be very distracting.”
● Do not read off a script. Doing so will make it difficult to connect with your audience. Notes are OK, and you should not try and learn your talk off by heart.
● Do not be tempted by an autocue. “The reason newsreaders look good reading an autocue is because they’re trained to do it,” says Mr Etherington.
● Recognise the difference between formal and informal communication. One of the biggest things here is getting rid of “vocalised pauses” – ums and ahs. Martin Newman, a coach who has worked with David Cameron, UK prime minister, and Vodafone chief executive Vittorio Colao, explains: “When you’re speaking in a meeting, these are saying: ‘I’m still thinking so don’t interrupt me.’ But as a speaker you won’t be interrupted anyway.”
● Make the signposting very clear. When you speak in a group, the thread of your conversation is shaped by questions, queries and interjections from others. Public speakers need to compensate for the lack of this.
● Anticipate questions your audience might have and address them during your talk. This way people feel as if they are having a conversation with you.
● Vary your pitch and emphasis and watch your body language too. “Make sure you stand strongly,” says Mr Newman. “Think about how guitar heroes like Brian May stand. You want to be planted like that.”
● Dump or at least pare back the PowerPoint presentation. This often acts as the visual equivalent of management jargon, providing a veneer of professionalism but obfuscating the message. If you read off slides, it will sound like you are reading – and complex slides are distracting. “A presentation comes alive when you stop using PowerPoint,” says Mr Etherington.
● You need a strong finish. Most people get to the end and say, “I guess that’s it”, and their body language collapses. Mr Etherington suggests a summary, then a call to action: “People expect to be told to do something at the end of a speech. Leave them singing your song.”

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Sunday, October 27, 2013

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

October 27, 2013 at 7:30pm

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.

Multimedia

Graphic

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.

Saturday, October 26, 2013

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 !

Friday, October 25, 2013

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.

Thursday, October 24, 2013

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.

Wednesday, October 23, 2013

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.

Tuesday, October 22, 2013

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.”

JKHC FORUM

Tuesday, October 29, 2013