Archive for August, 2011

Just Crickets

August 30, 2011

Night rhythm
Just loud enough to reassure you
That good things are out there,
That it’s cool and pleasant and free.

No disasters or catastrophes tonight
Just crickets,
Chirping away busily,
No hidden message,
No terrible secret,
Just the quiet murmurings
Of couples slowly, hesitantly
Approaching.

They bear no news,
Ill or good,
They are not TV
They are not the stock market
They are not the loud-,
Ever-shouting,
Ever-present,
Information.

They bring peace and sleep,
And carry you off,
Nature’s lullaby,
They tell you it will be a sunny morning
And a bright new day
Full of hopes and smiles
And running around like a kid.

That’s what you really want to know,
Isn’t it?

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On Making New

August 22, 2011

It is easy sometimes
To look back
To times past,
Always conveniently shrouded in memory,
Vague enough that you can tell your own story,
The one that makes you come out the hero,
And smile that knowing smile of Having Done Well
That knowing, hypocritical smile.

And this makes you forget,
Not just about what really happened
(You Haven’t Done Well),
But also to forget to look for new things, new times,
To give up the game of trying and failing and falling on your face,
Because really, it’s very hard and messy and why bother.

You shouldn’t. The smiling you, the contented you,
The you that doesn’t look to the future,
Is like the frog that was content to die in the milk,
And not the one who fought and fought
And turned it into cream.
The contented you
Will never make a new dream.

An Information Theoretic Perspective on the Global Financial Crisis

August 21, 2011

DISCLAIMER: This is a post about the economy, but I am not an economist. I am an information scientist. My understanding of the global financial crisis from the economic perspective is amateur at best. The text of this post represents an informal account of formal models. I will present a more formal version when time allows.

Consider a barter market of people trading goods. Let’s call this a one-level system, because there is only one level of interaction between people, namely, the exchange of goods. Given a current state of the system (who has what goods), it is fairly straightforward to predict the future state of the system (who will have what good three years from now).

Now let’s add money into the picture: consider a money market of people exchanging currency for goods. There are now two levels of interaction between people. First, they have to agree on the price of goods (how much currency to exchange for each good) and then they have to exchange the goods. This system has just one more level than the first but there is a very important difference: due to the presence of the extra level, it is no longer straightforward to predict the future state of the system (who will have how much money and goods) from the current state (who has how much money and goods now). In particular, some people might get very rich and others, very poor, but it’s not clear, who.

Finally, let’s add information into the system. In the money market, people have to know about the price of goods so they know how much currency to exchange for how much good. This information is pretty cheap to exchange, generate, modify, and store, so it has almost no value. But let’s say people begin to place a value on this information: let’s say the piece of information that says bananas are worth $5 right now is itself worth something. Now there are four levels of interaction between people: they have to agree on both the price of information and on the price of goods, and they trade in both information and goods. Note that information is fundamentally different from other goods in this system: it has a very very low cost both to create, exchange, modify, and store, unlike any other good type.

This last system is most like today’s financial markets, where people can trade not just on goods but also on information about how much these goods are worth, or will be worth. It is also difficult to predict the future of this system from its present; however, we actually know one thing about it that we don’t know about the second, namely, the extremely low cost of information. We also know that the information is about what goods will cost how much money, which, as we know from the second system, is very hard to predict. So, it is both difficult to generate accurate information and extremely cheap to generate any information at all. So as long as information has any value at all, people will gravitate towards trading in it, and they will trade in generally inaccurate information.

Now let’s try to imagine what happens in the third system over a long amount of time. At first, a few people will trade in information, and presumably make a lot of money off it, since its cost is so cheap. Other people will imitate these early adopters, and drive the price of information up, but its cost will remain low. So, more and more people will begin to trade in information, and its price will go ever higher, while its cost remains minimal. New people who want to trade in information have two options: buy and sell information that’s already out there, or make up new information. Since the price of information goes up over time, while its cost remains low, the second option is much more lucrative, so people will make up new information all the time. As more information enters the system, more and more of it will be inaccurate. Furthermore, due to the difficulty of predicting the value of goods, this information has the possibility of being wildly inaccurate. The value of information can be much higher, or much lower, than what it is being traded for, and this value can change drastically over time.

So over the long term, most of the people in this system will be trading in information – because it is the most profitable option – that information will have a very high price, and it will be extremely inaccurate. When new information comes to light, the value of old information can change drastically. This can lead to rapid changes in the state of the system (who has how much money at what time). Furthermore, the overall value of information owned by people in the system can change drastically, leading to rapid changes in social welfare. We saw precisely such rapid and drastic changes over the last few years, during the global financial crisis.

Is there a way of preventing such crises? In other words, is there a way of changing things around so we either adopt the first or second system (or some other system of exchanging goods and services), or we shift the rules of the third system so in the long term it doesn’t lead to concentration of trading in volatile information? Let’s examine our options:

1. Use the first or second system of exchange. Possible, but unlikely, since both are less efficient at generating value than the third system, and people really like to generate value (everybody wants to be rich).
2. Use some other not-yet-invented fourth system. Possible, but certainly a more difficult proposition than just altering the third system slightly.
3. Use the third system with some changes:
3a. Eliminate trading on information completely. This is the simplest solution, but it’s equivalent to using the second system, and people would again reject this option due to simple greed.
3b. Make it so information is very accurate. Unfortunately, accurate information (that is, accurate prices for goods) is very hard to come by, and becomes much harder with each new actor and each new good that enters the system. So this choice boils down to not allowing any new actors or goods to enter the system, at which point the market would quickly become stale, not an attractive option.
3c. Increase the cost of information. This requires rebuilding our information infrastructure, as with the existing information infrastructure, it is almost impossible to make it impossible to trade or generate information cheaply. Again, a very expensive proposal.
3d. Regulate the value that can be assigned to information. This is very difficult to enforce.
3e. Add an alternative to trading on volatile information. This alternative will act as a “pressure valve” so that as amount of trading in information increases it becomes more valuable to trade goods, pay, and trade information, for this alternative. At the same time, the alternative should be self-limiting so that people don’t start assigning too much value to it. This is not trivial to design, but once designed, should offer an incentive to behavior that destabilizes the system and leads to rapid drops / rises in value. It should also be possible to provide this alternative in a cheap way.

This Post Is Not About Politics

August 10, 2011

There’s been a lot going on in the news right now: huge market volatility. S&P downgrade of US credit rating. Violent crackdown in Syria. Rioting in London. But in the middle of it all, happened (for me) one of the most important events of the last couple of weeks: recall elections in WI.

You can find a detailed play-by-play of the election results here.

The short story is, Democrats called for recall against six Republican Senators who sided with WI Gov. Scott Walker on a bill stripping local unions of much of their power. They got recall elections against all six Republicans, and won two of those elections. Those two won’t be enough for the Democrats to take control of the state Senate, but they do heavily erode the Republican majority in the Senate. And most important of all, they show the very real power of citizens fighting for – and getting – change.

This wasn’t about Treasury bonds or debt ceilings. This wasn’t about complex alliances or unsatisfying compromises. This was about a bunch of people upset with their representatives, going out and challenging those representatives, and making their voices heard at the ballot box. This was about a grassroots social movement, no fiery speeches by Obama, no big donors (as far as I know, on the Democratic side at least), just door-knocking and phone-calling and demonstrations outside the Capitol in freezing Wisconsin winter. And I couldn’t be more proud of the Wisconsinites who went out and voted, for either party, who showed the nation what democracy is really all about, and who fought for change.

They didn’t win right away, but they didn’t give up, either. And neither should any of us.

Attentiveness

August 8, 2011

A quiet well rising
Brings up a ponderous sound
From the depths.
It is the sound of troubled, dirty water,
Trembling as hydraulic shocks
Fracture the earth all around.
We shrug it off, complain
About the smell,
And take a sip.
Now, it’s just water
In our system,
And we will purge and absorb it
Without attentiveness.
The well still stands there,
Trying to remind us of something,
But there are many more cups to drink
And not enough time to learn about each one.
A shame.

Inspired by William Stafford

Off to Europe: Conclusion

August 2, 2011

Again, apologies for the massive delay, but over the past few days I’ve been vacationing, working, and traveling, with absolutely no time to write. Finally back in the States now, and I want to put down a few words about the end of vacation.

Montsegur, which we visited on Friday, was the second most impressive site we saw on vacation (read on for the most impressive one :)). To get to the place, you drive up a long winding road through a quiet forest, while the castle towers over you, perched right on top of a mountain. We approached slowly, craning our heads more and more as we got closer, but found out that the road ended merely a third of the way up the mountain. There was the tiny village of Montsegur, and our lovely hotel, with a lovely homestyle French restaurant in the basement, and a very nice woman called Heidi who welcomed us. We then took another short drive up the mountain to the site parking lot, which was still only about halfway up, and hiked the rest of the way. The road quickly became a path, and soon we were hiking / climbing up the mountainside, making use of occasional time-worn steps.

Montsegur itself is a ruin, but there is enough to tell that a sizeable castle *and* a settlement around its walls were both standing here in the thirteenth century. I have to emphasize that these houses are literally standing on top of a (small) mountain, with sheer drops right outside their (former) front doors! There used to be a curtain wall around the entire settlement, and some semblance of roads cut into the rock, but still walking around the settlement in good weather probably involved a bit of mountain climbing. And the weather is not always good – we got plenty of strong wind while on top of the mountain. Walking around in a rainstorm would be very dangerous (I hesitate to say suicidal, *somehow* these people survived).

After Montsegur, we went to Rennes-le-Chateau, which is famous for being featured in the Da Vinci Code and in Holy Blood, Holy Grail, which is an earlier, much better account of the mystery surrounding the Holy Grail in the south of France. The place *is* plenty strange, so much so that it felt fake, somehow, and I spent the visit trying to figure out plausible theories for why an oddball French priest might decide to fill his parish church with odd religious symbolism and turn his house into a giant, modernist-style villa complete with observation tower. My more prosaic take on the situation is that politics were involved somehow, though of course I would never rule out Cthulhu 🙂

Our last, and most impressive, visit was to Montserrat, a monastery in Spain we drove by on our way back to Barcelona. We had an extra day before the plane, and decided to check it out. It’s on top of an even taller mountain than Montsegur, which ends in bizarre, finger-like peaks rising up from the rock everywhere. The name of the place, Montserrat, means something like “serrated mountain,” and it’s accurate – the peaks look unnaturally thin and sharp from below, though once you get to them (there is a little train that goes up), they appear round and extremely smooth. Apparently, they used to be on the bottom of the Mediterranean, and were pushed all the way up here by tectonic forces millions of years ago. Geology is cool 🙂

Montserrat itself is pretty touristy, and not all that cool from an art / architecture perspective, but we took the train up, and wandered around the round, smooth peaks, and found chapels built into the rock at this impossible height. I still don’t know How, or Why, people would choose to live here, even if they Really Really liked God, but I came away impressed.

With that, it was time to head back to Barcelona and thence to Philly. The flight back was pretty smooth, and here I am, back in the states, far away from crazy mountain-top churches. I expect to go back to these diaries, and fill them with pictures and videos I took on the trip, though I do not know when. Thank you for reading along, gentle readers!