Posted on 08/14/2007 9:25:31 PM PDT by bruinbirdman
25-standard deviation event” – something that only happens once every 100,000 years or more.
Lost $1.5bn? Blame the computer.
What ever happened to the human brain?
Live by the sword..
What’s happening is pretty simple: The stock market is in a closed feedback loop with the models. What’s that mean?
Take the stock market from its start up until today. You can make a great model that “predicts” every event in the whole thing based on past data for each point. Use that to predict the future. Won’t work long. Why? Because a lot of other big players have similar models, which in turn change the way the market operates, which eventually invalidates those models due to various types of feedback.
In other words, the 25-SD events don’t mean the market’s broken, they mean the market’s changed due to the feedback effect.
In fact, it’s mathematically provable that you can NEVER build a complete model that will work out into the future for this type of system because once you do (or rather get close to doing so) and it becomes part of the system, the feedback will force an out-of-model behaviour.
(Maybe not well stated, but I’m tired — it’s Miller time.)
Computer models are only as good as the data they’re based on. GIGO (garbage in, garbage out).
So what do these bright young bucks do? Leave the computers on auto-pilot while they summer in the Hamptons?
Well, every 100,000 years or so.
“People say these are one-in-a-100,000-years events but they seem to happen every year...”
Kinda Biblical. "100,000 years is as 365 days"
This stuff is over my head...
I’d say you’ve pretty-much nailed it. Well done.
In fact, it’s mathematically provable that you can NEVER build a complete model that will work infinitely far (or even really far) out into the future for this type of system because once you do (or rather get close to doing so) and it becomes part of the system, the feedback will eventually force an out-of-model behaviour.
Breaks down to computers can’t anticipate real life.
Thanks...
But happened real quick-like. As they say, back to the drawing board.
Further compounding the model problem is that while it is a closed feed back loop, it is an open system and influenced by external factors. The inputs of today are not going to be the same inputs as tomorrow.
I’m not totally against computer model ... but business types and often computer types don’t understand the limitations of the systems like math types.... and there is the first step to a failure.
What you said reminded me of Goedel.
Your explanation could be the reason “why” the article speaks to neural networks, whihc would seem to me to mean that all the models are interconnected and marching to the same song.
“The dog ate my homework” will now be “the computer ate my billion.”
"Medallion, has had an annual return of 30 per cent since 1988 – is suffering badly from recent movements."
30%/yr for 19 years leaves quite a profit to take a hit on.
So, it takes my house 5 years to double in value, free money. I am not sad when the market price falls 12% in 3 months. yitbos
Why of course. The stock market, after the original sales of the stock, is a game of trying to outbet everybody else in real time. Earlier buyers hope to make money off of later buyers (because, of course, they expect to sell sometime), the winners make money off the losers.
“It tends to be more consistent, since machines – unlike people – never get tired.”
Wrong. Computers don’t have emotions and their trading is strictly based on Technical Analysis. The normal trader will allow emotions in and sell when he should be buying or vice versa. A good trader sets the rules and should be like a machine in carrying them out.
Self referencing systems are generally chaotic - nearly anything can happen at any given moment. (”Godel, Escher & Bach”). I guess the rich madmen/institutions using emancipated computers for trading are like nukes with random timers in the center of our economy. We had better slow them down! Let humans and computers trade in entirely different markets, with no cross overs. I know, cannot happen, but it would be interesting to see what the outcome would be.
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