Re: LCTM

["ÁÎ×Ó¹â Henry C.K.Liu ¹ù¤l¥ú" <hliu@xxxxxxxxxxxxxx>]

Life is complex and it is composed of many components with different
functions. Academic economists are engage in a search for truth, policy
economists are engaged in a search for operative rules of the game, and market
participants are engaged in playing the perfect game.  Each needs the others.
Truth is a manifestion of reality, and reality is governed by a superstructure
of rules which market participants agree to observe in order the have a game.
But each component has a related but decidedly different view of truth and
reality.   A General Theory is a statement of universal truth, a model is an
algorithm to beat the rules and the performance of the model become the
reality. There is constant feed back and adjustments in this process.  A
General Theory gives meaning, but it is next to useless as an operational
manual.  Policy makers are basically setting handicaps with the aim of making
the perfect rules so that the game always ends with a draw.  Market
participants strive to beat the rule without violating them.  A general
theorist knows that predicting the future is futile, the policy maker tries to
prevent the unthinkable or unpleasant future and the market  participant only
hopes to be richer at the end of each day.  As one character in the TNT series
"Bull" (Tuesdays 10pm) said: "If at the end of the day we have more money than
when we woke up that morning, then we've done opur job."  To the market
particiapant, his future is the next minute.  A piece of bogus news release
caused a compny's market capitalization to drop by $2.5 billion in 15 minutes,
before the market caught on.

The future is not an abstact state.  It is an intergation of a continuos
sequential time inmcrement. The Calculus of time-events makes the future
predictable in theory, by considering each instant a differentiation of
continuum. Calculus is a mathematical method of limiting the value of a
function as a variable tends to approach zero. The basic ideas concern
continuity and limits.

Jon, you are welcome to use any of the ideas in my post, with or without
attribution.  I probably got it somewhere else anyway, consciously or
subconciously.  It all in the public domain.

Henry C.K. Liu


Jonathan D Halvorson wrote:

> Henry, I don't think the quote is relevant here. Barkley's point is that
> the supermodels might explode (implode?) in the short run. Or rather, any
> disasters using the models will arise quickly: almost by definition, too
> quickly to react by those who have been lulled into a false sense of
> confidence with the thought that they have finally discovered the
> unbeatable model. There isn't any such thing in economics or any social
> science, for reasons already mentioned. I think part of the problem with
> LTCM was precisely this belief that if we just get a little more clever
> we'll discover an algorithm which will allow prediction (and hence,
> manipulation) comparable to the natural sciences.  Rational AND
> irrational adaptations just don't leave room for this idea, as far as I
> can see.  I really like the model/supermodel metaphor, though! Do you mind
> if I borrow it?
>
> Jonathan
>
> > Remember, as Keynes said: "In the long run, we all will be dead."
> >
> > Henry
> >
> > "J. Barkley Rosser, Jr." wrote:
> >
> > > Henry (not sure if this will get to pkt or not),
> > >       There is no resolution to this.  The point is that
> > > every "super model" will have a possible flaw, something
> > > that was not expected, people doing what they were not
> > > supposed (and certainly expected) to do.  So, one can
> > > cover the compensatory strategy with yet another hedge,
> > > and that one with yet another cross-trade.  But, it becomes
> > > an infinite regress of trying to ultimately cover all contingencies.
> > > It cannot be done.  Implicitly these deals are all bets on the
> > > future at some level, no matter how well covered, no matter
> > > how beautiful the equations underlying the derivatives.  They
> > > can always blow up in one's face, even if they do so infrequently.