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walt373 (99.84)

Financial Engineering for Social Good

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October 22, 2011 – Comments (8)

Here is a very interesting speech by Andrew Lo at MIT on financial engineering: how it caused the financial crisis, what purpose it serves in society (managing incentives), and how we can use it to cure cancer and solve other major challenges.

8 Comments – Post Your Own

#1) On October 22, 2011 at 11:01 PM, whereaminow (61.20) wrote:

Thanks for sharing.

Because I like your blogs, I pulled up the video.  I got 8:43 into it before I turned it off.  He starts off by noting that we had very low interest rates throughout the 1990s.   How were those low interest rates achieved?  They don't come from the market.  The Fed sets the rate.  So all of these wonderful market products that he is talking about have a root source, the Soviet central planning agency called the Federal Reserve.  They created the incentive.  He's knows that. 

In fact, I know he knows that since he claims early on that the Fed tightened monetary policy late in the boom, and he points out that this is when the crash started.   I am guessing that sadly his solution would be to keep the economy in a quasi boom for as long as possible.  Right outta General Theory. (Btw, the Fed never actually tightens monetary policy, except Volker who actually shrunk the money supply.  No other Fed chief has ever accomplished this as far as I know.  To Wo, tightening policy is most likely simply not lowering target rates.)

So instead of looking at finance and saying, "hmm, what made these investment vehicles attractive was low rates, since otherwise, they would not be profitable," he takes the standard central bank apologist line that we need to deal with human behavior.

Now, I don't know how far he gets with his analysis of the role of the Federal Reserve, or whether he understands 101 of economic calculation (not financial calculation), but if he hits that at any time, give me a minute mark and perhaps I'll find it worthwhile.

But judging by the title of his presentation and the first 8 minutes that I could stomach, it appears he is going to go the opposite route, and argue that as long as certain controls and regulations are placed on various Fed-created incentives, we can save the planet from global warming and cure cancer.  If that is the route he's going, he had better develop a sense of humor.

(Polio vaccine was created through private donations without any need for fancy finance through low interest rates.  Most forms of cancer are caused by the modern diet.  And global warming, well, when they actually start performing real scientific experiments and not simply exorbitantly high priced observational studies, I'll show some interest.)

David

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#2) On October 23, 2011 at 9:39 AM, devoish (98.81) wrote:

Sure Dave, sure. Attack science and observation. God only knows when "they" might start doing real science" and abandon using "high priced observation" that confirms the scienctific experiments only you are still waiting on. I hope you are not just saying things like that in the hope that your suggestion will actually cause some folks to believe that experimentation confirming the ability of CO2 to regulate atmospheric temperatures by trapping radiated heat has not been done.

 Tyndall set out to find whether there was in fact any gas in the atmosphere that could trap heat rays. In 1859, his careful laboratory work identified several gases that did just that. The most important was simple water vapor (H2O). Also effective was carbon dioxide (CO2), although in the atmosphere the gas is only a few parts in ten thousand. Just as a sheet of paper will block more light than an entire pool of clear water, so the trace of CO2 altered the balance of heat radiation through the entire atmosphere...

...In 1896 Arrhenius completed a laborious numerical computation which suggested that cutting the amount of CO2 in the atmosphere by half could lower the temperature in Europe some 4-5°C (roughly 7-9°F) — that is, to an ice age level. But this idea could only answer the riddle of the ice ages if such large changes in atmospheric composition really were possible. For that question Arrhenius turned to a colleague, Arvid Högbom. It happened that Högbom had compiled estimates for how carbon dioxide cycles through natural geochemical processes, including emission from volcanoes, uptake by the oceans, and so forth. Along the way he had come up with a strange, almost incredible new idea.

It had occurred to Högbom to calculate the amounts of CO2 emitted by factories and other industrial sources. Surprisingly, he found that human activities were adding CO2 to the atmosphere at a rate roughly comparable to the natural geochemical processes that emitted or absorbed the gas. As another scientist would put it a decade later, we were "evaporating" our coal mines into the air. The added gas was not much compared with the volume of CO2 already in the atmosphere — the CO2 released from the burning of coal in the year 1896 would raise the level by scarcely a thousandth part. But the additions might matter if they continued long enough.(2) (By recent calculations, the total amount of carbon laid up in coal and other fossil deposits that humanity can readily get at and burn is some ten times greater than the total amount in the atmosphere.) So the next CO2 change might not be a cooling decrease, but an increase. Arrhenius made a calculation for doubling the CO2 in the atmosphere, and estimated it would raise the Earth's temperature some 5-6°C (averaged over all zones of latitude).

http://www.aip.org/history/climate/co2.htm 

Best wishes,

Steven

PS. We could also observe the 1950's work of Jona Salk and his discovery of the polio vaccine, and the contribution of progressively high personal income taxes and the high union membership of that time, and how the financial freedom of such a wide wealth distribution made a March of Dimes possible which funded polio vaccination research with small contributions from millions.

Best wishes again,

Steven

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#3) On October 23, 2011 at 1:09 PM, whereaminow (61.20) wrote:

Religious nuts are always on the attack. 

David

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#4) On October 23, 2011 at 2:32 PM, TMFBlacknGold (99.35) wrote:

I don't see how quants can do anything useful. I'm one of science's biggest advocates, but I have a deep hatred of quants. The only reason they are protected is because the fastest growing part of our GDP is the financial sector. The truth is, it doesn't add any value to society. As a real engineer, I cringe everytime I hear a quant call themselves or their peers a financial "engineer". The only thing they engineer are bubbles. Real engineers build the infastructure that makes life possible, whether its bridges, water sanitation systems, or consumer products. Financial engineers try to fit the market and all of its variables to mathematical models that will never work. Pure bs!

So sure, perhaps quants could do some good, but we all know that will not happen. Will all quants put their egos aside and work to help society? No. Technology is not good or bad, it all depends on how it is used. Nobel didn't want dynamite to be used to blow people to smithereens, but it was used in just that way. Harnessing the power of the atom is good for nuclear power plants, but it also turns out to work just fine on the tip of a warhead.

BlacknGold

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#5) On October 23, 2011 at 3:25 PM, walt373 (99.84) wrote:

David, don't get too hung up on his explanation of the financial crisis or whatever you disagree with. That is just a small part of the video. I would say skip to 26:00 when he talks about the Darpa challenge, that is really interesting.

BlacknGold, did you actually watch the video? Because he doesn't talk about quants or markets.

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#6) On October 23, 2011 at 7:29 PM, TMFBlacknGold (99.35) wrote:

Haha yes I watched the video. Forgive my rant - I admit I am biased and my opinions are twisted by the recent financial crisis - but the MFIN (master of finance) program at MIT Sloan mirrors that of a quantatative financial engineering program. I was invited to Sloan and Haas (Berkeley) for graduate seminars on their programs, so I did my research before emphatically turning them down.

The video makes good points. My point is that not everyone will get involved and put their egos aside to help solve society's problems (like during the DARPA challenge). It's a nice thought that unfortunately has zero chance of happening.

Either way, great video and very thought provoking indeed.

BlacknGold

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#7) On October 23, 2011 at 11:04 PM, TMFBlacknGold (99.35) wrote:

Let me clarify: finance people, whether engineers or just financial consultants or whatever, won't put their egos aside. Sure, I would love to invest $2,000 in a Science Bond/Treasury and redeem it after 10 years for a nice little gain. My doubts lie in the institutions that create the Science Bond/Treasury. If they make an 87% profit (taking the example from the video) then that equals about 10% a year for 10 years. The institutions that put these on the market would probably not be very inclined to payout anywhere near 10% and pocket most of the gains for a nice profit. So we would have the chance to solve some of society's problems, but a relatively small amount of people would make boo-koo $$$ in the process. As we've seen before, that leads to a cycle of greed and dishonesty that slowly but surely inflates a bubble.

If done correctly, then yes, it could be an amazing step for humanity. Perhaps the profits not paid out to Science Bond/Treasury holders could go towards bringing the cost of treatment down. That would add even more value to society! But again, it is unlikely.

BlacknGold

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#8) On October 23, 2011 at 11:57 PM, valunvesthere (< 20) wrote:

Americans are possibly the best in the world to raise funds.

The main reason why United States of America is the land of abundance, innovation, oppurtunities, and etc. is because it's ability to raise funds from domestic investors and foreign investors to finance its endeavors. Americans have a financial sales force that sell various investments such as ownrship in any industry in all risk levels like bluechips (low risk), large caps (low - medium risk), small caps (medium - high risk), venture start-ups (high risk) and etc. Loan your money to various endeavors in forms of bonds. Also many innovative fund vehicles.

United States go through boom and bust cycles.

Through out American history America is built on investors, loaners, and donated money. From time to time Americans go through build, create, and service production cycles. The speeds are full production cycle - medium production cycle or low production cycle in any order any time. Americans also has the ability to always bounce back from depression and many recessions. United States of America was hit with the world financial crisis in 2008 and did not farewell as Canada, China, Australia, and etc. or worst than Portugal, Italy, Ireland, Greece, Spain, and etc. It seems the mass availability of the internet and the recent crisis has provided the leftists a vehicle to magnify the size of the crisis then it really is.

Americans are possibly the best in the world in producing and attracting talent.

United States of America has most corporate headquarters with the large market capitalizations, medium market capitalizations, and small market capitalizations therefore having the oppurtunities for domestic and foreigners with skills.If we compare United States of America to any country in the world America produces more, invents more, and provided more most oppurtunities inside and outside United States of America than anywhere in the world. Finally, yes Americans can finance social good if it meets domestic and foreign investors criterias.

Valunvesthere.

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