Thorp, Shannon: Inspiration for Alternative Perspectives on the ID vs. Naturalism Debate

The writings and life work of Ed Thorp, professor at MIT, influenced many of my notions of ID (though Thorp and Shannon are not ID proponents). I happened upon a forgotten mathematical paper by Ed Thorp in 1961 in the Proceedings of the National Academy of Sciences that launched his stellar career into Wall Street. If the TSZ regulars are tired of talking and arguing ID, then I offer a link to Thorp’s landmark paper. That 1961 PNAS article consists of a mere three pages. It is terse, and almost shocking in its economy of words and straightforward English. The paper can be downloaded from:

A Favorable Strategy for Twenty One, Proceedings National Academy of Sciences.

Thorp was a colleague of Claude Shannon (founder of information theory, and inventor of the notion of “bit”) at MIT. Thorp managed to publish his theory about blackjack through the sponsorship of Shannon. He was able to scientifically prove his theories in the casinos and Wall Street and went on to make hundreds of millions of dollars through his scientific approach to estimating and profiting from expected value. Thorp was the central figure in the real life stories featured in the book
Fortune’s Formula: The Untold Story of the Scientific Betting System that Beat the Casino’s and Wall Street by William Poundstone.

fortune's formula

Poundstone’s book doesn’t actually go into detail what formulas actually work in today’s markets because once something works well, it stops working once everyone else figures it out. Thorp’s only published work on how to make money on Wall Street became obsolete and he had to find new avenues of success with secrets he will take with him to the grave….But for those interested, here is Thorp’s only published book on how to make money on Wall Street. As I said it is now obsolete, but it showcases Thorp’s genius and insight. It used to retail for $300 used on Amazon, but then Thorp offered a PDF copy for free:
BEAT THE MARKET
A Scientific Stock Market System
.

So if you want a change of pace from the usual arguments over ID, I offer Thorp’s work and you can skip the rest of what is written below since it is my version of ID inspired by Thorp and Pascal.

Though I had followed Thorp’s work on and off for 10 years, I only recently discovered Thorp’s 1961 article while preparing my own draft of a paper that encapsulates my version of Intelligent Design presented at the Blyth Institute’s “Alternatives to Methodological Naturalism Conference” (AM-NAT 2016). I present to the TSZ readers a draft of a paper that I’m submitting as part of the AM-NAT 2016 conference proceedings. AM-NAT 2016 was a conference organized and mentioned by JohnnyB at TSZ and UD. So if you want to argue ID instead of discuss Thorp’s work, that’s ok too.

I got fascinated by the body of math surrounding expected values partly as a result of Thorp’s work. Because of this body of math, I concluded ID theory has been focused too much on information theory and the 2nd law of thermodynamics, and I’ve argued this is a misguided approach. A more clear cut way to frame the probability arguments is to leverage expected values and the law of large numbers and apply similar mathematical approaches, not the approach laid out by Dembski and his almost intractable conception of specification and CSI.

My approach to the question of ID at the personal and practical level has been more along the lines of Pascal’s wagering ideas than trying to make absolutist assertions about reality. Pascal’s wagering ideas were not limited to the theological questions of heaven and hell, but were originally developed to answer theoretical questions about fair values of wagers in gambling games. His solutions using his notion of “expected value” became foundational in probability and statistics, and the notion of expected (or expectation) values has found its way into the realms of physics, chemistry and finance, etc. I’ve framed ID vs. Naturism debate at a personal and practical level more in terms of what is to be gained if ID is right and what might be lost if ID is wrong and how to move forward in science without formal resolution the question of ID.

In my paper, I focused on a practical (not theological) dimension regarding the NIH’s half-billion dollar research investment into the ENCODE and RoadmapEpigenomics projects. Evolutionary biologist Dan Graur has labeled the ENCODE project leaders “crooks” and “ignormuses” and likened the chief architect of ENCODE, Ewan Birney, to Saddam Hussein. Even money aside, there is an issue of bragging rights as to which group of scientists (ENCODE vs. Gruar) should be praised and which group will have egg on their faces after all the dust settles.

To my surprise, the fight over ENCODE spilled over into a fight over what I thought was a rather innocuous article in the New Yorker that promoted the chromatin-centric viewpoint of the epigenome. I did not realize there was a camp (for lack of a better name, I’ll call them the dinosaurs or the transcription-factor proponents or gene-centrists) that was furious at the chromatin-centrists. ENCODE is not only labeled as promoting an “evolution-free gospel” (verbatim words used by rival scientists in a peer-reviewed publication), but they are also not exactly liked by the gene-centrists for their chromatin-centric viewpoint of the epigenome. Creationists and IDists are more sympathetic to the chromatin-centrists, with the qualification that creationists and IDists in general are more favorable to all forms of non-DNA somatic and transgenerational inheritance mechanisms that may reside outside DNA be it organelle, structural, glycomic or whatever “-omic” inheritance devices that may be out there, not just chromatin based mechanisms.

I’ve qualitatively argued the favorable wager in practical terms is on ENCODE, not on evolutionary theory. Most of the paper is rehash of debates I’ve had here at TSZ, so the material is nothing new. It can be said, my paper is really a product of the debates I’ve had at TSZ. The interactions here have helped provide editorial and technical improvements. The paper is still a draft, the figures and formatting will be cleaned up by the myself, reviewers, and the Blyth Institute before it is published in the AM-NAT 2016 conference proceedings. This draft still has a lot of cleanup needed, so I’m posting it to invite improvements. Some of the material might later be reworked as reading material for the high school home school and/or creationist biology students in college. I don’t consider the paper a professional offering, but a way to codify some of my ideas for later reference.

For those tired of reading and arguing what I’ve posted before and have no inclination to read my paper, I provided a link to Thorp’s paper in the chance it may be of passing interest and a change of pace to some readers in this blog.

But for those interested in my paper, here it is:
Gambler’s Epistemology vs. Insistence on Impractical Naturalism: The Unwitting Half-Billion Dollar Wager by the NIH Against Evolutionary Theory.

ACKNOWLEDGEMENTS
Thanks to all at TSZ who have contributed to the refinement of the ideas in my paper. Thanks to the admins and mods of the skepticalzone hosting my postings. TSZ has been a place where I’ve had the chance to receive critical and editorial feedback on materials I’m publishing in various venues.

PS

I had the opportunity to put in practice some of Thorp’s theory in the casino and so did a group of Christians. Their story is documented in the DvD Holy Rollers. I’m listed in the credits of the Holy Rollers documentary.

Here is the trailer. Featured in the trailer is Pastor Mike and other pastors who were part of the Holy Rollers:

holy rollers

290 thoughts on “Thorp, Shannon: Inspiration for Alternative Perspectives on the ID vs. Naturalism Debate

  1. fifth:

    Yep the uncleanliness stuff is more vital in the long term spiritual sense of things. Slavery is temporary and local.

    Patrick:

    My personal view is that those who speak so cavalierly about slavery should experience it for themselves.

    For a lifetime.

  2. stcordova,

    Again, Sal, you are only embarrassing yourself. All those protein comparisons are exactly what I would expect to see based on the standard phylogeny. That you think you are arguing against me there only shows that you don’t understand something crucial, perhaps multiple somethings.

    Yes, of course the zebrafish is closer to the chicken than the lamprey. That’s because the zebrafish and chicken share a more recent common ancestor with each other than with the lamprey. “Fish” are paraphyletic, if you know what that word means, and paraphyletic to tetrapods. Tetrapods, therefore, are descended from “fish”. “Fish” as commonly understood refers to teleosts, lungfish, sharks, and yes, even lampreys. You seem to be using it only for the first group.

  3. Patrick: My personal view is that those who speak so cavalierly about slavery should experience it for themselves.

    Who spoke cavalierly about slavery. It’s you who mock and minimize it by ignoring spiritual slavery.

    You also flippingly dismiss the experiences of all the millions who owe their freedom to Christ and his mission.

    You need to understand that abolishing slavery is what Christianity is all about it’s why Christ came

    quote:

    “The Spirit of the Lord is upon me, because he has anointed me to proclaim good news to the poor. He has sent me to proclaim liberty to the captives and recovering of sight to the blind, to set at liberty those who are oppressed,
    (Luk 4:18)

    end quote:

    I would suggest that your cavalier attitude warrants that you experience slavery but the reality is you already are doing that you just don’t know it.

    It’s called Stockholm syndrome and I was there once as well

    peace

  4. Neil Rickert: Fifth is rewriting the bible. Okay, he is rewriting it with the exact same words. But he has changed the meanings of those words so as to fit his theology.

    It’s not my theology it’s the theology of the author. He has the right to define his terms.

    It’s you who are changing meanings when you don’t allow him to do so.

    peace

  5. Patrick: My personal view is that those who speak so cavalierly about slavery should experience it for themselves.

    It’s the people on this forum who have equivocated the slavery of the ancient near east with the horrible things that occurred in America.

    I can’t think of anything more cavalier than that

    peace

  6. It takes a mind perverted by religion to argue that an entire chapter full of crap like this…

    When a woman has her regular flow of blood, the impurity of her monthly period will last seven days, and anyone who touches her will be unclean till evening.

    …is “vital”, while a sentence like this…

    Don’t enslave people.

    …isn’t even worth uttering, because slavery is only “temporary and local.”

    Fundagelicals don’t seem to realize that naming God as the author of the Bible is a terrible insult. Why blame him for it? It was obviously written by humans, not God, and it exhibits all of their flaws.

    It’s amusing to imagine someone like fifth standing before God on the day of judgment, stammering when God asks him incredulously, “You actually thought I wrote that shit?”

  7. An interesting and relevant essay by David Barash in Aeon:

    Is God a silverback?

    Protective, omnipotent, scary and very territorial. The monotheistic God is modelled on a harem-keeping alpha male

  8. fifthmonarchyman: It’s the people on this forum who have equivocated the slavery of the ancient near east with the horrible things that occurred in America.

    Describe the life of a biblical slave. Demonstrate that it was not so bad.

    But it’s good to know that FFM supports the idea that one person can literally own another person as long as the owner does not beat the slave too hard.

    The lord of that servant shall come in a day when he looketh not for him, and in an hour that he is not aware of,
    And shall cut him asunder, and appoint him his portion with the hypocrites: there shall be weeping and gnashing of teeth.

    So far so terrible for FMM

    And that servant, which knew his lord’s will, and prepared not himself, neither did according to his will, shall be beaten with many stripes.

    FMM, do you happen to know who said that?

  9. fifthmonarchyman: He has the right to define his terms.

    He? You mean god? You do know that the bible was written by humans, many different humans over a long period of time?

    Slavery might have been standard at the time, but a few words directly from god could have changed all that, no?

    fifthmonarchyman: You need to understand that abolishing slavery is what Christianity is all about it’s why Christ came

    Wikipedia notes that modern slavery is a multibillion-dollar industry with estimates of up to $35 billion generated annually. The United Nations estimates that roughly 27 to 30 million individuals are currently caught in the slave trade industry.

    So, seems that your Christ did a terrible job of abolishing slavery. If only he’d said something other than to beat them nicely! You know, like don’t own people m’kay.

    fifthmonarchyman: Who spoke cavalierly about slavery. It’s you who mock and minimize it by ignoring spiritual slavery.

    You also flippingly dismiss the experiences of all the millions who owe their freedom to Christ and his mission.

    Not those 27 million people. Why do only some get freed? Does christ only care about americans?

    In fact it’s you that flippantly dismiss the misery slavery has caused throughout the ages with your attempts to dismiss the fact of it in the bible.

    No doubt people had to be enslaved their entire life just so christ could come free their slave descendents many hundreds of years later.

    Somewhat cold comfort to know that slavery is bad and christ is going to fix it all but not for you, you’ll have to be a slave until you die otherwise it won’t be the big reveal that christ the showman is looking for when he finally notes that slavery is a bad thing mm’kay!

    The bible gives instructions on how to treat your slaves. To FMM this is a positive thing, as those slaves would have been treated worse without those instructions. Yet he can’t address the fact that Jesus never spoke directly against slavery, but somehow did anyway but indirectly.

  10. OMagain: Describe the life of a biblical slave. Demonstrate that it was not so bad.

    not sure what you mean by a biblical slave but all slavery is bad.

    OMagain: But it’s good to know that FFM supports the idea that one person can literally own another person as long as the owner does not beat the slave too hard.

    Where do you get that Idea. Do you think advocating precise clear thinking instead of equivocation is advocating slavery?

    That explains a lot

    OMagain: FMM, do you happen to know who said that?

    Do you know what metaphor is?

    OMagain: He? You mean god? You do know that the bible was written by humans, many different humans over a long period of time?

    Do you think that being written by different humans in inconsistent with divine authorship? That explains a lot

    OMagain: Slavery might have been standard at the time, but a few words directly from god could have changed all that, no?

    Words form God would not have changed all that.Because no one obeys God’s words of their own volition.

    Apparently you missed that answer as well.

    Knowledge acquisition would be a lot easier for you if you were interested in answers to your questions.

    Peace

  11. OMagain: Wikipedia notes that modern slavery is a multibillion-dollar industry with estimates of up to $35 billion generated annually. The United Nations estimates that roughly 27 to 30 million individuals are currently caught in the slave trade industry.

    And they will be freed when Christians and others who are inspired by the Bible win the day over those who would ignore what it says. That is after all what Christianity is all about.

    OMagain: Yet he can’t address the fact that Jesus never spoke directly against slavery, but somehow did anyway but indirectly.

    What are you taking about?

    You do know Jesus is the author of the Bible don’t you?
    All the verses against slavery that I quoted were him speaking (directly).

    Perhaps you missed it since you are not interested in answers. I suggest you go back and read

    peace

  12. fifthmonarchyman:

    My personal view is that those who speak so cavalierly about slavery should experience it for themselves.

    Who spoke cavalierly about slavery.

    You did: “Yep the uncleanliness stuff is more vital in the long term spiritual sense of things. Slavery is temporary and local.”

    You trivialize the horror of enslaving other human beings as a “temporary and local” issue.

    It’s you who mock and minimize it by ignoring spiritual slavery.

    There is no evidence for anything resembling “spiritual slavery”. Real slavery affects real people. The fact that you care less for that suffering than for your myths proves that Weinberg was correct when he said “With or without religion, you would have good people doing good things and evil people doing evil things. But for good people to do evil things, that takes religion.”

    I would suggest that your cavalier attitude warrants that you experience slavery but the reality is you already are doing that you just don’t know it.

    It’s called Stockholm syndrome and I was there once as well

    Thanks for the condescension, but I’ll stick with objective, empirical evidence. It makes me far less likely to dismiss actual human suffering.

  13. fifthmonarchyman: It’s the people on this forum who have equivocated the slavery of the ancient near east with the horrible things that occurred in America.

    So some types of slavery are fine and dandy with you and your god? You’re making a great argument against your beliefs.

  14. keiths:

    Fundagelicals don’t seem to realize that naming God as the author of the Bible is a terrible insult. Why blame him for it? It was obviously written by humans, not God, and it exhibits all of their flaws.

    It’s amusing to imagine someone like fifth standing before God on the day of judgment, stammering when God asks him incredulously, “You actually thought I wrote that shit?”

    fifth,

    How will you answer if God asks you that question?

  15. fifthmonarchyman: And they will be freed when Christians and others who are inspired by the Bible win the day over those who would ignore what it says. That is after all what Christianity is all about.

    Is it? I presume you are a christian. Therefore you are working to overturn modern day slavery.

    Fifth, what have you personally done today with regard to overturning slavery?
    Or is it someone else’s job?

  16. fifthmonarchyman: not sure what you mean by a biblical slave but all slavery is bad.

    The bible talks about how to treat slaves. They are ‘biblical slaves’, if you will.

    Describe a day in their life!

  17. fifthmonarchyman: All the verses against slavery that I quoted were him speaking (directly).

    Oh? It’s funny how you quote Luke when I can do the same and it’s much clearer and to the point

    The servant who knows the master’s will and does not get ready or does not do what the master wants will be beaten with many blows. But the one who does not know and does things deserving punishment will be beaten with few blows.

    Seems quite clear to me. And there are others as well. But no doubt you’ll have a good set of excuses as to why this is actually a good thing and it’s really a metaphor.

    The master of that servant will come on a day when he does not expect him and at an hour he is not aware of. He will cut him to pieces and assign him a place with the hypocrites, where there will be weeping and gnashing of teeth.

    Yeah, seems like a not-oppressive at all relationship to me. It’s amazing what religion does to you. White is black and black is white.

  18. fifthmonarchyman: It’s the people on this forum who have equivocated the slavery of the ancient near east with the horrible things that occurred in America.

    I can’t think of anything more cavalier than that

    peace

    Why don’t you just come out and endorse slavery, with beatings and murder, the way the bible does? Why do you try to impose your own fallible morals on God’s laws and commandments? God wants you to take slaves, real genuine slaves, to beat or kill them when they disobey you and who the hell are you to disagree anyway?

  19. stcordova,

    Again, Sal, you are only embarrassing yourself. All those protein comparisons are exactly what I would expect to see based on the standard phylogeny. That you think you are arguing against me there only shows that you don’t understand something crucial, perhaps multiple somethings.

    Yes, of course the zebrafish is closer to the chicken than the lamprey. That’s because the zebrafish and chicken share a more recent common ancestor with each other than with the lamprey. “Fish” are paraphyletic, if you know what that word means, and paraphyletic to tetrapods. Tetrapods, therefore, are descended from “fish”. “Fish” as commonly understood refers to teleosts, lungfish, sharks, and yes, even lampreys. You seem to be using it only for the first group.

    I refer the reader to the discussion here which goes into the details. We’ll see who’s left standing at the end of the exchange:
    http://theskepticalzone.com/wp/phylogenetics-huh-what-is-it-good-for-absolutely-nothing/comment-page-5/#comment-129783

  20. I pointed out here:
    http://theskepticalzone.com/wp/thorp-shannon-inspiration-for-alternative-perspectives-on-the-id-vs-naturalism-debate/comment-page-1/#comment-129165

    Just for fun, I’m going to make a prediction and an associated paper trade based on concepts of expected value and some of Thorp’s hedge fund theory.
    ….
    But anyway, if my paper trade is right, it will yield 10% return (85 dollars profit / 850 collateral) by November 16, 2016 for an annualized rate of return of 28%.

    I’m betting Crude oil won’t close above 80 dollars by November 16, 2016.

    So I’m putting my make-believe money where my mouth is. 🙂

    At my discretion, if the trade become profitable before November 16, 2016, I can close it and lock in the profit. I’ll post at TSZ if this happens on this thread.

    We’ll my paper trade is exceeding expectations. Woohoo. Current price of LOZ6 C8000 at 12:45 7/7/16 is 0.05 (the average of the bid of 0.04 and ask of 0.06) which implies the standard contract is now trading at 50 dollars (.05 x 1000). Which means my short sale has a net profit of 35 dollar (85-50 dollars).

    Given the collateral I set aside was 850 dollars, this is a return on equity of 35/850 = 4.1% in only 9 days which would be an annualized rate of return of over 400%. Woohoo. I’m closing out the trade and breaking out the champagne (actually I like ginger ale better).

    Experiment agrees with Thorp’s theories. Science works.

    Learn about the scientific basis of the trade here:
    https://en.wikipedia.org/wiki/Volatility_arbitrage

  21. stcordova,

    Hate to be critical, but that’s not a very scientific approach. You need to do a test for a population of trades and measure against a control (or random selection).

  22. I should note when I pulled the trigger on my paper trade on June 29:

    http://theskepticalzone.com/wp/thorp-shannon-inspiration-for-alternative-perspectives-on-the-id-vs-naturalism-debate/comment-page-1/#comment-129165

    The price of crude was 51.82 on 6/29, as of right now it is 45.09 at 1pm EST 7/7/16, a horrific drop. The paper trade I put forward was counting on the price of crude Oil not exceeding 80 by November 16, 2016. That’s a rather easy call (pun intended).

    If crude oil dipped, like it did, it’s easy money.

    If on the other hand it started to rise, one would have to wait it out and see if crude oil closed about 80 on November 16, 2016. Volatility arbitrage theory said it was a favorable wager even if crude oil rose, just as long as it wasn’t over 80 on November 16, 2016.

    The trick of course is having contingencies when things start to go really bad as they expected to on occasion. But those contingencies are the topic of proprietary techniques which I don’t discuss publicly.

  23. Rich,

    Hate to be critical, but that’s not a very scientific approach. You need to do a test for a population of trades and measure against a control (or random selection).

    I was only being half serious, but Volatility Arbitrage theory is a real theory that is applied in hedge funds of today. I learned this stuff from a Morgan Stanley executive whom I met in my blackjack circles. It’s no coincidence Blackjack players sometimes go on to be investment managers.

    To actually be able to do this in away that is consistently within some safety parameter ( say a 5% failure rate), is not easy.

    Hate to be critical, but that’s not a very scientific approach. You need to do a test for a population of trades and measure against a control (or random selection).

    I’m glad you’re being critical because this is an interesting topic of conversation and there is a cynical twist to all this which I will describe below.

    The following was done by an S&P 500 researcher of the success of volatility arbitrage theory. It worked till the crash of 2008. No doubt, the success of derivative trading for 18 years prior to 2008 contributed to the magnitude of the crash when the Black Swan finally appeared.

    You can look at the methodical study right here by Keith Loggie of S&P.

    http://www.markit.com/news/volatility-arbitrage.pdf

    Ok, so what does this mean, and I’m sorry I have to put a cynical twist on all this but it will make sense if one sees it through the lens of cynicism.

    Loggie showed theory worked well for 18 years. That is, one counts on the market operating within two standard deviations 95% of the time. So that means 19 out of 20 years, you’ll be making money, and then you have that one awful 1 year you get wiped out.

    In terms of hedge fund management, you manage investors money for 19 of 20 years and they are getting spectacular returns while you (the hedge fund manager) collect a nice management fee along the way. You are making money off of other people’s money, not your own. Then when the fund blows up, as it is expected to, they lose their money, but you keep yours since your money was the management fee and hopefully you were smart enough not to risk your money but theirs.

    Personally I don’t think hedge fund managers are that sociopathic, as it is easy for a hedge fund manager to believe he’s found the holy grail. After all, for 18/19 years he had an unparalleled success rate, and if he was conservative, he could be lucky and have a 50 years of steady success until the day the Black Swan shows up. In fact I think most hedge fund managers who are successful want to believe it’s because of their genius rather than random luck, and that they are doing a real service to their clients.

    I think personally there are some open ended questions, but I think the market isn’t totally random and is exploitable.

    The bottom line question is, when is it reasonable to play Russian roulette with the market? One can get long steady returns for a long time, until the revolver has a loaded chamber when you pull the trigger.

  24. I heard that after 2008, economic statisticians were shocked by the failure of the investment strategies based on things like the Black-Scholes model. Supposedly they looked into this and concluded that the model was fine, the problem was that the model had been trained, its parameters had been chosen, using a stretch of past years that did not include any large economy-wide downturns.

    Incidentally, this sort of theory is also used by evolutionary biologists. In particular, to predict the outcome when fitnesses vary through time. The basic theory started with Haldane and Jayakar in 1963, and was refined by John Gillespie and others in the 1970s. For example suppose that (in a haploid organism) if in wet years genotype A has fitness 1.05 compared to fitness of a 1.0, while in dry years the fitnesses are 0.9 : 1. If 68% of years are wet the average fitness of A relative to a is 1.002. So in the long run A will win out, right?

    Wrong. The theory shows that in this case in a large population a will win out. And this will happen even if the wet and dry years are not independently occurring each year.

    The theory does usually assume that all the organism’s assets are bet every year. But there are case where one wants not to assume that, for example when a plant’s seeds enter a “seed bank” in the soil and only (say) 10% of them germinate every year.

  25. Joe:

    I heard that after 2008, economic statisticians were shocked by the failure of the investment strategies based on things like the Black-Scholes model

    Some random facts: The Black-Scholes model won the Nobel Prizes for Myron Scholes, but since his co-author Fischer Black had died an untimely death from cancer, and since Nobel Prize aren’t awarded posthumously, the Nobel Prize went to Myron Scholes and Robert Merton (who independently derived the equation using something called Ito’s calculus).

    Then in 1998, one year after wining the Nobel Prize, both Scholes and Merton went bankrupt when they were dumb enough to risk their own money on their own economic theory, when wisdom should have told them to bet other people’s money and collect the management fees (this is actually the casino model of business if you think of it).

    https://en.wikipedia.org/wiki/Long-Term_Capital_Management

    Here is the story:

    Long-Term Capital Management L.P. (LTCM) was a hedge fund management firm[1] based in Greenwich, Connecticut that used absolute-return trading strategies combined with high financial leverage. The firm’s master hedge fund, Long-Term Capital Portfolio L.P., collapsed in the late 1990s, leading to an agreement on September 23, 1998 among 16 financial institutions — which included Bankers Trust, Barclays, Bear Stearns, Chase Manhattan Bank, Credit Agricole, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, JP Morgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, Paribas, Salomon Smith Barney, Societe Generale, and UBS — for a $3.6 billion recapitalization (bailout) under the supervision of the Federal Reserve.[2]
    ….

    Founder
    John W. Meriwether

    Defunct
    1998

    Headquarters
    Greenwich, Connecticut

    Key people
    Myron S. Scholes
    Robert C. Merton

    Products
    Financial services
    Investment management

    Below is the picture of what happened. It accords with Black Swan theory whereby in a small unrepresentative sample, a theory looks impressive, until it explodes. This is exactly Richard Hughes complaint which I sympathize with, with some qualification.

    Scholes himself thought the hedge fund was stepping on the gas pedal to hard and spinning out of control. They could have reached their destination, but just had to be willing to get there more slowly. Scholes was overruled by the other partners, and the whole ship eventually sunk.

    I think there is money to be made in the market, but some caution is in order and some skepticism of idealized theories (which are mathematically tractable, but formally not reality) should always be held.

  26. As an addendum to Black-Scholes, even though Sholes when broke, the other guy, Black died quite wealthy. To the best of my knowledge this was because Black worked for Goldman-Sach’s which to large extent bets everyone’s money, and tries to avoid betting their own. Black was promoted to the coveted position of Goldman-Sach’s partner.

    He refined his theories (which he even acknowledge were inaccurate) and that helped make money for Goldman Sachs. Black with the help of Emmanuel Derman (a physicist) had to use Feynmann-Kack solutions to differential equations which, from my understanding, some population genetcists like Durrett and Schmidt had to employ to solve some of their population genetics problems.

  27. That’s the Feynman-Kac formula.

    It expresses the connection between expectation of a functional of a Brownian Motion process and a differential equation.

    It isn’t just “some population geneticists”. The connection was developed by Andrei Kolmogorov in about 1930. In the late 1930s Sewall Wright realized that the equilibrium distributions of gene frequencies in population genetics, which he had computed by matching the first four moments of the stochastic process of genetic drift and other evolutionary forces, could also be obtained more neatly using Kolmogorov’s “foreward equation”. This went on, in the hands of Motoo Kimura, William Feller, Geoff Watterson and others to become the standard machinery of theoretical population genetics. (Kolmogorov himself was interested in the genetic applications but had to drop that work when Lysenko banned genetics in the Soviet Union).

  28. Joe Felsenstein:

    In the late 1930s Sewall Wright realized that the equilibrium distributions of gene frequencies in population genetics, which he had computed by matching the first four moments of the stochastic process of genetic drift and other evolutionary forces, could also be obtained more neatly using Kolmogorov’s “foreward equation”.

    I just looked it up in your book. Whoa. Thanks. I presume this is related to
    Fokker-Planck:

    https://en.wikipedia.org/wiki/Fokker%E2%80%93Planck_equation

    Except to get the Kolmogorov forward equation, one has to constrain the left-hand side of the Fokker-Plank equation to equal to zero to get the equation in your book on page 325. Am I off base?

    The problem that Black and Derman tried to solve was what happens when there is a market disaster, how does it affect derivative (option) prices. I suppose a market crash is like an intrusion or migration to a once stable population.

    I couldn’t understand any of Derman and Black’s math, your explanation is more accessible (relatively speaking).

  29. fifthmonarchyman: Words form God would not have changed all that.Because no one obeys God’s words of their own volition.

    What does “Because no one obeys God’s words of their own volition” mean?

  30. And of course fifth’s argument is bogus:

    OMagain:

    Slavery might have been standard at the time, but a few words directly from god could have changed all that, no?

    fifth:

    Words form God would not have changed all that.Because no one obeys God’s words of their own volition.

    If people couldn’t obey an injunction against slavery “of their own volition”, then they couldn’t obey the endless rules and regulations of the Old Testament of their own volition either.

    So when God filled an entire chapter of Leviticus with instructions on dealing with “discharges causing uncleanness”, he was apparently just yammering, according to fifth.

    Or if fifth agrees that God helped the Israelites to obey the discharge commandments, then an obvious question arises: Why couldn’t he help them to obey an injunction against slavery?

    As usual, fifth hasn’t thought things through.

  31. Keiths said here:

    Regarding Sal’s paper, McAfee WebAdvisor says:

    http://theskepticalzone.com/wp/thorp-shannon-inspiration-for-alternative-perspectives-on-the-id-vs-naturalism-debate/comment-page-1/#comment-129148

    Here is an improved version of the paper that is in PDF format which will hopefully negate the virus warning problem Keiths mentioned regarding his McAfee virus scanner:

    http://www.creationevolutionuniversity.org/public_blogs/skepticalzone/paper31.pdf

  32. Time for another trade. This one is the Russian Roulette trade on a leptokurtic distribution.

    Here is the trade:

    Today is Friday October 13, 2017

    The CME ticker symbol is LOZ7 C6300 which is the option December 2017 call option expiring on November 15, 2017 (funny labeling I know) with strike price of .02 bid .03 ask.

    Short 1000 LOZ7 C6300 option contracts for gross cash of 20,000 dollars gross and 17,400 dollars net after commissions.

    The December Crude Oil Contract is presently at 51.66. A normal distribution prediction based on historical volatility of 25.1% indicates there is only about 0.4% chance the price will be above 63 on November 17, 2017. But that’s based on the Normal Distributions. Real distributions have lepkurtotic black swans in them.

    But still I’d guess you have a better than 99% chance of success. If the price of oil closes below 63 dollars a barrel on November 17, 2017, you pocket 17,400 dollars of profit. Woohoo!

    Of course there is that 0.4% or higher chance you’ll get your head blown off. To quote Clint Eastwood, “Do you feel lucky, punk?”

    If you make this money on this trade you can send a 10 dollar donation to the Discovery Institute or the Creation Research Society on my behalf in thanks for the free trading idea I just provided. 🙂

    NOTES:
    http://www.investopedia.com/terms/l/leptokurtic.asp

    http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude.html

  33. Dr. Michael Burry at the UCLA Economics School Commencement. Amazing speech, hints of anti-left wingery and collectivism. He was harassed by the government for telling the truth. Who knows the culprit behind the harassment.

    From Wiki:

    Michael J. Burry (/ˈbɜːri/; born June 19, 1971) is an American physician, investor, and hedge fund manager.

    He was the founder of the hedge fund Scion Capital, which he ran from 2000 until 2008, and then closed to focus on his own personal investments. Burry was one of the first investors to recognize and profit from the impending subprime mortgage crisis.
    ….
    Though he suffered an investor revolt (where some investors worried the logic was wrong and withdrew their investment in Scion Capital’s hedge fund) before his predictions came true, Burry earned a personal profit of 100 million and a profit for his remaining investors of more than 700 million.[3] Scion Capital ultimately recorded returns of 489.34% (net of fees and expenses) between its November 1, 2000 inception and June 2008. The S&P 500 returned just under three percent including dividends over the same period.[3]

    Here is his speech:
    https://youtu.be/1CLhqjOzoyE

    Who should win the Nobel Prize in Economics? How about all those hedge fund managers who bet on failing leftist polluted economies and profited like Mike.

  34. https://panampost.com/jose-nino/2015/04/22/40-years-later-milton-friedmans-legacy-in-chile/

    Though democratically elected by a narrow margin in 1970, Salvador Allende was determined to turn Chile into the next Cuba by undermining all of its democratic institutions. Through price controls, arbitrary expropriations, and lax monetary policy, Allende put the Chilean economy on the verge of collapse. By 1973, inflation reached 606 percent and per capita GDP dropped 7.14 percent.

    Under the command of General Augusto Pinochet, the military deposed Allende’s government. Despite this tumultuous change, the military ruler did not have a clear economic vision for Chile.

    Milton Friedman’s visit to Chile in March 1975 proved to be quite fateful. Friedman was on a week-long lecture tour for various think thanks. Eventually, Friedman sat down with the general himself for 45 minutes. Right off the bat, Friedman recognized that Pinochet had very little knowledge of economics. After their meeting, Friedman sent Pinochet a letter with a list of policy recommendations.

    Friedman was blunt is his diagnosis of Chile’s economy: for the country to recover, it had to truly embrace free-market measures.

    Ideas Put in Action

    Cooler heads prevailed and Pinochet let the Chicago School disciples occupy various posts in the military government. In April 1975, El Plan de Recuperación Económica (The Economic Recovery Plan) was implemented. Soon Chile curbed its inflation, opened up its markets, privatized state-owned industries, and cut government spending. By the 1990s, Chile was experiencing the largest economic boom in its history.

    Left-wing critics will say Chile is a disaster. Oh really? Compared to Communist Venezuela, I’d say Chile is paradise!

  35. On October 13, 2017 I wrote:
    http://theskepticalzone.com/wp/thorp-shannon-inspiration-for-alternative-perspectives-on-the-id-vs-naturalism-debate/comment-page-6/#comment-196175

    Today is Friday October 13, 2017

    The CME ticker symbol is LOZ7 C6300 which is the option December 2017 call option expiring on November 15, 2017 (funny labeling I know) with strike price of .02 bid .03 ask.

    Short 1000 LOZ7 C6300 option contracts for gross cash of 20,000 dollars gross and 17,400 dollars net after commissions.

    The December Crude Oil Contract is presently at 51.66. A normal distribution prediction based on historical volatility of 25.1% indicates there is only about 0.4% chance the price will be above 63 on November 17, 2017. But that’s based on the Normal Distributions. Real distributions have lepkurtotic black swans in them.

    But still I’d guess you have a better than 99% chance of success. If the price of oil closes below 63 dollars a barrel on November 17, 2017, you pocket 17,400 dollars of profit. Woohoo!

    Congratulations to anyone who made this trade and netted 17,400 dollars. Oil didn’t go above 58 since I made that comment on 10/13/17, and it closed on expiration Wednesday 11/15/17 well below 63 two days earlier than the date I provided (Friday 11/17/17) where it closed at 56.55.

    Now, let me wax philosophical for a moment. All the math models that drive the above trade are based on the limited sample size of the lifetime of the crude oil market. We build nice normal distributions, but we know that is only an approximation.

    To appreciate the risks of such trading, we can assume the temperature in Siberia will go around a certain mean with a few standard deviations, we don’t expect a black swan event where the temperature in one location will be hot enough to melt rock. The model works nicely till a meteor hits. When it does, oh well, so much for our mathematical model! So it is with the derivatives market. Things cruise well until a black swan shows itself.

    And on another philosophical note, is there a time to properly play Russian Roulette? Well, if it is electronic and you have a 1 in 1,000,000 chance of losing, would you play given the right payoff. There is no right or wrong answer, but so many decision in life are a trade off of reward vs. risk.

    A reasonably good hedge fund manager I know personally said he’d play Russian Roulette for a 20 million dollar payoff and a risk of blowing his head off of 1 out of 1 million. I understand his reasoning. If having 20 million spares you from driving in dangerous traffic for the next 20 years going to work, then it would seem a lower risk bet to play than not playing. Again, no right or wrong answer, but that is the question each investor must make if he want to play this sort of game.

    Btw, below is the photo of the Siberian meteor I was talking about and a little blurb from Wiki:
    https://en.wikipedia.org/wiki/Tunguska_event

    Since the 1908 event, there have been an estimated 1,000 scholarly papers (most in Russian) published on the Tunguska explosion. In 2013, a team of researchers published analysis results of micro-samples from a peat bog near the center of the affected area showing fragments that may be of meteoritic origin.[5][6]

    Early estimates of the energy of the air burst range from 10–15 megatons of TNT (42–63 petajoules) to 30 megatons of TNT (130 PJ),[7] depending on the exact height of burst estimated when the scaling-laws from the effects of nuclear weapons are employed.[7][8] However, modern supercomputer calculations that include the effect of the object’s momentum find that more of the energy was focused downward than would be the case from a nuclear explosion and estimate that the airburst had an energy range from 3 to 5 megatons of TNT (13 to 21 PJ).[8]

    The 15-megaton (Mt) estimate represents an energy about 1,000 times greater than that of the atomic bomb dropped on Hiroshima, Japan—roughly equal to that of the United States’ Castle Bravo (15.2 Mt) ground-based thermonuclear detonation on 1 March 1954, and about one-third that of the Soviet Union’s Tsar Bomba explosion on October 30, 1961 (which, at 50 Mt, is the largest nuclear weapon ever detonated).[9]

    It is estimated that the Tunguska explosion knocked down some 80 million trees over an area of 2,150 km2 (830 sq mi), and that the shock wave from the blast would have measured 5.0 on the Richter magnitude scale. An explosion of this magnitude would be capable of destroying a large metropolitan area,[10] but, due to the remoteness of the location, no human fatalities were officially documented. Several reports have indicated that two people may have died in the event, however these deaths remain unofficial.[11][12][13][14] This event has helped to spark discussion of asteroid impact avoidance.

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