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MIT experts analyze financial crisis, debate cures

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Owen Densmore

MIT experts analyze financial crisis, debate cures

Administrator

This seemed to be a pretty sound analysis of the current crisis:
http://techtv.mit.edu/file/1448/
In particular, I was surprised to see how reasonable several things I
had thought to be "bad" were. For example, the "securitization" of
mortgages arose from a very reasonable desire to "smooth out" risk. I
hadn't understood their function before.

-- Owen

============================================================
FRIAM Applied Complexity Group listserv
Meets Fridays 9a-11:30 at cafe at St. John's College
lectures, archives, unsubscribe, maps at http://www.friam.org

Owen Densmore

Re: MIT experts analyze financial crisis, debate cures

Administrator

In the video I sent out below, there were several buzz words that I
found here:
http://en.wikipedia.org/wiki/Structured_finance

-- Owen

On Oct 22, 2008, at 10:11 AM, Owen Densmore wrote:

> This seemed to be a pretty sound analysis of the current crisis:
> http://techtv.mit.edu/file/1448/
> In particular, I was surprised to see how reasonable several things
> I had thought to be "bad" were. For example, the "securitization"
> of mortgages arose from a very reasonable desire to "smooth out"
> risk. I hadn't understood their function before.
>
> -- Owen

============================================================
FRIAM Applied Complexity Group listserv
Meets Fridays 9a-11:30 at cafe at St. John's College
lectures, archives, unsubscribe, maps at http://www.friam.org

Phil Henshaw-2

Re: MIT experts analyze financial crisis, debate cures

In reply to this post by Owen Densmore

Of course!, the reason they fooled everyone so completely was that they were
designed to be completely sensible. That's what is meant by the "black
swan".

Phil Henshaw

> -----Original Message-----
> From: [hidden email] [mailto:[hidden email]] On
> Behalf Of Owen Densmore
> Sent: Wednesday, October 22, 2008 12:11 PM
> To: The Friday Morning Applied Complexity Coffee Group
> Subject: [FRIAM] MIT experts analyze financial crisis, debate cures
>
> This seemed to be a pretty sound analysis of the current crisis:
> http://techtv.mit.edu/file/1448/
> In particular, I was surprised to see how reasonable several things I
> had thought to be "bad" were. For example, the "securitization" of
> mortgages arose from a very reasonable desire to "smooth out" risk. I
> hadn't understood their function before.
>
> -- Owen
>
>
>
> ============================================================
> FRIAM Applied Complexity Group listserv
> Meets Fridays 9a-11:30 at cafe at St. John's College
> lectures, archives, unsubscribe, maps at http://www.friam.org

============================================================
FRIAM Applied Complexity Group listserv
Meets Fridays 9a-11:30 at cafe at St. John's College
lectures, archives, unsubscribe, maps at http://www.friam.org

Phil Henshaw-2

Re: MIT experts analyze financial crisis, debate cures

Gosh, I don't know why it's so hard to convey, but it's important to
understand.

The error in planning on things working as if responding to a normal curve
distribution (i.e. admirably designed for all the usual problems) is relying
on it if there is a growing 'fat tail' of abnormal events (the black swan).
That situation is sure to develop when trying to regulate a system for
producing ever more unusual and complex events. That is precisely what we
were, and have always been, and still are trying to do.

A bubble pops at it's weakest point, not it's strongest. When the
'containment' is a regulatory design, the certainty is that the breach will
occur at the most critical place that no one checked. By definition it's a
small error that multiplies to an irreversible point before anyone quite
realizes it. The CAUSE of that is not the rare event (the pin prick).
It's not the weak point in the containment that no one checked (patches of
poor design or regulation or greed, etc). It's not the size of the bubble
(how big the gradient is from high to low). It's the pump.

The cause is pumping the bubble of complications in an accelerating way that
guarantees people will miss the problems developing. It's operating an
growth system and making the first regulatory error, accepting the learning
curve of exploding complication required to stabilize it forever.

There are a lot of 'why' answers, and some of them circular. I think the
correctable reason why is the common scientific error of reading the future
in the past. We plan on the future behaving like the past by trusting old
stereotypes and patterns for changing things. We plan on the future being
like the past EVEN for systems we design for the purpose changing at
continually multiplying rates. The solution is to notice the cognitive
dissonance... you could say, and just ask the dumb questions.

Phil Henshaw

> -----Original Message-----
> From: [hidden email] [mailto:[hidden email]] On
> Behalf Of Phil Henshaw
> Sent: Thursday, October 23, 2008 12:06 PM
> To: 'The Friday Morning Applied Complexity Coffee Group'
> Subject: Re: [FRIAM] MIT experts analyze financial crisis, debate cures
>
> Of course!, the reason they fooled everyone so completely was that they
> were
> designed to be completely sensible. That's what is meant by the
> "black
> swan".
>
> Phil Henshaw
>
>
> > -----Original Message-----
> > From: [hidden email] [mailto:[hidden email]] On
> > Behalf Of Owen Densmore
> > Sent: Wednesday, October 22, 2008 12:11 PM
> > To: The Friday Morning Applied Complexity Coffee Group
> > Subject: [FRIAM] MIT experts analyze financial crisis, debate cures
> >
> > This seemed to be a pretty sound analysis of the current crisis:
> > http://techtv.mit.edu/file/1448/
> > In particular, I was surprised to see how reasonable several things I
> > had thought to be "bad" were. For example, the "securitization" of
> > mortgages arose from a very reasonable desire to "smooth out" risk.
> I
> > hadn't understood their function before.
> >
> > -- Owen
> >
> >
> >
> > ============================================================
> > FRIAM Applied Complexity Group listserv
> > Meets Fridays 9a-11:30 at cafe at St. John's College
> > lectures, archives, unsubscribe, maps at http://www.friam.org
>
>
>
> ============================================================
> FRIAM Applied Complexity Group listserv
> Meets Fridays 9a-11:30 at cafe at St. John's College
> lectures, archives, unsubscribe, maps at http://www.friam.org

Kenneth Lloyd

Re: MIT experts analyze financial crisis, debate cures

Phil,

You speak of causality and "why" answers as if they "ought" be deterministic
in some scientific paradigm. Uncle Occam cautions that may be one
assumption too many.

Therefore, I sense that the underlying assumption in your observation is
that science is "supposed" to be the search for truth from events of the
past. I refer you to Henry Pollack's book "Uncertain Science, Uncertain
World", and Michael Lynton's observation that the purpose of science is to
"separate the demonstrably false from the probably true".

I would add that "probably true" actually means "probably not false", so
even that logical state is approached asymptotically. This is an artifact
(meaning a residual error or inaccuracy) from a Newtonian era paradigm of
science that has long been shown erroneous yet still permeates most peoples
thinking.

The problem caused by planning on things working is what I call The Sunny
Day Paradox - usually faced by those who believe in a deterministic
scientific paradigm. In other words, in spite of successful surgery, the
patient died.

One last point, by "pump" do you mean "probabilistic wavefunction"?

Ken

> -----Original Message-----
> From: [hidden email]
> [mailto:[hidden email]] On Behalf Of Phil Henshaw
> Sent: Friday, October 24, 2008 8:17 AM
> To: [hidden email]; 'The Friday Morning Applied Complexity
> Coffee Group'
> Subject: Re: [FRIAM] MIT experts analyze financial crisis,
> debate cures
>
> Gosh, I don't know why it's so hard to convey, but it's
> important to understand.
>
> The error in planning on things working as if responding to a
> normal curve distribution (i.e. admirably designed for all
> the usual problems) is relying on it if there is a growing
> 'fat tail' of abnormal events (the black swan).
> That situation is sure to develop when trying to regulate a system for
> producing ever more unusual and complex events. That is
> precisely what we
> were, and have always been, and still are trying to do.
>
> A bubble pops at it's weakest point, not it's strongest.
> When the 'containment' is a regulatory design, the certainty
> is that the breach will occur at the most critical place that
> no one checked. By definition it's a small error that
> multiplies to an irreversible point before anyone quite
> realizes it. The CAUSE of that is not the rare event (the
> pin prick).
> It's not the weak point in the containment that no one
> checked (patches of poor design or regulation or greed, etc).
> It's not the size of the bubble (how big the gradient is
> from high to low). It's the pump.
>
> The cause is pumping the bubble of complications in an
> accelerating way that
> guarantees people will miss the problems developing. It's
> operating an
> growth system and making the first regulatory error,
> accepting the learning curve of exploding complication
> required to stabilize it forever.
>
> There are a lot of 'why' answers, and some of them circular.
> I think the correctable reason why is the common scientific
> error of reading the future
> in the past. We plan on the future behaving like the past
> by trusting old
> stereotypes and patterns for changing things. We plan on
> the future being
> like the past EVEN for systems we design for the purpose changing at
> continually multiplying rates. The solution is to notice
> the cognitive
> dissonance... you could say, and just ask the dumb questions.
>
> Phil Henshaw
>
>
> > -----Original Message-----
> > From: [hidden email]
> [mailto:[hidden email]] On
> > Behalf Of Phil Henshaw
> > Sent: Thursday, October 23, 2008 12:06 PM
> > To: 'The Friday Morning Applied Complexity Coffee Group'
> > Subject: Re: [FRIAM] MIT experts analyze financial crisis, debate
> > cures
> >
> > Of course!, the reason they fooled everyone so completely was that
> > they were
> > designed to be completely sensible. That's what is meant by the
> > "black
> > swan".
> >
> > Phil Henshaw
> >
> >
> > > -----Original Message-----
> > > From: [hidden email]
> [mailto:[hidden email]]
> > > On Behalf Of Owen Densmore
> > > Sent: Wednesday, October 22, 2008 12:11 PM
> > > To: The Friday Morning Applied Complexity Coffee Group
> > > Subject: [FRIAM] MIT experts analyze financial crisis,
> debate cures
> > >
> > > This seemed to be a pretty sound analysis of the current crisis:
> > > http://techtv.mit.edu/file/1448/
> > > In particular, I was surprised to see how reasonable
> several things
> > > I had thought to be "bad" were. For example, the
> "securitization"
> > > of mortgages arose from a very reasonable desire to
> "smooth out" risk.
> > I
> > > hadn't understood their function before.
> > >
> > > -- Owen
> > >
> > >
> > >
> > > ============================================================
> > > FRIAM Applied Complexity Group listserv Meets Fridays 9a-11:30 at
> > > cafe at St. John's College lectures, archives,
> unsubscribe, maps at
> > > http://www.friam.org
> >
> >
> >
> > ============================================================
> > FRIAM Applied Complexity Group listserv Meets Fridays
> 9a-11:30 at cafe
> > at St. John's College lectures, archives, unsubscribe, maps at
> > http://www.friam.org
>
>
>
> ============================================================
> FRIAM Applied Complexity Group listserv
> Meets Fridays 9a-11:30 at cafe at St. John's College
> lectures, archives, unsubscribe, maps at http://www.friam.org

Phil Henshaw-2

Re: MIT experts analyze financial crisis, debate cures

Ken
> Phil,
>
> You speak of causality and "why" answers as if they "ought" be
deterministic
> in some scientific paradigm. Uncle Occam cautions that may be one
> assumption too many.
[ph] Ah yes... but the value of deterministic answers does not remove the
value of closely focused anticipatory questions. One needs to be careful
not to waste one's time, but there really are some clear actionable signs of
change that are every bit as useful as deterministic answers.

>
> Therefore, I sense that the underlying assumption in your observation is
> that science is "supposed" to be the search for truth from events of the
> past. I refer you to Henry Pollack's book "Uncertain Science, Uncertain
> World", and Michael Lynton's observation that the purpose of science is to
> "separate the demonstrably false from the probably true".
[ph] Yes, and of course what science "is" is whatever scientists "do" and
that's a quite broad spectrum of things. Some habits scientists consistently
return to over and over, include coming up with new questions when the
patterns of what we're looking at just don't fit... I'm just pointing to a
better methodology for identifying that 'cognitive dissonance' in the
environment that prompts the need for new questions. It's a way of
scanning the environment for signs of impending systems change, and things
like that. Relative to *that* point of view the purposes of science seem to
be to describe only what is changeless, and to distract us from many of the
exciting new questions all around us.

> I would add that "probably true" actually means "probably not false", so
> even that logical state is approached asymptotically. This is an artifact
> (meaning a residual error or inaccuracy) from a Newtonian era paradigm of
> science that has long been shown erroneous yet still permeates most
peoples
> thinking.
[ph] Well, from an anticipatory science view "probably true" mean "worth
checking out", so even if past data is inconclusive at the moment, the
progression observed may suggest future data will become so. As we build an
ever more complex and rapidly changing world, the "probably true"
expectation that the system will expose ever larger errors we didn't see is,
in my estimate, worth looking into.

>
> The problem caused by planning on things working is what I call The Sunny
> Day Paradox - usually faced by those who believe in a deterministic
> scientific paradigm. In other words, in spite of successful surgery, the
> patient died.
[ph] Well that is also aptly pointed out with the statistical world view of
the turkey in the month before Thanksgiving... He's being treated unusually
well and feeling fit as a fiddle... statistically speaking he has great
prospects for a long life.

>
> One last point, by "pump" do you mean "probabilistic wavefunction"?
[ph] No I don't mean equations. I mean a reciprocating process of
accumulation. The simple handle pump for water in a farmyard or the
spritzer of a lady's perfume are analogous in various ways to the complex
processes that systems use to accumulate changes. If the spritzer worked
the way a growth system does, starting with an almost imperceptible
discharge and then using some output to multiply the output, a person
patient and persistent enough to get it to operate at all is likely to be
suddenly drenched with perfume and feint to the floor if they don't pay very
close attention to just when to stop it. It's the relation between the
doubling rate of the pump and lag time in the control system responses that
displays the range of outcomes. The big lag time to watch, of course, is
the time it takes to switch it off automatic.

It's actually a quite useful question. The wonder to me is why science
has not yet seemed to acknowledge that systems of change change things.

Phil

>
> Ken
>
> > -----Original Message-----
> > From: [hidden email]
> > [mailto:[hidden email]] On Behalf Of Phil Henshaw
> > Sent: Friday, October 24, 2008 8:17 AM
> > To: [hidden email]; 'The Friday Morning Applied Complexity
> > Coffee Group'
> > Subject: Re: [FRIAM] MIT experts analyze financial crisis,
> > debate cures
> >
> > Gosh, I don't know why it's so hard to convey, but it's
> > important to understand.
> >
> > The error in planning on things working as if responding to a
> > normal curve distribution (i.e. admirably designed for all
> > the usual problems) is relying on it if there is a growing
> > 'fat tail' of abnormal events (the black swan).
> > That situation is sure to develop when trying to regulate a system
> for
> > producing ever more unusual and complex events. That is
> > precisely what we
> > were, and have always been, and still are trying to do.
> >
> > A bubble pops at it's weakest point, not it's strongest.
> > When the 'containment' is a regulatory design, the certainty
> > is that the breach will occur at the most critical place that
> > no one checked. By definition it's a small error that
> > multiplies to an irreversible point before anyone quite
> > realizes it. The CAUSE of that is not the rare event (the
> > pin prick).
> > It's not the weak point in the containment that no one
> > checked (patches of poor design or regulation or greed, etc).
> > It's not the size of the bubble (how big the gradient is
> > from high to low). It's the pump.
> >
> > The cause is pumping the bubble of complications in an
> > accelerating way that
> > guarantees people will miss the problems developing. It's
> > operating an
> > growth system and making the first regulatory error,
> > accepting the learning curve of exploding complication
> > required to stabilize it forever.
> >
> > There are a lot of 'why' answers, and some of them circular.
> > I think the correctable reason why is the common scientific
> > error of reading the future
> > in the past. We plan on the future behaving like the past
> > by trusting old
> > stereotypes and patterns for changing things. We plan on
> > the future being
> > like the past EVEN for systems we design for the purpose changing at
> > continually multiplying rates. The solution is to notice
> > the cognitive
> > dissonance... you could say, and just ask the dumb questions.
> >
> > Phil Henshaw
> >
> >
> > > -----Original Message-----
> > > From: [hidden email]
> > [mailto:[hidden email]] On
> > > Behalf Of Phil Henshaw
> > > Sent: Thursday, October 23, 2008 12:06 PM
> > > To: 'The Friday Morning Applied Complexity Coffee Group'
> > > Subject: Re: [FRIAM] MIT experts analyze financial crisis, debate
> > > cures
> > >
> > > Of course!, the reason they fooled everyone so completely was that
> > > they were
> > > designed to be completely sensible. That's what is meant by the
> > > "black
> > > swan".
> > >
> > > Phil Henshaw
> > >
> > >
> > > > -----Original Message-----
> > > > From: [hidden email]
> > [mailto:[hidden email]]
> > > > On Behalf Of Owen Densmore
> > > > Sent: Wednesday, October 22, 2008 12:11 PM
> > > > To: The Friday Morning Applied Complexity Coffee Group
> > > > Subject: [FRIAM] MIT experts analyze financial crisis,
> > debate cures
> > > >
> > > > This seemed to be a pretty sound analysis of the current crisis:
> > > > http://techtv.mit.edu/file/1448/
> > > > In particular, I was surprised to see how reasonable
> > several things
> > > > I had thought to be "bad" were. For example, the
> > "securitization"
> > > > of mortgages arose from a very reasonable desire to
> > "smooth out" risk.
> > > I
> > > > hadn't understood their function before.
> > > >
> > > > -- Owen
> > > >
> > > >
> > > >
> > > > ============================================================
> > > > FRIAM Applied Complexity Group listserv Meets Fridays 9a-11:30 at
> > > > cafe at St. John's College lectures, archives,
> > unsubscribe, maps at
> > > > http://www.friam.org
> > >
> > >
> > >
> > > ============================================================
> > > FRIAM Applied Complexity Group listserv Meets Fridays
> > 9a-11:30 at cafe
> > > at St. John's College lectures, archives, unsubscribe, maps at
> > > http://www.friam.org
> >
> >
> >
> > ============================================================
> > FRIAM Applied Complexity Group listserv
> > Meets Fridays 9a-11:30 at cafe at St. John's College
> > lectures, archives, unsubscribe, maps at http://www.friam.org
>