Come See Me!

Hi everyone!
I will be presenting my project on May 14 at UNS Energy-Tucson Electric Power (88 E Broadway Blvd).  The presentations start at 6 pm.
Thanks for reading this blog, and I hope to see you there!  :)

Week 11?

Hey guys!  Just a quick update here.  Obviously everyone's projects are basically done by this point (including mine) and I'm super excited to report that I finally finished my draft for the final paper and have sent it to my advisers for review.  I'll probably add to and edit it throughout this coming week, and hope to have it completely polished by next Monday.  (I'm also working on figuring out a way to share it to this blog, so that anyone who wants to read it can.)  It ended up being the longest paper I've written in my high school career, so that's exciting.

I also have my first presentation rehearsal tomorrow, during which we'll see how successful I was at trimming everything down to fit the time limit.  I hope to see you all at my final presentation. (date still TBD, but I'll let you know!)

Week 10: End Stretch

Hey guys!  I'm going to apologize in advance for a briefer blog post.  As it turns out, I've already talked about everything I'm planning to include in my final paper; there might be a bit more detail, but these blogs should give you an idea of the topics I'm going to cover and the arguments I'm planning to make.

Unfortunately, the final paper is a lot harder than I was expecting it to be!  I've finished an outline and the skeleton of the paper, but right now I'm struggling to fill it in so that I can create a persuasive argument that isn't too repetitive; (you'd be surprised how many times I've used the word "Econophysics" in the first three pages alone...) not to mention citations, which are close to the top of my list of least favorite things.

Everything else about my project is winding down; I'm meeting with Dr. Frieden as usual next Tuesday, but most likely for the last time, and of course I've also begun work on my final presentation.  Due to scheduling conflicts, I didn't go into the lab this past week like I thought I was going to, but I'm planning to make up that time this coming week, in addition to finishing my final paper and presentation draft.

I actually have family in town this weekend, so I haven't had time to do much of anything (hence the really short blog post), but I'll resume what's left of my project on Monday.  Have a great week, everyone!

Week 9: Mixing Metaphors

As I'm reading everyone's blog posts, and seeing how everything is beginning to wind down, I keep having to go take a few deep breaths and think calming thoughts.  It's crazy how fast this project has gone!

I'm still doing some work with the sandpiles (next week I will be working to determine if their dynamics behave differently at different frequencies projected by a speaker system) but I don't think the actual experimental results will play a role in my final product or presentation.  (Rather, the things I've learned about sandpiles and avalanche dynamics will be larger factors.)  On the reading front, I still have one-and-a-half more books to read (one-half about sandpiles and the markets; one about fractals and the markets) and I've started work on my final paper and presentation!

On that front, I'm planning to have my final paper rough draft finished by this coming Thursday, and then after that I'll start on the presentation.  (I'm hoping that having everything already outlined in the paper will make the presentation easier, but I guess we'll see.)

And then... I'll be done?

As long as we're talking about things giving me anxiety issues, fitting my presentation into twenty minutes is going to be a bit of a bear.  I'm guessing I'll be talking about as fast as those prescription drug commercial narrators, where they try to tell you the side effects as fast as possible so you don't have time to wonder why you'd take headache medicine if it's going to give you diarrhea, nausea, and dizziness.

This week, I will be discussing the work of Nassim Taleb, who I mentioned a few weeks ago.  I read his book The Black Swan, which concerns unpredictable events, both in and outside the markets.

Taleb argues that events that are considered by most to be extremely rare (for example, a black swan) are actually more common than would be expected.  He goes on to detail different events that he considers to be black swans; most of them take place in the financial markets.  (It turns out that his "black swans" become metaphors for the fat-tailed distributions I've been going on about for the last few weeks.)

However, what distinguishes Taleb's work is that he argues that these events are not only extreme (and therefore occur more often than a typical bell curve would have us believe) but he also argues that these events are inherently unpredictable.

This is where a friend of Taleb's, a French physicist named Didier Sornette, comes in.  Sornette, who has background in geophysics and other modeling involving critical events, agrees with Taleb about extreme events being a more common occurrence than the traditional bell curve would lead us to believe.  However, he argues that rather than being silent-but-deadly black swans, these events would be better-represented by Dragon Kings; if you "listen" the right way, you can hear them coming.

Sornette can back his claim up; he's actually predicted the last few financial crises (and made quite a bit of money off of it, too.)  If you guys are interested, you can watch his Ted Talk here.  It's really interesting, and in my opinion, makes a  better case for Dragon Kings than for Black Swans.

Hope you all are having a great week!

Week 8: Beware of Geeks Bearing Formulas

Hi everyone!  Welcome to another Sunday Night Blog Post from Maddie the Procrastinator.
It's crazy how fast time is going... we're almost getting to that point where we have to start working on our final products!  I've decided that, in the interest of time, my final product will be a haiku about econophysics.  Here's a sample of my rough draft:

Econophysics
Oh, how you explain it all
More people should know.

Okay, just kidding.  My final product will not be a haiku, even though that would make my life significantly easier.  Instead, I'll be writing a paper that analyzes the claims of econophysics in the context of various investment strategies, trying to decide if it's worth its salt as a theory.  I'm super excited about it, but I definitely have a bit of an overflow of information, so my challenge will be organizing it in a way that creates an effective argument.

This week, I'll be talking about another allegation that is leveled at econophysics, claiming it is ineffectual or even harmful to the economy when applied improperly.  I don't think these allegations have a lot of substance, as I'll explain in a minute.

As I've mentioned before, the idea that tools from physics can be applied in the economy is not somehow novel.  Wall Street has been hiring physicists for decades, given their unique abilities in math, computer science, and problem solving.  They joined hedge funds and together with PhDs in finance, armed themselves with formulas and computer programs telling them exactly how options and stocks should be priced.  These scientists were referred to as "quants", short for quantitative finance.

However, in August 2007, hedge fund portfolios, run by quants, tanked.  Positions that were supposed to go up went down.  Positions that were supposed to go up even if everything else went down also went down.  As presitigious firms like Morgan Stanley and Goldman Sachs lost anywhere from 500 million to 1.5 billion dollars, every stock they had bet against actually rallied-- the DOW Jones overall went up 150 points.

Even as the crisis of the summer of 2007 (known as the "quant crisis") stabilized, the 2008 housing meltdown followed.  Again, models showing how subprime mortgages could be treated as bonds collapsed, leaving the entire housing market vulnerable.  (And we're arguably still recovering from the afteraffects.)

Many policymakers and regulators, seeing the disastrous results that the quants wreaked on the economy, are inclined to distrust any such models.  As Warren Buffett famously said, "Beware of geeks bearing formulas."  It seemed that using science on Wall Street was nothing more than a dream.

I disagree, however, and I certainly don't advocate the cessation of doing science on Wall Street, for several reasons.

1) Speculative bubbles are not a new thing.  While the housing craze and subsequent crash of 2008 may have been a result of the meddling of quants, such bubbles go much farther back to well before the dawn of computers.  (Remember the Dutch tulip frenzy from European history?  A single bulb could sell for the worth of a house, at least until the bubble popped.)  It's unfair to entirely blame quants for a crisis that could just as easily have been the Dot-Com crisis of the early 2000s.

2) The quants were doing "bad science."  Criticism of quants as scientists only works if you believe they were acting as scientists would.  The problem wasn't that the quants were using the scientifically-derived models to price options; rather, the problem was that they were relying too heavily on the models.  Any good scientist will recognize that there may be inherent holes in their model, and as such, will not treat it as infallible, but rather continue to look for the holes and be wary of its failings.  The quants of 2007, though, were not checking their models properly.

3) Not every hedge fund was hit by the crisis.  The Renaissance fund, run by Jim Simons (a well-known theoretical physicist), is staffed entirely by physicists, mathematicians, and statisticians.  None of them have gotten their start at traditional investment banks.  In 2008, when every other hedge fund was losing millions of dollars, Renaissance's Medallion Fund actually gained an 80% return.  This suggests that whatever models that Renaissance created were somehow "better" than those of their competitors; perhaps because they were created based on pure mathematical and scientific principles, that is, the principles that econophysics purports to advocate.

Therefore, we should not be skeptical of using mathematical and physical tools in the economy; people have proven that it is possible to do so successfully.  Rather, we should ensure that we are doing so in a manner that follows the scientific method, and continue to check ourselves for our mistakes.

I really enjoyed seeing many of you at the senior meeting!  For those of you who are out of town, I look forward to talking to you when you get back.  I hope this week brought good news to all waiting to hear from colleges. :)
Have a great week, and comment below if you have any questions/concerns.

Since I don't have any project-related pictures for you this week, here is a shot of an adorable baby animal!

Week 7: Can't We All Just Get Along?

This week, since it was Spring Break at the U of A and so my adviser Dr. Manne was out of the lab, I didn't get very much done with regards to my experimental work.  I did, however, still meet with Dr. Frieden; our discussions have started to branch out to other applications of statistics and statistical physics, which I find incredibly interesting.  Of the (many) things I've gotten out of this project so far, one of them is a new curiosity about statistics-- it's definitely on my list of things to try in college.  (Along with yoga, water polo, and Portuguese.  Go figure.)

This week, I thought I would bring some perspective into the project.  After all, my goal was to analyze the effectiveness and applicability of Econophysics' claims.  So it's about time, after 6 weeks of praising it, that I try to argue from the other perspective.

The thing is, though, that I genuinely think the claims of econophysics are correct.  They fit with experimental data, they find interesting correlations between our natural world and the markets, and they provide a similar or even more accurate view of economics models.  There are two main problems that I can see with econophysics so far, though.
For one, econophysicists, while they have shown myriad applications of physics and tools from physics in the economy, have yet to present a unified theory of macroeconomics that can trump our current ideas.  It's one thing to claim that macroeconomics is flawed; it's another thing to present a solution.
The second problem, though, I think is a lot more serious, and it has to do with the people advocating these ideas.

Physicists and other "hard" scientists have, traditionally, held a lot of animosity towards economics.  They mock it as an expression of "science" while ignoring its intellectual and mathematical roots.  They feel that their work is more important and applicable, conveniently ignoring the fact that markets impact our day-to-day lives much more than cosmology.

When physicists decide to get involved in economics, many of them don't familiarize themselves with the field beyond what is absolutely necessary.  This means that an physicist criticizing current macroeconomic theory might not even understand a simple supply-and-demand curve.  It means that a physicist may triumphantly show that income distribution follows a power law; he just may not know that economists have been aware of that for years.  Then he'll turn around and mock those same economists for not using his methods.

This isn't to say that economists don't suffer from institutional biases as well!  Many economists refuse to consider that the markets are anything less than perfectly efficient, or that equilibrium based on rational expectations doesn't always occur in real life.  Refusal to consider these claims has made trouble for them during the last few economic meltdowns, and econophysicists are quick to trumpet their methods as a fix for a corrupt, inept field.  These econophysicists are forgetting three essential things, though.
1) Just because an assumption of equilibrium economics or the Efficient Market Hypothesis is wrong, doesn't invalidate the whole field of economics or all the methods of economists
2) Econophysicists, while they have demonstrated impressive correlations and applications of their methods in the markets, have yet to come up with an alternative, all-encompassing macroeconomic theory of their own, and
3) Physicists criticizing institutional biases are hilarious examples of the pot calling the kettle black. 

Meanwhile, the quality of discussion is rapidly deteriorating as both sides resort to name-calling and patronizing epithets.  Just for fun, let's take a look at some of the rhetoric used by both econophysicists and economists.  Here are some quotes from different blogs dedicated to arguing about, criticizing, and defending economic theory:

• "If you want to know how the average Freshwater-y DSGE-slinging macroeconomist thinks about his place in the cosmos, read Yates' post."
• "So the only people qualified to judge the value of an activity are those being paid by the government to do it?  How convenient.  Snark snark."
• "Noah is extremely sceptical of microfoundations.  So much so that he requests a post to explain why they might have any merit at all.  So, he should be saying:  NO NO GET RID OF ALL THE MOTHER&&&&&&G MICROFOUNDATIONS WHILE YOU ARE AT IT."
• "The discussion about how to do macro often neglects that there are serious people trying to work out the details of how to do policy when you don’t understand how the world works."
• "What on earth is he saying?  And marvel at the confidence with which it is said."
• "Wonderful. Economists are no longer stuck with their RE straitjacket, but can readily begin exploring the kinds of things we should expect to see in economies where people act like real people."
• "Kind of obvious when you say it like that, but this is economics.... people have tried very hard to deny the obvious...."

This is just a few select blog posts.  The snippets of the books I've been reading really aren't too much better.

Now, don't get me wrong, I'm all about sarcastic rhetoric.  (Look at these blog posts!)  But the constant mud-slinging has to stop at some point.  If econophysicists ever want economists to take them seriously, they should invite them to their conferences.  Show respect for the ideas that economists have built their careers on.  Recognize that there's more than one way to skin a cat.  Present alternative solutions, rather than just claiming that the current methods don't work.  There has to be a real, intelligent exchange of ideas at some point, or the status quo will remain unchanged.  (Cue High School Musical "status quo" music in my head...)

I have no idea how to cite blog posts properly, but the links to the posts I quoted above can be found here, here, here, here, and here.  Hope you all had a great quasi-Spring Break.  I can't believe how quickly these projects are progressing... let me know in the comments if you have any questions!

P.S. In case all that negativity up there made you depressed, and as an apology for another lengthy blog post that's all words, here's a shot of a hedgehog cuddling a raspberry:

Week 6: I Learn What "Ubiquitous" Means

You know those words that you've seen a hundred times while reading, looked up fifty times, and can't remember to save your life?  The ones you dread seeing on the SAT, because you should remember them, but you don't?
For me, "ubiquitous" has always been one of those words.  Until recently, when my research led me to see the word so many times that eventually I no longer had any excuse to not remember it.

"Ubiquitous" is a fancy word for "found everywhere."  And apparently scientists won't use a simpler word when a fancy one will do, so I've been reading a lot about how power laws are ubiquitous.  So far, I've found it's a pretty accurate statement.

What's a power law?
I touched on this very briefly last week, but power laws are probability distributions that generate fat tails.  Specifically, the probability law p(x) follows the form p(x)=Cx^-a, where C and a are constants.  (The value of the constant a is the most important, as it determines how "fat" the fat tails will be.)

As a quick refresher, "fat tails" in a probability distribution mean that extreme events are far more probable (and remain more probable) than in systems with normal, Gaussian probability distributions, where the probability of extreme events quickly decreases to zero.

This image from a few weeks ago shows the fat tails in price
fluctuation probabilities, but could be a representation of the
probability of many different values

A power law is sometimes called a "scale-free" distribution because the distribution looks the same no matter what scale we use to look at it.  (If we change the scale or units by which we measure x, the overall shape of the distribution stays unchanged, except for some multiplicative constant.)

To understand scale-free distributions on a more descriptive level, we can go back to Pareto's law of income distribution from last week.  Sometimes called the 80-20 rule, or Pareto's Principle, Pareto found that 80% of the wealth of the world is held by only 20% of the people.
However, if we look at those top 20%, we'll see that 80% of their wealth is held by the top 20% in that group (and so forth).  Hence, no matter what scale you are looking at it, the distribution rule remains the same.  (Incidentally, income distribution follows a power law.)

So why are power laws considered ubiquitous?
I talked about this a bit in the comments section of my fat tails post from a few weeks ago, but I thought I'd do a quick recap here.  Examples of power-law distributions in nature include, but are not limited to:

• Magnitude of earthquakes and avalanches
• Diameter of moon craters
• Intensity of solar flares
• Models of Van der Waals forces
• Volume of water flowing through river branches
• Initial Mass Function of stars

Power laws are also very prevalent in economics, showing up in:

• Intensity of economic recessions
• Income and wealth distribution
• Stock market indices (and price fluctuations)
• Population of cities
• Urban areas of cities
• Company size
• Number of books sold in U.S.

Heck, they even show up in disciplines that seem fairly unrelated, including:

• Emails received
• Frequency of word usage 
• Frequency of family names
• Hits on websites
• Intensity of wars

It's important to note that these are just some of the applications of power law probability distributions.  They really are-- to use my new favorite word-- ubiquitous, and we should perhaps begin to pay more attention to their interesting properties.  (In particular with regards to the markets.)

Also interesting is that power laws are often found in systems that follow the self-organized criticality that I talked about a few weeks ago; so, these power law distributions are actually really relevant to my work with the sandpiles.

In related news: this week, I read a book called The Black Swan: The Impact of the Highly Improbable by Nassim Taleb.  I didn't enjoy it very much (I'm hoping to do an in-depth comparison in a few weeks with more market-related books I've been reading, so I'll explain more then) but the basic premise was that extreme events occur more frequently than we would expect them to.  Which, given the ubiquity (heh) of power laws and fat tails, shouldn't really come as much of a surprise.

Hope everyone is having a great week.  Comments are welcome!