Risk modeling in Financial Markets

Bloomberg has an interesting article exploring how the banks are changing their risk models. Roger Ehrenberg adds some insight to the article. To me the most fundamental question that needs to be asked isn't what is the best model, but can risk even been modelled?

In all the discussion about risk and its modelling, there is always the underlying assumption that the risk can be modelled. I'm not so sure you can really model the risk. Time and again in financial markets past performance has been shown to not be a predictor of future performance (all the managed funds have that explicit on their brochures) and yet the assumption is that past risk can be used to model future risk. See the incongruence?

The market looks to be an indeterminate, chaotic system. Which to me makes the assumption of normal distribution of risk a little suspect. Being an indeterminate system, it may very well be impossible to model risk using the standard statistical methods.

Tags: Risk, Finance, Credit Crisis

EU energy plan aims to stop carbon exporting

The EU has announced its climate change policy. What struck me most is the move to stop the exporting of carbon production to other countries. As I have previously posted this is crucial requirement for carbon trading to actual work in reducing carbon emissions.

Implementing carbon trading without something to address the issue of out-sourcing carbon, the price of goods and services in Europe would have gone up without the beneficial reduction in carbon. As many have pointed out, there is no way of making sure carbon stays on the other side of the planet.

This also changes the dynamics of the up-coming discussions on the next climate change treaty. For one, it does reduce the negotiating strength of the BRIC nations against mandatory caps. It also precedes an alliance of OECD nations which go it alone to implement mandatory emission caps and via the mechanism proposed by the EU in effect force mandatory caps on emissions on the rest of the world as the OECD still make up the bulk of the worlds affluent consumers.

I wonder if this announcement signals the tipping point to worldwide mandatory emissions caps whether BRIC nations want it or not.

Tags: Climate Change

Language and problem solving

In the most recent New Scientist (Vol 197 No 2637) there is an interesting article discussing the issue of language and how it frames problems. The perspective of the article was that English's newtonian way of describing the world failed to frame questions properly for quantum and other similar non-newtonian physics. The article even goes so far to say that the lack of progress in non-newtonian physics is because problems are framed via the language with a newtonian world view.

Does the same problem exist in the world of the internet? While I realise the Internet world is great at creating new words, these are still framed by the overall language. A language that is "newtonian". As Internet shifts to flows and systems as opposed to objects and links, do we need to look at how we frame the discussion via language to open up the problem solving juices of the internet community? New next wave of innovation will be less around nouns towards verbs, the doing rather than the being and yet we still primarily use nouns in discussing the web and its evolution. Should verbs that describe process, systems and flow be the primary descriptors of the next web?

The article describes an example of Montagnais phrase "Hipiskapigoka iagusit". It very, very roughly translates to "singing health", a process, within which a medicine man and sick person exist. However, a dictionary written in 1729 translated into something that emphasised the objects and not the process. The web is shifting to loosely coupled processes as opposed to objects. I wonder whether the discussion of Robert Scoble's recent tiff with Facebook, would have evolved differently if the language emphasised process (say maintaining contacts) as opposed to data (the contacts themselves). The discussion was about who owned what objects (the contact data) rather than what the ins and outs of maintaining contacts. Another example is the current discussion going on about whether data is a commodity or not. Again the language is of objects rather than flow. How would this discussion evolve if it was frame by a language of flow (verbs) as opposed to objects (nouns)?

The same questions can be asked of programming. Everyone expresses the need to ramp up parallel programming to take advantage of the distributed nature of the internet and multi-core processes. However, can any real problem be solve properly while the language used to frame the problem is based on objects rather than flow? Does the conceptual framework that underpins object orientated programming preclude successful problem solving in the parallel world? Yes there are languages that focus specifically on parallel programming but I am also talking about the language used to describe and communicate the problem. These will need to respond to the requirements of a parallel world for people to solve problems and communicate solutions.

A lot of questions asked. I don't have the answers and I expect no one will for a while. It is interesting to step away from objects and consider things from a flow perspective. I even think I need to re-visit my recent post of Data Ecosystems and look at it from the perspective of flow rather than objects

Tags: Data, Language, Programming, Internet, Physics, Data Ecosystems