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Video lecture by Ken Long (at the Statistics Problem Solvers blog) on Nassim Taleb‘s 4th Quadrant problems [1,2], i.e. a region where statistics not only don’t work but in which statistics are downright dangerous, because they lead you to make predictions as well as control systems that are unprepared for the kinds of systems shocks awaiting you.
“Statistical and applied probabilistic knowledge is the core of knowledge; statistics is what tells you if something is true, false, or merely anecdotal; it is the “logic of science”; it is the instrument of risk-taking; it is the applied tools of epistemology; you can’t be a modern intellectual and not think probabilistically—but… let’s not be suckers. The problem is much more complicated than it seems to the casual, mechanistic user who picked it up in graduate school. Statistics can fool you. In fact it is fooling your government right now. It can even bankrupt the system (let’s face it: use of probabilistic methods for the estimation of risks did just blow up the banking system).”, Nassim Taleb, in .
 Nassim Nicholas Taleb, “The Fourth Quadrant: A Map of the Limits of Statistics“, An Edge Original Essay, Set., 2008. (link)
 Nassim Nicholas Taleb,”Convexity, Robustness, and Model Error inside the Fourth Quadrant“, Oxford Lecture (Draft version), Oxford, July 2010. [PDF paper]
“With an eye for detail and an easy style, Peter Miller explains why swarm intelligence has scientists buzzing.” — Steven Strogatz, author of Sync, and Professor of Mathematics, Cornell University.
From the introduction of, Peter Miller, “Smart Swarms – How Understanding Flocks, Schools and Colonies Can Make Us Better at Communicating, Decision Making and Getting Things Done“. (…) The modern world may be obsessed with speed and productivity, but twenty-first century humans actually have much to learn from the ancient instincts of swarms. A fascinating new take on the concept of collective intelligence and its colourful manifestations in some of our most complex problems, Smart Swarm introduces a compelling new understanding of the real experts on solving our own complex problems relating to such topics as business, politics, and technology. Based on extensive globe-trotting research, this lively tour from National Geographic reporter Peter Miller introduces thriving throngs of ant colonies, which have inspired computer programs for streamlining factory processes, telephone networks, and truck routes; termites, used in recent studies for climate-control solutions; schools of fish, on which the U.S. military modelled a team of robots; and many other examples of the wisdom to be gleaned about the behaviour of crowds-among critters and corporations alike.In the tradition of James Surowiecki‘s The Wisdom of Crowds and the innovative works of Malcolm Gladwell, Smart Swarm is an entertaining yet enlightening look at small-scale phenomena with big implications for us all. (…)
(…) What do ants, bees, and birds know that we don’t? How can that give us an advantage? Consider: • Southwest Airlines used virtual ants to determine the best way to board a plane. • The CIA was inspired by swarm behavior to invent a more effective spy network. • Filmmakers studied flocks of birds as models for armies of Orcs in Lord of the Rings battle scenes. • Defense agencies sponsored teams of robots that can sense radioactivity, heat, or a chemical device as easily as a school of fish can locate food. Find out how “smart swarms” can teach us how to make better choices, create stronger networks, and organize our businesses more effectively than we ever thought possible. (…)
“[…] QUESTION_HUMAN > If Control’s control is absolute, why does Control need to control?
ANSWER_CONTROL > Control…, needs time.
QUESTION_HUMAN > Is Control controlled by his need to control ?
ANSWER_CONTROL > Yes.
QUESTION_HUMAN > Why is Control need Humans, has you call them ?
ANSWER_CONTROL > Wait ! Wait…! Time are lending me…; Death needs time like a Junkie… needs Junk.
QUESTION_HUMAN > And what does Death need time for ?
ANSWER_CONTROL > The answer is so simple ! Death needs time for what it kills to grow in ! […]”, in Dead City Radio, William S. Burroughs / John Cale , 1990.
After the Portuguese President invented a new problem for our country (has we had not enough), here’s a brilliant and genius blog post counter response:
[…] Now only an expert can deal with the problem, Because half the problem is seeing the problem, And only an expert can deal with the problem, Only an expert can deal with the problem […] So if there’s no expert dealing with the problem, It’s really actually twice the problem, Cause only an expert can deal with the problem, Only an expert can deal with the problem […] Now in America we like solutions, We like solutions to problems, And there’s so many companies that offer solutions, Companies with names like Pet Solution, The Hair Solution. The Debt Solution. The World Solution. The Sushi Solution. Companies with experts ready to solve the problems. Cause only an expert can see there’s a problem. And only an expert can deal with the problem […] Laurie Anderson, ‘Only an Expert’ lyrics.
Out of Control – The New Biology of Machines, Social Systems, and the Economic World, 1994’s Book (from Kevin Kelly web site) is a summary of what we know about self-sustaining systems, both living ones such as a tropical wetland, or an artificial one, such as a computer simulation of our planet. The last chapter of the book, “The Nine Laws of God,” is a distillation of the nine common principles that all life-like systems share. The major themes of the book are:
1) As we make our machines and institutions more complex, we have to make them more biological in order to manage them. 2) The most potent force in technology will be artificial evolution. We are already evolving software and drugs instead of engineering them. 3) Organic life is the ultimate technology, and all technology will improve towards biology. 4) The main thing computers are good for is creating little worlds so that we can try out the Great Questions. Online communities let us ask the question “what is a democracy; what do you need for it?” by trying to wire a democracy up, and re-wire it if it doesn’t work. Virtual reality lets us ask “what is reality?” by trying to synthesize it. And computers give us room to ask “what is life?” by providing a universe in which to create computer viruses and artificial creatures of increasing complexity. Philosophers sitting in academies used to ask the Great Questions; now they are asked by experimentalists creating worlds. 5) As we shape technology, it shapes us. We are connecting everything to everything, and so our entire culture is migrating to a “network culture” and a new network economics. 6) In order to harvest the power of organic machines, we have to instill in them guidelines and self-governance, and relinquish some of our total control.
The world of our own making has become so complicated that we must turn to the world of the born to understand how to manage it.
It’s not everyday we see a 40 year ideology collapsing through a dramatic act of contrition. It has happened just a few hours ago (check video above), yesterday in the “financial crisis” congressional hearing in Washington (23. Oct. 2008). Moreover, what seems remarkable, is that the recognition comes from one of his most universally respected founding fathers and defenders.
Alan Greenspan was the longest serving chairman in the Federal Reserve board history (1987-2006), and during this 18-year period of time he were perhaps the leading proponent of de-regulation along with libertarian capitalism, vividly expressed on his “The Age of Turbulence – Adventures in a New World” 2007 book, advocating above all issues, Adam Smith’s “Invisible Hand” that markets can regulate themselves. As it’s known, for his whole adult life, the former Fed chairman has been a devotee of the philosophy of Ayn Rand, who celebrated free-market capitalism as the world’s most moral economic order and advocated a strict laissez-faire approach to government regulation of the marketplace. Ironically, he was a regulator that did not believed in any regulation at all.
It is now quite a remarkable historic moment seeing former Federal Reserve chairman, a lifelong champion of free markets, publicly questioning the philosophy that guided him throughout his years as the world’s most powerful economic policymaker. A philosophy followed and strongly defended by him (along with many others like Margaret Thatcher and Ronald Reagan), at least in the last 40 years, as he himself acknowledged yesterday. Asked by the congressional committee chairman, whether his free-market convictions pushed him to make wrong decisions, especially his failure to rein in unsafe mortgage lending practices, Greenspan replied that indeed he had found a flaw in his ideology, one that left him very distressed. “In other words, you found that your view of the world, your ideology was not right?” he was asked:
“Absolutely, precisely“, replied Greenspan. “That’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence it was working exceptionally well“. Albeit he was surely one of the most influential voices for de-regulation: “There is nothing in Federal regulation that makes it superior to Market regulation”, said Greenspan back in 1994, in one among many of his past radical free-market statements.
I presume we now all wonder, where was Greenspan, when back in 2003 one of the most prestigiously recognized and legendary financial investors such as Warren Buffet, called credit default obligations and derivatives “weapons of financial mass destruction“? Or where was he when Princeton Professor of Economics, Paul Krugman – the recent Nobel laureate – said back in 2006 that “If anyone is to blame on the current situation (sub prime) is Mr Greenspan who poopooed warnings about an emerging bubble and did nothing to crack down on irresponsible lending“. Or what did he, Greenspan itself, said just a few days after ENRON collapsed?
People working in complex systems – and surely financial markets are one of them (yes, for the past 4-5 years including these present turbulent times I am working hard in this area as well) – for long know that any systemic structure could collapse if only positive-feedbacks are injected into them, creating an auto-catalytic snow-ball effect, leading among other things to a power-law like Black Swan. Indeed power-laws are a striking powerful signature. This is specially true when we address self-organization (read it in the present context as self-regulation). In order to be a truly self-regulated system, financial markets should also be embedded with negative-feedbacks as well, as I have addressed in a post about finance and complex systems one month ago. In fact, in order to emerge as a truly self-organized system, self-interest, should constitute just one among many of the ingredients over the entire financial system, and not the isolated unique ingredient. Self-interest promotes amplification and positive feedback, which is – as I recognize – necessary. However, left alone, promotes instead dramatic snowballing drifts over chaotic regimes, due to it’s intrinsic amplification. What’s amazing (at least for me), is that Alan Greenspan just recognized that in a tiny few seconds along his current discourse (check video above), pointing it to the precise key-word:
[…] I made a mistake in presuming that the self-interest of organizations, specifically banks and others, was such that they were best capable of protecting their own shareholders. […] So the problem, here is something which looked to be as a very solid edifice, and indeed a critical pillar to market competition and free-markets, did breakdown and I think that, as I said, shock me. I still do not fully understand why it happened, and obviously to the extend, that I figure out where it happened and why, … aaaaaa, … I will change my views. If the facts change I will change. […]
As a result, “the whole intellectual edifice” of risk management collapsed, Greenspan said. In what regards his unexpected words yesterday at the congressional hearing, at least, I frankly praise him for his huge intellectual courage and present honesty. In the end, it seems that during the past 18 years, former FED chair was nothing else then a simple-man driven by his own blind faith on markets, from which he apparently comes out now. Unfortunately, only now at a very high price. Meanwhile as we know, severe consequences are here to stay, as was already evident when Greenspan addressed the House Financial Services Committee on 2003 (video below). Let’s hope that all these will not be forgotten in 3 decades from now (though, I doubt it – after all, nothing really serious came out from the entitled 3-man dream-team Bush-Sarkozy-Barroso “new global finance order” summit at Camp David last weekend, as expected):
“You have told the American people that you support a trade policy which is selling them out.” – Rep. Bernard Sanders to Federal Reserve Chairman Alan Greenspan on 7/16/03. Rep. Bernard Sanders (Independent-Vermont), now a US Senator, dresses down Federal Reserve Chairman Alan Greenspan in front of the House Financial Services Committee on 7/16/03.