Capital Ideas and Real Estate Futures Markets

As you know if you read this blog, I post from time to time on the topic of economics. Not that I have much expertise in the subject beyond 14.01, 14.02, and a subscription to The Economist, but it intrigues me. In particular, markets (stock, bond, futures, predictive, etc) are fascinating.

On that particular topic, I just finished reading Capital Ideas by Peter L. Bernstein. It's an amazing book about the history of the people and ideas that formed the theoretical groundwork that the modern stock market and its derivative markets runs on.

I'm a big fan of Bernstein. He's a great storyteller and knows how to explain technical concepts to laymen with the right historical context to make it all make sense. One of his other books, Against The Gods, about the history of the concept of risk from modern times back to the ancient Greeks, is also outstanding. I highly recommend either book.

One of the topics covered in Capital Ideas is the method of using options and futures to hedge against risk. The book was written in 1992, before the current hedge fund boom, and most of the attention focuses on LOR's Portfolio Insurance that was popular in the 80's and demonized after the '87 crash. It's an intriguing concept that I'd like to learn more about.

Coincidentally, just the other day I also ran across on article in The Economist about the opening a futures market in Chicago tied to housing prices. It's not at all clear if your average homeowner can use such a market, but given the volatility of home prices, it's a cool idea. I wonder how many ways there might be to diversify your risk in owning a home. One idea that popped into my head was selling off "shares" in your home, keeping a controlling block of at least 51% of them yourself. The idea would be that you sell off part of your home and buy shares in other people's houses in other markets. That way, if a market in one location tanks, you're not exposed to all the risk.

I have no idea if such a scheme could actually work. A home is such a different asset than a stock that it's tough to know how to start. First of all, there are no dividends or profit being returned by owning a home. Instead, it's all the value you get out of living there, plus any upward change in price. You also have to figure out how mortgage payments get split up, who pays the taxes, etc. Who knows, but it sure would be nice to be able to diversify the biggest asset that most people every own. Any thoughts?

Publishing Leaks and the First Amendment

According to Attorney General Alberto Gonzales, journalists who published leaked information, such as stories about illegal government surveillance programs, can be prosecuted under "some statutes on the book which, if you read the language carefully, would seem to indicate that that is a possibility." Specifically which laws might these be? He does not say. One wonders if those laws themselves are classified. Likely they are espionage laws not intended to apply to journalists.

I wonder if the A.G. realizes how ridiculous he sounds when he says things like that because Congress passed the laws before "we have an obligation to enforce those laws. We have an obligation to ensure that our national security is protected." Just like those 750 other laws congress passed that the administration is enforcing just as congress intended.

Even if you accept his premise here, the argument is still bogus. If in fact there is no program to listen in on the phone calls of tens of millions of Americans, then what state secrets are being revealed by these leaks? At this point, though, I cannot believe any word that comes from the President or any of his Administration anymore. They have consistency lied about their illegal, immoral, and just plain stupid actions only until presented with incontrovertible evidence to the contrary. And even then, they don't right their wrongs, they take revenge.

More likely is that the true breadth of this surveillance program is bigger than any of us can possibly imagine. Destroying our liberty in order to protect it. This is how tyranny starts.

Update:

At least there are a few people who refuse to kowtow to Big Brother's all encompassing demand for secrecy (in this case, it's AT&T who is claiming the secrecy). Wired News is publishing all of the contents of a file submitted to the court by Mark Klein, the whistle-blower and ex-AT&T employee.

Peer-To-Peer Finance

Just a quick parrot of a post from Slashdot this morning, about peer-to-peer finance. Haven't had much time to think about it, but it seems intriguing.

Wiretapping vs. Futures Market

There is some irony in the most recent revelation about warrantless NSA wiretapping of the phonecalls of tens of millions of Americans. Following 9/11, there was a flurry of ideas of how to improve the predictive capability of the intelligence community to help prevent the feared next wave of attacks. The programs we're hearing of today; the massive data-mining of communications, such as this new NSA program, the so-called Terrorist Surveillance Program, the MATRIX database, and probably others, all had their genesis in the Total Information Awareness project at DARPA. Headed up by Adm. John Poindexter, the program was intended to amass vast amounts of data and use sophisticated mining techniques to search for hints of terrorist activity. Operating on the assumption that the intelligence failures of 9/11 were due to insufficient information, their goal was to gather all information that exists. With perfect information, the world becomes deterministic. However, due to it's Orwellian overtones (and Poindexter's very creepy logo for the Information Awareness Office), the program was (supposedly) cancelled by congress.

Around the same time, a very different idea was proposed, called the Policy Analysis Market. The PAM was based on the idea that the intelligence failures were not due to lack of information, but to the inability to synthesis the information and analysis that already existed. The PAM was a prediction market, basically a futures market where traders bet on the outcomes of future events, as one can do on TradeSports.com. In the PAM, players, which could be anyone in the world who wanted to sign up, could buy and sell contracts for predictions of the future. The price of the contracts then indicates the aggregate belief of all the players of the probability of an outcome. But this program too, was cancelled after public and congressional outcry, because of aversion to the idea that people who bet on a terrorist attack could profit from the deaths of others.

But, as Bruce Schneier wrote in Wired, the TIA may have been cancelled, but it lives on in these programs we're hearing about now. There does not, however, appear to be any successor to the PAM. It's unfortunate and ironic that the administration chose to continue the TIA because it is almost assuredly to fail to be useful while trampling civil liberties, whereas the PAM would probably be much more accurate and have the side benefit of being constitutional. As Schneier says,

Finding terrorism plots is not a problem that lends itself to data mining. It's a needle-in-a-haystack problem, and throwing more hay on the pile doesn't make that problem any easier.

While it seems logical that more information is better and all information is best, reality is much different. Maybe if you were omniscient and had all information available in the universe, then it might actually be deterministic. But for mere mortals, it will always be a game of probability and signal detection. You will always have incomplete information and will always have a probability of both missed detection and false positives. In this case, more information can actually be worse, due to what Schneier refers do as the "base rate fallacy"

Let's look at some numbers. We'll be optimistic -- we'll assume the system has a one in 100 false-positive rate (99 percent accurate), and a one in 1,000 false-negative rate (99.9 percent accurate). Assume 1 trillion possible indicators to sift through: that's about 10 events -- e-mails, phone calls, purchases, web destinations, whatever -- per person in the United States per day. Also assume that 10 of them are actually terrorists plotting.

This unrealistically accurate system will generate 1 billion false alarms for every real terrorist plot it uncovers. Every day of every year, the police will have to investigate 27 million potential plots in order to find the one real terrorist plot per month. Raise that false-positive accuracy to an absurd 99.9999 percent and you're still chasing 2,750 false alarms per day -- but that will inevitably raise your false negatives, and you're going to miss some of those 10 real plots.

There is a high cost to false positives, in that it wastes investigators' time and also intrudes on innocent people's constitutional rights. Data mining can work in certain cases, but does not seem appropriate in uncovering terrorist activity. Predictive markets, on the other hand, are much more efficient at aggregating opinions of a large number of people. An arbitraty number of people can trade on a particular question and many may disagree, but the simple market price of the contract represents the probability of that event occurring according the the entire market. The more people in the market, the better.

When making predictions, even having more information is not always beneficial. A study by Daniel G. Goldstein and Gerd Gigerenzer found that, when inferring answers to uncertain questions, knowing a moderate amount of information led to more correct answers than knowing very little or very much information. George Freidman, of Stratfor.com, reached a similar conclusion about the U.S. intelligence community, writing

The American IC is much too big. It has
way too many resources. It is awash in information that is not
converted into intelligence that is delivered to its customers.
Huge organizations will lose information in the shuffle. The bigger they are, the more they lose.

One wonders if the vast intelligence apparatus should even exist at all. Instead, it could be split up and diversified into much smaller organizational groups of analysts linked by a prediction market to aggregate their findings. With all the information that's available openly on the internet, you could probably put together a very capable shop of analysts on a very small budget, at least for grand-scale, strategic intelligence. Of course you need other types of intelligence for other uses, in particular satellite and signals intel for the faster-paced tactical world. But for the big picture, you would probably get quite a bang for the buck by gathering up a small group of smart, educated, experienced, and motivated people, giving them an internet connection and subscriptions to all the information providers they want, and let them run with it.

The Benefits of a Quiet Workspace

Being streetsweeping day today, I left for work early this morning. When I got in, most people hadn't arrived yet and it's a generally peaceful time. But today, the test engineer guys are reconfiguring the lab that is next door to my cube. While doing so, they had shut down all the computers, power supplies, and flight displays that are usually constantly running, with their cooling fans droning on at all hours of the day.

It's truly amazing how much noise those fans make and how much it actually affects you. I've noticed before that I can't sit in the lab for too long or else I'll get a headache from the noise. It's bearable from my cube, but still annoying. But this morning was pure workplace bliss. Too bad it can't last, and even now, most of it is back up and running, fans and all.

If we could figure out a way to silence the fan noise, I wonder how that would affect people's moods and productivity?

Ruby On Rails and MySQL

So I started learning Ruby On Rails last week in preparation for developing OpenThinkTank.org. I must say, I'm quite impressed with this system so far. Ruby is a very simple language, and Rails is incredibly powerful, yet still simple to use. MySQL on the other hand, is much harder to learn. I can't seem to get the GUI working properly and the Rails book I'm using is all command prompt, so when something goes wrong, I have no idea what's happening. Anyone know of a good MySQL reference? I'm usually a fan of the O'Reilly books, so this one might be good.

Managing and Using MySQL, Second Ed.

Any thoughts?

Junk Snail Mail Followup Followup

A report on my attempts to reduce junk mail, as described in previous posts. I finally did write to the Direct Marketing Association asking to be removed from their lists. While I didn't keep any records of my junk mail receipts before and after, I have definitely seen a significant reduction in the number of junk letters. Not a total reduction, but noticeable.

I blame the continuing flow on Citibank and AOPA (Aircraft Owners and Pilots Association). AOPA, I understand, but I wish I didn't get so many letters. Citi, I don't understand, because I already have a credit card with them. Why would I want to sign up with another?

It might be worth writing to both of them directly asking to be removed from their lists as well. I'll report back what happens.

In the mean time, if you want to reduce you junk mail, I highly recommend writing to DMA. Here's the address again:

MAIL PREFERENCE SERVICE
ATTN: DEPT 7488547
DIRECT MARKETING ASSOCIATION
PO BOX 282
Carmel NY 10512-0282

Imperial Executive

Even though it was published over a week ago, I've been hearing more and more about Charlie Savage's story in the Boston Globe about how President Bush has issued over 700 signing statements, many of which he uses to quietly explain that he will disregard the law he is just signing. For some, he claims reasons of protecting national security, for others it seems he simply would rather not obey the law. He does not veto a law he does not agree with, he simply ignores it.

Twice has the president signed laws mandating an inspector general to investigate allegations of torture and other abuses in Iraq, yet he declares in his signing statements that the inspector cannot investigate such matters. He has claimed ultimate authority dealing with how prisoners are held, claimed authority for illegal search and seizure, even refused to provide congress information on basic government scientific research.

To justify these egregious actions, the president points to his "inherent authority" as commander-in-chief and head of the executive branch. The "Unitary Executive" theory holds that because the Constitution grants the president the authority for executing the laws, he has unlimited authority to decide what those laws should be and when to break them.

For their constitutional justification, they point the following clauses in Article II, Sections 2 and 3:

The President shall be commander in chief of the Army and Navy of the United States,

he shall take care that the laws be faithfully executed

Forget the fact that Congress is the sovereign body in the United States. I don't know what crack these lawyers who push this theory were smoking during their con law class, but they seemed to have missed reading the rest of the Constitution, in particular Article I, Section 8. In this section it grants Congress the power to:

To declare war, grant letters of marque and reprisal, and make rules concerning captures on land and water;

To raise and support armies, but no appropriation of money to that use shall be for a longer term than two years;

....

To make rules for the government and regulation of the land and naval forces;

....

To make all laws which shall be necessary and proper for carrying into execution the foregoing powers, and all other powers vested by this Constitution in the government of the United States, or in any department or officer thereof.

Further more, Article IV, Section 3

The Congress shall have power to dispose of and make all needful rules and regulations respecting the territory or other property belonging to the United States;

It's tough to be any more clear than that. I honestly just cannot comprehend how anyone who truthfully took an oath to "preserve, protect, and defend the Constitution" can look themselves in the mirror. Even worse are those who excuse such authoritarian power grabs. This is how totalitarianism sprouts. That is what is so terrifying about them; not that a totalitarian army might march in and conquer a free country, but that a free country would willingly give itself over to those who disdain democracy, ignore the rule of law, and idolize secrecy.

Non-sketchy Real Estate Listings Follow Up

Back in March, I posted about my desire for non-sketchy real estate listings and possible ways to improve apartment searching. Today I just ran across MyNewPlace.com, which does some cool searching and mapping of apartment listings. There's a blurb on CNet News about them.