Lagged asset correlations, a thought experiment

December 1st, 2014

Suppose I start a fund that imposes a 1-day withdrawal lead time, and takes your money and invests it in the S&P 500 on day 0, but then reports the day 0 return as the day 1 return, the day 1 return as the day 2 return, and so on, reporting the return on day 0 as 0. This fund has a return which is a tiny bit less than the S&P, but is completely uncorrelated on a daily basis. It would, however, have an almost perfect correlation on an annual basis, and that’s why you wouldn’t invest in such a thing. If you only used daily correlations when deciding whether to put this asset into your portfolio, you would have been greatly mislead!

If you optimized for track record Sharpe ratio you would actually invest in this stupid fund. That TYPE of smoothing is worthless though!

The legitimacy of capture

October 29th, 2014

EconTalk on regulatory capture and economists: http://www.econtalk.org/archives/2014/10/luigi_zingales.html

Incentives are important to think about, because getting incentives wrong can mean pitting another human against you, and by symmetry there is no telling who would win when that happens.

Immediate material gains are a part of incentives which are relatively easy to understand. What’s discussed in this podcast under the label of capture is the fact that there are systematic influences that go beyond immediate individual gain. Regulators tend to come to sympathize with the regulated, because in their shared knowledge and social circles they are closer to each other than they are to the rest of us.

This is a very tasty idea when you think about how any ideology can interpreted as capture. To be ideological is to have an opinion based on a framework, more so than on objective data. Often this is the right thing to do, because data is too noisy in individual cases to be leaned on too heavily (http://xkcd.com/1132/).

I think the solution is not to try and be neutral – that is impossible. Rather, we should declare our roles in order to detach our egos from them. We do so by speaking in such manner, for example about Uber:

  • speaking as a libertarian, I think people should have the right to use whatever tools they want as long as it’s a transaction between willing parties
  • speaking as a consumer, I like that I can call cars that are cheaper than cabs
  • believing in the rule of law, I think that Uber is violating the spirit of taxi medallions, and the state should step in to either compensate the cabs for a lost property right, or enforce those rights
  • speaking as an anti-monopolist, I think that Uber is getting too powerful

It would be nice to have a list of these tropes, similar to tvtropes.org

Skillz

September 15th, 2014

As many of you know, I left Katong Capital as of May this year, where I worked with Yishen Kuik and Jeff Ma for the last 3 years. The statistics was fun, the infrastructure building was fun, and I have had the fortune to continue to do those things at my current job with Minus Inc.

I still greatly enjoy finance ideas, the same way I will continue to enjoy electronic structure. I also have a lot more to say about working in small partnerships now, hah. Ideology, can’t live without it, can’t live with it – it can be difficult to diagnose insanity from the inside!

Idealism takes courage, cynicism is a form of cowardice

August 12th, 2014

Idealism is necessary for someone to behave with honor. I am wary of people who are very up front about their own cynicism – I think it’s expectation-setting behavior. It may be presented as a form of humility, as in “I’m very self-aware about the limitations of my own understanding”, but what I’ve seen it come out to mean is “Don’t expect me to hold to any of my commitments, as I will plead ignorance for any acts of self-interested malice I willingly commit.”

Necessary doesn’t mean sufficient, of course. There are plenty of idealistic assholes out there – it’s just that the self-labeling cynic is declaring their intent to be an asshole upfront, and one does well to take the free warnings as they come.

Inspired by the bit about expectations, employment and marriage in the most recent EconTalk: http://www.econtalk.org/archives/2014/08/reid_hoffman_an.html

The Joys of Rambling

November 26th, 2013

I take great joy in incoherent rambling. I find the sound of my own voice, even when just in my own head, to be pleasant. I think this is because there is a form of thinking that can only happen when you are writing for yourself, and if you have any kind of intellectual personality then what you write for yourself would be unintelligible to others just because you have a unique background of assumptions and private knowledge which other people don’t have.

Only writing for the consumption of others can be very stifling on actual thought. There is writing that, while it makes for good public consumption, if you wrote that way when writing for yourself then you are a sadly shallow individual. Never forget that marketing and self-promotion goes into public writing – don’t drink your own kool-aid.

Imprecision

November 26th, 2013

Weasel words are equivocating phrases aimed at creating an impression that something specific and meaningful has been said, when in fact only a vague or ambiguous claim has been communicated.

Hearing people say “It depends” angers me. It angers me because those are weasel words.

Balance of Payment

November 17th, 2013

A cheaper currency makes it easier to sell one’s goods abroad. A government can make a currency cheaper by buying foreign-denominated assets. For example, China puts downward pressure on the CNY/USD by buying USD-denominated bonds. If we were to think of the (current account) surplus and deficit countries as two companies, what’s happening is akin to seller financing – the seller is lending the buyer money with which to buy goods.

How can selling something cheaply be considered bad for the buyer? Anti-competitive dumping comes to mind – this is where a company sells cheaply in order to drive out the competition and subsequently raise prices. It’s the path-dependence that makes this a difficult situation to evaluate.

There are many catch-22s in economics. Without producers, there can’t be consumers, and without consumers, there can’t be producers.

  • China wants to produce, but waiting for the virtuous cycle of increasing sophistication in productivity and consumer appetites to kick in is too slow.
  • China is a relatively centralized economy, so the state had the option of directly buying products from businesses to boost growth. However, that would result is a lot of waste, as the state doesn’t know what goods people actually want in the future, and would cause the wrong producers to develop.
  • Instead, China pays American consumers to buy goods from Chinese producers. This exerts competitive selectivity while avoiding the problem of having to develop a domestic consumer.

Conclusion: China pays for quality assurance services, forcing its people to compete to sell to foreigners for artificially low prices.

The pride behind words

November 15th, 2013

Mental state is a global thing. Work and play can’t be cleanly separated, and the mindset in one realm leaks into the other.

It is important to talk with yourself, and it can be difficult to switch between talking with yourself and talking with other people, not the least because motivations and capabilities can be quite idiosyncratic. Talking to people different in want and ability requires both sides to drop to the lowest common denominator of common topics and interests – hence small talk. I don’t enjoy small talk, but big talk is difficult when the room is diverse. Worst is when small talk masquerades as big talk, and all you get is buzzword slinging without much the way of insight being exchanged.

Ben Cashnocha said all this better

 

Introducing a paper

October 20th, 2013

The introduction section of an academic paper is where the author describes the historical sequence of inquiries which lead up to the work detailed in the paper proper. Referees, who decide if the paper will be published, do not take kindly to the omission of their own work. Given that the referees are anonymous, this forces the author to tie in their work with that of everyone else as much as they can.

I used to think of this process as a corruption, but having done more research-type work, I’ve come to appreciate this organization a lot more. Innovation without context is a huge waste of time for the reader.

Productivity and the value of Labor

January 1st, 2013

Thought of the day:

Prosperity that resulted from manufacturing jobs happened because even as the industrial revolution made human muscle worthless, it made human brains more valuable. Everyone who lost their muscle job got a new job for doing some menial but not capital-substituteable mental task.

This is hardly something that can be taken for granted for all productivity increases though. There is no guarantee that labor will always remain valuable.

But what about Baumol’s Disease?¬†If you think Baumol’s disease will dominate, what jobs should you aim for?