Quantification — describing reality with numbers — is a trend that seems only to be accelerating. From digital technology to business and financial models, we interact with the world by means of quantification.

While we all interact with the world through more-or-less inflexible models, mathematics contributes to this lack of flexibility because it is seemingly precise and objective. Even though mathematical models can be very complex, you can use them without understanding them very well. A trader need not really understand the financial engineering models that he may use on daily basis. This uncritical acceptance amounts to the assumption that reality is identical to our rational reconstruction of reality — for example, that the economy or the stock market is captured by our latest model. (…)

Statistical models are all based on the notion of randomness, but no one can really understand randomness. Many people use the word random without realizing that random means what it says — randomness cannot be predicted or controlled. A model of randomness is no longer true randomness.

Because they are logically consistent, mathematical models screen out ambiguity. Ambiguity is real, but business and financial models have little to no room for it.


{ Harvard Business Review | Continue reading }

It’s hard to imagine Apple’s App store — 50 million users, 400,000 apps, 10 billion downloads — being threatened with extinction. (…) But we know that empires crumble: what’s interesting is how.

Right now pundits are focused on the threat of Android. (…) Android’s not the issue, however.

The real threat are web apps. The kind that will download to your device the moment you open then, allowing you offline access, whether they’re news, games, email or some other utility. If you don’t believe they’ll work — and eliminate dependencies on plugins outside of open web standards, like flash — go download a free copy of Angry Birds for Google Chrome and try disconnecting from your local network. (…)

Or try opening Nytimes.com/chrome in Firefox, any webkit-based browser or, of course, Google Chrome, and you’ll see what the future holds.

{ Technology Review | Continue reading }

Apple has entered the final stages of negotiations with the major record labels and music publishers for a service that will allow people to upload and store their music on the Web and listen to it on smartphones, tablets or computers — so-called cloud-based music.

Amazon and Google introduced similar services weeks earlier. Apple’s service, though, is expected to be easier to use, and to find a ready market in the 200 million people who have iTunes accounts. (…)

“I don’t think it is something they will have to give away for free, at least initially,” said Gene Munster, an analyst with Piper Jaffray. Mr. Munster said the service could be bundled with MobileMe.

{ NY Times | Continue reading }

artwork { Laurent La Torpille }

related { Offlining is a growing response to what is now widely recognised as a first-world social problem: we’re all addicted to the net. | And: Is Netflix Reducing Illicit File Sharing? }

{ The Evolution of Lids| full story }

For the past 150 years, MIT has been leading us into the future. The discoveries of its teachers and students have become the warp and weft of modernity, the stuff of daily life that we now all take for granted. The telephone, electromagnets, radars, high-speed photography, office photocopiers, cancer treatments, pocket calculators, computers, the internet, the decoding of the human genome, lasers, space travel… the list of innovations that involved essential contributions from MIT and its faculty goes on and on.

And with that drive into modernity MIT has played no small part in building western, and particularly US, global dominance. Its explosive innovations have helped to secure America’s military and cultural supremacy, and with it the country’s status as the world’s sole superpower.

{ Guardian | Continue reading | video via copyranter }

Television showrunners are notorious multitaskers, with the most successful able to toggle easily between the roles of CEO and auteur. But Louis C.K.’s work on Louie requires a whole different level of personal oversight. The show is based on his life. Louis is the director. He’s also the only writer, the sole editor (he no longer shares duties with the co-editor he had last season), not to mention the person who oversees music (when the music guy’s budget ran out, he decided to do it himself). He also hired his own casting team: Last season, he turned down FX’s offer to help out and doesn’t inform them about casting in advance. But perhaps the most unusual aspect of the show is that Louis C.K. gets no notes from the network during filming, no script approval—an ­unheard-of “Louis C.K. deal” that has made him the envy of comics and TV writers alike.

{ NY mag | Continue reading }

{ 1 | 2 }

{ Apple overtook Nokia last quarter to become the world’s No. 1 vender of mobile phones — smart or otherwise — in terms of revenue. In terms of sales, it still has a lot of room for growth. | Fortune }

A quick review: Some 17 of the 27 nations that constitute the European Union have abandoned their own currencies in favor of the euro. This means they have given up control of their exchange rates and their interest rates, the latter set by the European Central Bank on a one-size-fits-all basis. In fact, it is the state of the German economy, the area’s largest, that dictates interest rate policy for the entire 17-country group. When Germany was suffering under the weight of the costs of reunification, its sluggish economy needed, and got, a low-interest rate policy from the European Central Bank. That eventually proved too stimulative for, say, Ireland, which was in the midst of an inflating property bubble.

The creation of the eurozone also led lenders to assume that the credit of every member was just about as good as the credit of Germany and France. So Greece, Portugal, Spain, and Italy could sell sovereign debt at very low interest rates and use the borrowed money to finance an expansion of their welfare states — Greeks, for instance, could retire at 50 if they were in a hazardous occupation such as hairdressing (all those chemicals). More important, countries like Portugal, with a poorly educated workforce, and Spain, with politically run regional banks making imprudent loans to local property developers, became noncompetitive with their eurozone colleagues and international rivals. No problem: Fiscal policy was not controlled from the center, and investors hadn’t yet realized that lending to the so-called PIGS (Portugal, Ireland, Greece, and Spain) was a hazardous occupation. So the latter could tap the credit markets to fill the gap between tax receipts and spending, and benefit from German-level interest rates.

Then the rating agencies rose from their torpor and downgraded the sovereign debt of Greece, helping to drive interest rates on its government bonds to unsustainable levels. Enter Brussels with a bailout for Greece. And when Ireland’s deficit soared to 32 percent after the government decided to guarantee the debts of its insolvent banks, enter Brussels with a bailout for Ireland. Now Portugal, burdened with an economy that has not grown for a decade, also is rattling its begging bowl, and another bailout is being negotiated with a conclusion along the lines of earlier bailouts imminent, never mind that the previous two have done more harm than an honest confession of insolvency would. If at first you don’t succeed, repeat the mistake.

The main bailer, of course, is Germany, its economy growing smartly on the back of an export boom — it does not make what China makes, but makes what China buys. Chancellor Angela Merkel has two reasons to play Lady Bountiful. The first is her belief, shared by the German elite, that if a euro country declares bankruptcy, the currency will lose credibility and the entire European project will come unhinged.

Second, there is the small matter of the German banking system. The German banks, especially the state-run Landesbanken, are so woefully undercapitalized that some are planning to opt out of the new stress tests because they know they will fail. These banks are sitting on 220 billion euros of sovereign and bank debt of Greece, Portugal, and Spain, and if those IOUs become worthless, the German financial system might come tumbling down or at minimum require a taxpayer bailout. To make matters worse, France sits on another 150 billion euros of this dicey paper.

Add the news from tiny, previously europhile Finland. In last month’s election, the anti-euro, anti-bailout True Finn party’s share of votes jumped from 4 percent to 19 percent, and its parliamentary seats from 5 to 39 in a 200-seat parliament, enough to insist on inclusion in a coalition government. (…) Finland’s “no” vote is all that is needed to leave Portugal drowning in debt. (…)

Greece, Ireland, and Portugal are now frozen out of credit markets. The yield on Greek two-year bonds is 24 percent and on both Irish and Portuguese bonds of similar maturity around 12 percent. No country can afford to borrow at those rates. (…)

The more important question is whether Spain, its economy twice as large as those of Greece, Portugal, and Ireland combined, will be next when the bond vigilantes again saddle up. So far, the contagion has not spread. But Spain has an unemployment rate of over 20 percent (40 percent for young workers) and rising, its regional banks have so many IOUs from property developers gone bust that some failed the rather lax first round of stress tests, and Moody’s says the nation’s banks will have to raise as much as 120 billion euros in fresh capital (the government puts the figure at 15 billion euros, despite the fact that Spain’s banks and companies have 70 billion euros invested in Portuguese assets, 7 percent of Spain’s GDP).

{ The Weekly Standard | Continue reading }

artwork { Ashley Bickerton }

update { Finland’s Parliament approved bailout for Portugal }

Five reasons why I’m not buying Facebook

Excuse me for raining on the Facebook parade, but the $450 million investment by Goldman Sachs and $50 million from Russia’s Digital Sky Technology didn’t move me the way it seemed to move others. This despite the suggested $50 billion valuation, as big and beautiful a number as the stock market has seen in some time.

I am certainly not moved in the same way it appears to have moved Goldman’s own clients: the Wall Street firm has pledged to line up another $1.5 billion in sales to its high net worth investors, who are said to be champing at the bit to get a piece of the action, which starts with a $2 million minimum. Not that I have $2 million lying around, but I wouldn’t buy this stock if I did.

Reason #1: Someone who knows a lot more than I do is selling. While the identities of the specific sellers remain unknown, the current consensus seems to be that most will be from venture capital investors like Accel Partners, Peter Thiel, and Greylock Partners. Maybe Mark Zuckerberg will kick in $50 million or so himself, just for some fooling around money. (…) The way the social network is talked about these days, it’s the best investment opportunity in town. So why would anyone want to forsake it? And don’t give me that crap about VCs being “early stage” and wanting to cash out of a “mature” investment. These people are as money hungry as any other institutional investor, and would let it ride unless….they saw something that suggested that the era of stupendous growth was over. Facebook reached 500 million users in July. There’s been no update since, even though the company had meticulously documented every new 50 million users to that point. Might the curve have crested? And let’s not even talk about the fact that they don’t really make much money per user — a few dollars a year at most. (Its estimated $2 billion in 2010 revenues would amount to $4 per user at that base.)

Reason #2: Goldman Sachs. I’ve got nothing against Goldman Sachs. Hell, I worked there. But when Reuters’ Felix Salmon says that the Goldman investment “ratifies” a $50 billion valuation, he’s only half right. That is, someone, somewhere—perhaps the Russians at DST Global—might just believe this imaginary number. (It’s hard to see why, though: DST got in at a $10 billion valuation in May 2009. Facebook’s user base has more than doubled since then. So its valuation should…quintuple?) But concluding that Goldman Sachs believes in a $50 billion valuation is poor reasoning. (…)

Reason #5: Warren Buffett cautions those looking at outsize valuations to consider one’s purchase of company stock in a different way than price of an individual share, whatever it may be. He suggests one look at the total market valuation – in this case, a sketchy $50 billion – and to consider: Would you buy the whole company for that price, if you had the money? The market value of Goldman Sachs is just $88 billion. I’d take more than half that company over the whole of Facebook any day of the week.

{ Duff McDonald/CNN Money | Continue reading }

related { For News Sites, Google Is the Past and Facebook Is the Future | Google’s stealth multi-billion-dollar business }

and { The Next 10 Years Will Be Great For Both Founders And VCs }

…SCVNGR, a $100-million company that makes location-based apps to rival Foursquare and Groupon. (…)

Priebatsch is 22 years old. He’s also worth millions. And not just because he’s had a “Projects” folder on a hard drive since he was 8, made tens of thousands of dollars every month on a startup when he was 16, and dropped out of college after freshman year. He’s the man in charge because he sensed something three years ago that most of the rest of us did not: that a generation raised on video games would want to keep playing a game in real life. “I found out that basically the real world was essentially the same game as Civilization [an old computer game], just with slightly better graphics, maybe, and slightly slower.”

The story of SCVNGR begins with the story of Priebatsch and that game of Sid Meier’s Civilization. His aunt gave it to him when he was a kid, and its premise was simple: Build an ancient civilization strong enough to take over the world. Priebatsch, the son of a biotech entrepreneur and Morgan Stanley VP, was forbidden from watching TV, but could play on the computer. Spending hours with the game, he quickly became addicted not to conquering the world but conquering the game. “The fact that the game was designed by someone always made me think that someone had built it with their own biases,” he says, “I would essentially mine the game into a series of algorithms and know exactly what to do at any given time.”

Priebatsch, like an undergrad reading Marx for the first time, started to look at everything through this new worldview. “I have a much broader definition of game than most other people,” he says, explaining that games are just systems of challenges, rewards, and biases. After years of playing games, Priebatsch felt ready to actually build one.

{ Fortune | Continue reading | Thanks Tim }

“I’ve never felt threatened by Facebook. (…) Facebook has the most to lose because it has a history of altering its privacy policies and not doing the most to protect the privacy of its users,” said Priebatsch. “Facebook will be like Google, Microsoft and IBM before them – they’ve been dominant for maybe a year and I’d give them maybe four more years.”

{ Guardian | Continue reading }

related { 18 months ago, Groupon didn’t exist. Today, it has over 70 million users in 500-odd different markets, is making more than a billion dollars a year, has dozens if not hundreds of copycat rivals, and is said to be worth as much as $25 billion. What’s going on here? | Reuters | full story }

Almost every country in the EU last week approved the use of Meat Glue in food. Technically called thrombian, or transglutaminase (TG), it is an enzyme that food processors use to hold different kinds of meat together.

Imitation crab meat is one of the more common applications: it’s made from surimi, a “fish-based food product” made by pulverizing white fish like pollock or hake into a paste, which is then mixed with meat glue so that the shreds stick together and hold the shape wanted for it by its creator.

Chicken nuggets are also often bound with meat glue, as are meat mixtures meant to mold like sausage but without the casing. Meat glue is also used by high-end chefs like New York restaurant WD-50’s Wylie Dufresne, who is famous for his shrimp pasta dish—instead of shrimp with pasta, he just makes the pasta out of shrimp.

{ Discovery | Continue reading }

Negotiations trigger anxiety. Across four studies, we demonstrate that anxiety is harmful to negotiator performance.

Compared to negotiators experiencing neutral feelings, negotiators who feel anxious expect lower outcomes, make lower first offers, respond more quickly to offers, exit bargaining situations earlier, and ultimately obtain worse outcomes.

{ Science Direct | Continue reading }

…to recognize that we now live in a different, more constrained world in which prices of raw materials will rise and shortages will be common.

Accelerated demand from developing countries, especially China, has caused an unprecedented shift in the price structure of resources: after 100 years or more of price declines, they are now rising, and in the last 8 years have undone, remarkably, the effects of the last 100-year decline. (…)

The primary cause of this change is not just the accelerated size and growth of China, but also its astonishingly high percentage of capital spending, which is over 50% of GDP, a level never before reached by any economy in history, and by a wide margin. Yes, it was aided and abetted by India and most other emerging countries, but still it is remarkable how large a percentage of some commodities China was taking by 2009. Exhibit 3 shows that among important non-agricultural commodities, China takes a relatively small fraction of the world’s oil, using a little over 10%, which is about in line with its share of GDP (adjusted for purchasing parity). The next lowest is nickel at 36%. The other eight, including cement, coal, and iron ore, rise to around an astonishing 50%! In agricultural commodities, the numbers are more varied and generally lower: 17% of the world’s wheat, 25% of the soybeans, 28% of the rice, and 46% of the pigs.

{ Business Insider | Continue reading }

The U.S. economy has finally started to create jobs at a reasonable clip. Inflation is still low. Corporate profits are healthy, and surveys of business conditions suggest that the recovery is, as the Federal Reserve recently put it, “on a firmer footing.” So are happy days here again? Hardly.

Last month, consumer confidence plunged, and pundits are still talking about the possibility of a double-dip recession. Some of this can probably be put down to the general atmosphere of geopolitical turmoil—the threat of nuclear catastrophe in Japan, continued debt problems in Europe, political upheaval in the Middle East.

But, economically speaking, the source of the anxiety is something much more specific: high prices at the gas pump. The price of oil has risen thirty dollars a barrel since February and more than forty per cent since last summer, and the fear is that expensive oil may bring stagflation, as it did during the oil crises of 1973 and 1979, or even put the economy back into reverse. (…)

Last month’s drop in consumer confidence was attributed almost entirely to the spike in gas prices, in line with a 2007 study, by the economists Paul Edelstein and Lutz Kilian, showing that spikes in oil prices have often depressed public sentiment in the past.

{ The New Yorker | Continue reading }

image { Edward Ruscha, Lion in Oil, 2002 }

related { China’s energy use should flatten out sometime around 2030 }

Meet Donald Trump’s bankers. Like the characters in the fairy tale The Emperor’s New Clothes, a gaggle of major financial institutions has finally been forced to admit, after lending Trump billions of dollars, that there’s a lot less to the emperor — or at least his empire — than the banks had believed.

Not quite nine months after bailing out Trump with a rescue package that gave him $65 million in new loans and eased credit terms on his bank debt, Trump’s bankers last week stopped the game. Already more than $3.8 billion in the hole and sliding perilously close to a mammoth personal bankruptcy, the brash New York developer had no choice but to accept the dismantling of his vast holdings.

{ Time, May 1991 | Continue reading }

related { Trump Unable To Produce Certificate Proving He’s Not A Festering Pile Of Shit }

unrelated { Why is the Federal Reserve forking over $220 million in bailout money to the wives of two Morgan Stanley bigwigs? }

{ $23,698,655.93 (plus $3.99 shipping) }

The disconnect in Europe just gets worse and worse. (…) There are going to be tears and lots of them somewhere. Greek three-year rates are now at 21%. (…)

On Saturday Jurgen Stark, an executive board member of the ECB, warned that a restructuring of debt in any of the troubled eurozone countries could trigger a banking crisis even worse than that of 2008. (…)

In a well-done column from Zero Hedge, which discusses a controversial Citibank report, we learn that, “No country with Debt/GDP ratio of more than 150% has ever avoided a default anyways. Why would Greece be different?” (…)

But the Greeks are not the only ones who are unhappy. I wrote about the Finns last week. Now we jump to a marvelous Wolfgang Münchau piece from the Financial Times, which gives us additional insight and points out that the Germans are getting rancorous: “A premature Greek default would change everything. As would the failure by the EU and Portugal to agree a rescue package in time; or an escalation in the EU’s dispute with Ireland over corporate taxes; or a ratification failure of the ESM in the German, Finnish or Dutch parliaments; or a German veto for a top-up loan for Greece in 2012; or the refusal by the Greek parliament to accept the new austerity measures; or a realisation that the Spanish cajas are in much worse shape than recognised, and that Spain cannot raise sufficient capital.”

{ John Mauldin | Continue reading }

photo { Jeremy Dine }

How much does the U.S. economy depend on purchases of goods and services people don’t absolutely need?

As it turns out, quite a lot. A non-scientific study of Commerce Department data suggests that in February, U.S. consumers spent an annualized $1.2 trillion on non-essential stuff including pleasure boats, jewelry, booze, gambling and candy.

That’s 11.2% of total consumer spending, up from 9.3% a decade earlier and only 4% in 1959, adjusted for inflation.

{ WSJ | Continue reading }

The value of the greenback determines how competitive U.S. goods and services are on the world market. (…) Many politicians talk about a strong dollar, but it’s mostly lip service. A weak dollar helps to create jobs by making U.S. products more price-competitive overseas. (…)

There are four major currency blocs — the dollar, the euro, the yen and the yuan. With so many factors against it, why would anyone want to own U.S. dollars? Because, well, it’s the least ugly currency of the lot.

The Europeans are still not only dealing with an ongoing banking crisis. Portugal, Ireland, Italy, Greece and Spain all have solvency problems. Lacking their own currency, these nations cannot simply print their way out of debt. Thus, there is a small but real possibility that the European Union will not hold, and the euro will collapse.

Japan is even worse. It was mired in a multi-decade slog, and then the earthquake/ tsunami/nuclear crisis rocked it back on its heels.

That leaves China. Despite market reforms, it is still a totalitarian communist regime. Western nations are none too keen about making its currency the reserve of the world.

{ Barry Ritholtz/Washington Post | Continue reading }

{ Five-Hundred Life-Saving Interventions and Their Cost-Effectiveness, 1994 | PDF }

People who pitch project ideas to venture capitalists often focus on convincing them of #1, idea quality, not realizing that if you convince them of that but not #2, your team quality, they will just steal your idea and give it to another better team.

Usually they hear from several teams pitching pretty similar concepts, so they are judging mainly on team quality.

Knowing this, sophisticated innovators tend to neglect idea quality, and focus on team quality.

{ Overcoming Bias | Continue reading }

oil on wood panel { Van Arno }