Stochastic Bookmark

abstruse unfinished commentary

about correspondence



About a year ago, I read RKMerton & EBarber's "The Travels and Adventures of Serendipity: A Study in Sociological Semantics and the Sociology of Science" (a field making paternal claims upon Merton). The core text (which becomes a bit repetitious, with the dullness of an academic monograph, about halfway through, but the book is then thoroughly redeemed by its Afterword, being Merton's autobiographical reflections on the topic: the familiar discursivity returns, with footnotes as well) remained unpublished for 45 years, but sparked "On the Shoulders of Giants", which footnotes it. There's this weird father-son entanglement involved: I read Merton fils first, two decades back, on financial option modeling, seminal work that created not just a market (ntm my then programming job), but a whole ecosystem of "derivatives" (pdfs here and here), one which was, in some sense, a self-fulfilling prophecy (as Merton pere coined it in a seminal paper in '48, in reference to financial institutions among other things). Merton fils' research was specifically to fix the value that chance, as manifested by price diffusion over time, contributes to contingent claims aka financial options; so pere's research into diffusion of something chancy contributing to scientific claims was of especial interest. One disappointment was that certain epistemological consequences weren't followed up -- Feynman does crop up, but not the significance of what he termed his 'personal toolbox' of methods, differing from the standard set and giving him a different perspective (so that problems others found hard were much less so for him, and helped build his reputation in student days -- cf Surely You're Joking) -- given the breadth and depth of human knowledge, no one's encyclopaedic any longer, and interdisciplinary studies are limited in scope -- but I can't complain that it missed one hot button amongst the many it hit, and I gladly settled for the excursus upon the recursivity of certain concepts and other otsogiana, reprise.

Anyway, it was this last 'ecosystem' link on performativity, with reference to Tlön in the defunct NYT Borges forum, that led to a recounting of Herbert Hacke as the model for a character therein. But this was further brought to mind by two current newspaper articles, one on yet another financial modeling exercise {WSJ, $}, once again demonstrating the deterministic effect of a probabilistic model, "How a Formula Ignited Market That Burned Some Big Investors":

All this traces back, in a sense, to a day eight years ago when a Chinese-born New York banker got to musing about love and death -- specifically, how people tend to die soon after their spouses do. Therein lies a tale of how a statistician unknown outside a small coterie of finance theorists helped change the world of investing.
The banker, David Li, came up with a computerized financial model to weigh the likelihood that a given set of corporations would default on their bond debt in quick succession. [...]
The model fueled explosive growth in a market for what are known as credit derivatives: investment vehicles that are based on corporate bonds and give their owners protection against a default. This is a market that barely existed in the mid-1990s. Now it is both so gigantic -- measured in the trillions of dollars -- and so murky that it has drawn expressions of concern from several market watchers. The Federal Reserve Bank of New York has asked 14 big banks to meet with it this week about practices in the surging market. [...]
The model Mr. Li devised helped estimate what return investors in certain credit derivatives should demand, how much they have at risk and what strategies they should employ to minimize that risk. Big investors started using the model to make trades that entailed giant bets with little or none of their money tied up. Now, hundreds of billions of dollars ride on variations of the model every day.
Mr. Li's solution drew inspiration from a concept in actuarial science known as the "broken heart": People tend to die faster after the death of a beloved spouse. Some of his colleagues from academia were working on a way to predict this death correlation, something quite useful to companies that sell life insurance and joint annuities.
"Suddenly I thought that the problem I was trying to solve was exactly like the problem these guys were trying to solve," says Mr. Li. "Default is like the death of a company, so we should model this the same way we model human life."
His colleagues' work gave him the idea of using copulas: mathematical functions the colleagues had begun applying to actuarial science. Copulas help predict the likelihood of various events occurring when those events depend to some extent on one another. Among the best copulas for bond pools turned out to be one named after Carl Friedrich Gauss, a 19th-century German statistician. [...]

"Gaussian copula" sounds like a less certain grammatical identity, almost surely.
The other article, on breaking faith with the reality-based community, has broader application: a feedback loop into culture, politics, and, more generally, narrativity ... Reality: who says it isn't what you think?

(thanks to d-squared for the MacKenzie pointer)


<< Home