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To add to your point Nick the whole premise of B&S was wrong. It led  
many that should have known better to say ' the world is a normal  
distribution and so this won't probably happen in your lifetime' but  
people have a very shaky understand of probability and they applied  
the data to Hungarian Equities as well as the root study, US Bond  
Prices from 1934 - 1977 (Milken). They took the whole thing out of  
context.

And to take Doug's point about avoiding them: You don't want to avoid  
them, just manage them. If you put in all the controls to avoid then  
you've lost the economy because we need volatility to make a profit at  
one level of the system: It's how you view the whole that matters.

Stefan

On 13 Nov 2009, at 03:10, Nick Green wrote:

> my point is there were probably theoretical mistakes in using normal  
> rather than power law assumptions. There were definitely practical  
> mistakes because there was no feedback on performance: sacrificing  
> rationality for commercial confidentiality. There was no public  
> market in these secondary instruments. That doesn't mean we abandon  
> the method of quantitative description of processes.  Anyhow Black  
> and Scholes company went bust in 1998 a year after the Nobel so even  
> emotional traders might have guessed something was wrong. Like it or  
> not you look at the trading history and guess the future market  
> price on the basis of current conditions- if you know them. If you  
> don't it's just luck as Taleb has it. Martingales work for the house  
> not the punter. These simple facts are getting lost in all the  
> vacuous posturing. Trivial to fix: set liquidity on the risk  
> performance and add a few percent for luck- just like always.
>
>
> From: Doug McDavid
> Sent: Friday, November 13, 2009 1:23 AM
> To: [log in to unmask]
> Subject: Re: The world is deterministic
>
> Interesting erudition, but i think we're forgetting how this  
> originated.  This guy was claiming he could predict (from past  
> performance) how financial markets will move.  The myth of the  
> rational market has been debunked.  Animal spirits (Keynes) are  
> loose, as always.  The quants and their bogus so-called rationality  
> and over mathematization of human emotions have pretty much been  
> discredited yet again in late 2008 and early 2009.
>
> Just be ready for the next bubble/crash.  They can't be be banned or  
> avoided.
>
> On Thu, Nov 12, 2009 at 4:24 PM, Nick Green <[log in to unmask] 
> > wrote:
> Chaos is deterministic- but sensitive to initial conditions. When at  
> Cardiff we found that chaotic oscillators could be forecast i.e. to  
> find within 5% for the next 3 or 4 points- but this was  
> interpolation off a hyper dimensional surface constructed from say  
> 10 nearest neighbours.
>
> Indeed the difference in nearest neighbour variance for white noise  
> was 20 times bigger than a chaotic signal. ( A sine wave would be  
> four orders of magnitude variance smaller than white noise on say  
> 1000 data points and ten nearest neighbours.)
>
> Extrapolation is where the problems really start i.e. futures have  
> to include outlier forecasting. Mandelbrot and Taleb seem to be  
> saying the variance around the mean is usually not standard normal  
> it's skewed and not stationary i.e. data is generally of power law  
> type not symmetric about a stationary mean. That means Wiener has to  
> redo his treatment of the random walk, gambler's ruin etc. and  
> trouble for the Law of Large Numbers when applied to physical  
> systems. Black and Schools assumed the Wiener process to define  
> their prices and to have a better chance they needed a Mandelbrot/ 
> per Bak (self-organized criticality - see wiki) power law. When you  
> do the random walk it seems plausible that the frequency of steps  
> longer and shorter than the mean is equal. But the step length can  
> never be shorter than zero and may be infinitely long (the walker/ 
> actor evaporates or at least crosses the containing coherence  
> boundary) or more simply can be long (and unbounded). The upper  
> bound of the longest step length of a Brownian walk increases with  
> time.
>
> At constant temperature in a long experiment the length of the  
> longest step will increase with observation time- this is the  
> simplest way to put it. Given these are abstractions of very large  
> restricted n-body problems we are certainly in difficult territory.  
> Experiments show power laws in the frequency of word use, size of  
> cities, length of rivers, blood vessels, sizes of meteorites etc http://en.wikipedia.org/wiki/Power_law#Universality
>
> But recall Stafford applied Harrison and Stevens for testing the  
> significance of a new data point (transient, trend or step change)  
> so very short term forecasting only...Science and mathematics is  
> certainly regards forecasting as its major concern. Pask would  
> probably speak of the production of applicable descriptions. e.g.  
> forecasting the length of wire to put a fence around an x by y  
> rectangular field- even that gets tricky if the ground is not flat  
> or x and y have astronomical values and thus need corrections from  
> General relativity
>
> Was von F talking about the halting problem perhaps?
>
> From: Alfredo Moscardini
> Sent: Thursday, November 12, 2009 1:03 PM
> To: [log in to unmask]
> Subject: Re: The world is deterministic
>
>
> I believe that it isan open system as it needs energy from the sun
>
> It is certainly a non-linear system and any non-linear system has  
> the potential to be chaotic
>
> As far as I understand there are very narrow limits for many  
> parameters and if they transgress the results are large i.e. small  
> imput - large outcome which is a sign of Chaos
>
> I dont know what von Forster said about non-trivial machines but to  
> me deterministic imples predictable
>
> Alfredo
>
> ----- Original Message -----
>
>
> From: Dirk Vriens <[log in to unmask]>
>
> Date: Thursday, November 12, 2009 12:14 pm
>
> Subject: Re: The world is deterministic
>
>
> > Dear Alfredo,
> >
> > Sorry for our intrusion into this discussion, but we would like to
> > know: if
> > the world is a chaotic open system, to which input is it open?
> > Input coming
> > from outside the world? Hmm, weird. Or input from within the world
> > - but
> > then one would rather use the term closed system, don't you agree?
> > And,besides, even though a system is deteministic it can still be
> > utterlyunpredictable (or transcomputational, as von Foerster
> > claims as he disusses
> > non-trivial machines).
> >
> > Kind regards,
> >
> > Jan Achterbergh,
> > Dirk Vriens
> >
> >
> > _____
> >
> > From: Forum dedicated to the work of Stafford Beer
> > [mailto:[log in to unmask]] On Behalf Of Alfredo
> > MoscardiniSent: donderdag 12 november 2009 11:32
> > To: [log in to unmask]
> > Subject: Re: The wo  
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>
> -- 
>
> Doug McDavid
> [log in to unmask]
> 916-549-4600
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