Now I’ve been “accused” of being a quant in the past (hi rybolov!) but in reality the only dogs I have in this fight are the model and the application of scientific method - and really, ethically speaking, I have to be tied to the latter while applying the former.

And I see a false dichotomy in this whole Quant vs. Qual thing.  We, as a profession, tend to create a political divide between the two which, if it even exists, I’d say is based more on our ignorance rather than our expertise.  After all, we are the profession that regularly multiplies across ordinal scales and uses wonderful models like R=VxTxI.   As someone  learning to deal in probabilities and rationalism, I have to recognize that this discussion is really just about the act of observation using different metrics of measurement.

But how we’re going about observing does not change the fact that there is measurement based on observation.  So if I’m working with you I can easily turn your qualitative scale into a quantitative one, and vice-versa.  Yes, Shrdlu, if we had the time, even your most seemingly Qual things could be Quant! (This flexible world view, btw, is an outcome of that new-fangled Bayesian thing).

COGNITIVE BIAS A-PLENTY

But back to what Rich is saying there about information security and risk - and he isn’t/won’t be the only one saying these sorts of things - we should try to understand what’s really going on rather than get caught up in the emotional hurricane.  Our profession suffers several forms of cognitive bias.  The nature of our jobs and what we do can cause us to be focused on the outcome and not the quality of the decision at the time it was made.  We want to bring in things from other professions that are useful, but at times we do view things outside our profession with false correlation to our own (unfortunately for those who write these sorts of articles, financial risk is completely different than operational risk).  We also have the tendency to focus on negative outcomes without acknowledging the positive outcomes (For example, I hear that Alan Greenspan’s new firm is up a couple of $billion in all this mess since he joined them, short sellers are doing quite well - must be because they have qualitative models or something -grin-).  The effect of these biases are compounded by the facts that proper correlation takes more work than we usually give it, and rational thought is not that easy when there’s a witch-hunt mentality.

What also floats in water? (link to Youtube)

WHAT SHOULD WE BE THINKING ABOUT?

So as you and I read opinions that seem to be the polar opposite of irrational exuberance (and there will be plenty between now and the election) we’ll have to ask ourselves, “what really failed here?”  At the risk (pun) of over-simplification:

• Was There an Error on the part of Probability Theory?

After all, Probability Science like all other fields of knowledge is always “advancing” as they say.  So perhaps probability theory is wrong somehow?

I’m personally disinclined to put the blame here, primarily because I would think that there would be evidence from other fields (like Quantum Mechanics) that something is amiss waaaaay before it hit a field like economics.

• Was There Error In The Model Used to Determine Risk?

Some people who understand real estate valuation and complex derivatives and financial risk want to put the blame here.  It’s a little too early to tell, but one thing is for sure - Financial risk is so different from operational risk I couldn’t begin to hazard an opinion on the subject.   But it would seem that this is really somewhere we might look.

• Was There Error In The  Scale Used (Quantitative vs. Qualitative)?

Honestly?  I find it extremely difficult to understand how this could be the source of financial ruin.

• Was There Error on the part of the Decision Maker?

What if all of the above were just fine, and the decision maker chose short term gain over long term stability?  What if this was (to simplify the matter greatly) a choice of “heads” over “tails” and the coin landed on tails?  What if the model represented the right risk (probability of negative outcome vs. positive outcome), but the complex derivative was sold to someone else who had poor “risk management” (ability to make a good decisions)?

Now I have no clue about complex derivatives, and I’m oversimplifying to be sure - chances are like most things, there are several problems that helped create the primary cause. But it seems to me that as we go into incident response mode for the economy, it’s more helpful to do so in a rational, logical manner.

OTHER THINGS WE MIGHT WANT TO CONSIDER

Consider the Source
Some authors (who I think tend to exploit outcome and hindsight bias,and then combine those with indirect ad hominem attacks in order to sell their books), are actually putting forth arguments against the use of analytics.  The source of this is a current epistemic debate between those who believe that only falsification is certain, and those who maintain that neither proof nor falsification are certain, there are only probabilities.    So before you go believing any “quadrants” of usefulness on faith - I encourage you to understand what is at the heart of the discussion.

We All Have to Live In The Real World
The sun will rise tomorrow, and someone will try to find the source of the problem and do a better job.  Now chances are, they’ll be doing it in a quantitative manner.  Chances are also that at some point their models will fail and we’ll need to build new ones.  And this will happen whether the field is cosmology, economics, meteorology, information security, or professional baseball.

WHAT ABOUT YOU, ALEX?

I’m far from certain and subject to change, but these days I lean towards Robin Hanson & MIchael Lewis w/regards to placing blame.

Speaking of the Yankees, they have made a few moves for the pennant run.  In addition to their own trade with the Pirates to get Xavier Nady and Damaso Marte, they pulled off a great deal yesterday getting Pudge Rodriguez to fill in as catcher for Jorge Posada.  This could be a huge deal for the Yankees.  They gave up Kyle Farnsworth, who while threw well this year, gave up home runs like candy.  I am flying up to NY with my two sons tomorrow and will be at the Stadium tomorrow night to watch the Yanks play the Angels, who also made a big trade for the Braves Mark Teixeira.

Another future hall of famer, Ken Griffey, Jr was also traded to the White Sox today.  Wow! What a day in baseball. I can’t wait to sit in the temple that is Yankee Stadium with my two boys tomorrow. It is like a dream come true, similar to taking them to a Steeler game last year.  With all of the action going on around baseball it is also a great time to do it.

Image by goddam via Flickr

Ah, its almost August.  Football training camps are open and the Yankees and Red Sox are battling. Does it get any better?  For most of this year I thought the Yankees were going to be out of it this year and content to have a rebuilding year.  We have several veteran players who past their prime and whose contracts are up after this year.  We have a some great young talent that need to grow into their potential.  It looked like the Bosox and Tampa Rays were going to run away with the division and wild card this year.

But like inevitable turning of the seasons, sometime after July 4th and then the All Star break, the Yankees beginninng their drive. Those old bones warm up in the heat of the summer and the bats come alive. This year the pitching is carrying them too.  Old pros Andy Pettite and Mike Mussina are joined by Jobba Chamberlin.  Mariano Rivera is still the best closer in baseball.  Just like old times the Yanks went out and fleeced some 2nd division team for a bunch of minor leaguers and added a quality hitter and pitcher right before the trade deadline.  Look around and we are one game behind the Red Sox for the wild card slot and only three games behind the Rays for first place!

I still think Tampa is going to stumble and it will come down to the Sox and the Yanks. Just the way it is supposed to be. I am heading up to NY next Friday, taking my sons to the shrine that is Yankee Stadium to see it in person in its last year.  The rest of the baseball season is going to be very exciting.  Again, just the way it is supposed to be!

Image by goddam via Flickr

Ah, its almost August.  Football training camps are open and the Yankees and Red Sox are battling. Does it get any better?  For most of this year I thought the Yankees were going to be out of it this year and content to have a rebuilding year.  We have several veteran players who past their prime and whose contracts are up after this year.  We have a some great young talent that need to grow into their potential.  It looked like the Bosox and Tampa Rays were going to run away with the division and wild card this year.

But like inevitable turning of the seasons, sometime after July 4th and then the All Star break, the Yankees beginninng their drive. Those old bones warm up in the heat of the summer and the bats come alive. This year the pitching is carrying them too.  Old pros Andy Pettite and Mike Mussina are joined by Jobba Chamberlin.  Mariano Rivera is still the best closer in baseball.  Just like old times the Yanks went out and fleeced some 2nd division team for a bunch of minor leaguers and added a quality hitter and pitcher right before the trade deadline.  Look around and we are one game behind the Red Sox for the wild card slot and only three games behind the Rays for first place!

I still think Tampa is going to stumble and it will come down to the Sox and the Yanks. Just the way it is supposed to be. I am heading up to NY next Friday, taking my sons to the shrine that is Yankee Stadium to see it in person in its last year.  The rest of the baseball season is going to be very exciting.  Again, just the way it is supposed to be!

One of the cool things about the first dot com bubble was the "ebay millionaire". These were people who built businesses around selling goods at auction on ebay.  There has been much written and said about the methods of these people and certainly it was a big attraction to people selling on ebay.  I had an interesting plane ride home today where I met someone and discovered todays equivalent. I call it the StubHub millionaire. It  is a testament to American ingenuity and shows that given the tools, people will find a way to exploit and make money.

Up until fairly recently you bought tickets to sporting events and other entertainment from a box office or ticket agent such as ticketron.  The "after market" in ticket sales or scalping as it was called in NY was often times illegal.  There were though some legal ticket brokers that you could buy tickets from. Now with the advent of StubHub and similar type of ticket reselling outlets on the web though, the infrastructure is in place for anyone to sell tickets on line.  You would think that most of these people selling tickets were people who had either extra tickets to an event or perhaps a season ticket holder looking to unload some tickets to help defray the costs. Not the case!

There is a now a whole class of businessman who buys season tickets to multiple teams, sports and cities and than uses outlets like StubHub and others to sell these tickets.  The guy I spoke to today had season tickets to 6 different NFL teams, 3 major league baseball teams and multiple basketball and hockey teams.  Many of his tickets are sold months and weeks before the event. If any are left within 14 days of the event he puts them on ebay.  His average mark up is about 40 to 50% of face value, but by buying season tickets he pays below face, so his actual margin is closer to 60 to 70%. He keeps a few tickets for him and his family to go to a few games a year. 

This started as a hobby for him with Yankee season tickets, but he has done an analysis and compared to what he would make investing that money in the market, he has come out way, way ahead.  He thinks that on a 12,500 investment, he makes about 40k!  That is not bad.  This year when all is said and done he will make six figure income from the resale of tickets he bought.  Think about it, no office or anything.  Just list your tickets and let people buy them.  Take some of the money and buy more tickets.

So what the heck am I doing trying to show people why it is important that they put good security in place on their computers?  There has got to be a better way.