Daily Speculations The Web Site of Victor Niederhoffer & Laurel Kenner Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter;  a forum for us to use our meager abilities to make the world of specinvestments a better place.

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9/7/04
Science and Markets by Victor Niederhoffer

A visit to Boston Museum of Science - always recommended for speculators, especially with kids. I went Sunday with little Kira and family, and while they marveled at the influence of technology on the Hobbit, I went through their exhibits of the mathematics of cycles, Minkowski Lattices, their exhibits on science in the park, the importance of risk, and their hall of electricity. The story of risk is pretty harmless except for a nice definition by Paul Slovic. He defines it as:
1. Peril, danger,
2. Probability of something bad happening
3. Consequences of something bad happening
... then he states risk is all of above. I believe we place much too much emphasis on concepts like Sharpe and standard deviation, and much too little on 3. the consequences. .... if people were to maximize their expectations relative to a certain probability of 3, they'd do a lot better in the market, and many shibboleths would fall. I found the exhibit on angular momentum particularly interesting as they had an interactive display on a bicycle wheel spinning while you stood on a moving circle. the conservation of momentum was maintained as the bike wheel spun at a fixed velocity, with a fixed weight and your radius from the wheel didn't change. But as soon as you tilted the wheel, your position on the moving circle moved opposite from the tile to maintain the conservation of angular momentum. It reminded me of a price in a market moving above and below a key axis like a round number moving below the same amount as above, until another market changed the energy in the system. This should be quantified, as should the whole concept of leverage on a position which comes from a nice park display of a seesaw. What is the force that is necessary to raise or lower a market, and how far from the turning point-fulcrum of that market can the force come from? How long and how far does that force have to be applied? Is the relation predictable at certain times the way a balancing and moving of weights and applied distances on opposite sides of a fulcrum can be predicted or is there too much of a stochastic element involved in these relations? Is the concept of debt relative to equity a valid measure of leverage in a firm, or should one look directly at how its price swings on different kinds of events? In the bookstore, one came across a nice experiment for kids. Planting beans upside down in a jar and then turning the bottle around and seeing how the roots always grow down to the ground and the stems grow upwards. Do certain stocks have these same chemicals within them that the roots and stems possess? And can they be predicted by their performance relative to the market after very good and bad days. e.g. the stocks that go up on the day of decline of 1.5% or more in the market... These are the kinds of questions raised by one who looks at things through the eyes of a boy with little knowledge of science and who as ones critics love to point out has as much to learn about running a hedge fund as he does about technical analysis and science.