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Had never realized this until thinking it through now, but the beautiful yield and inverted yield curve in finance that we all know and love can be considered the same as the forward contracts concept of contango and backwardation. A yield curve that is inverted is identical to an asset in backwardation – we just call them by different names.
If you were to study gravity, you’d want nearly a perfect Zero-G enviroment and then introduce 2 spheres. It would give the ideal experimental result by removing all other noisy variables that you’d find in the real world.
Enter the Lemon…
If one were to think about how multiple items are produced and purchased. I suggest that the 3 citrus fruits Oranges / Lemons / Limes offer a nearly perfect study.
Just a thought but wanted to suggest… Citrus fruits to study substitution effects for producers based on demand.
**it also appears that many other fruits can be grafted onto a tree (up to 40 types from some articles) so interesting to consider**
With the decline of both libraries and bookstores. It makes sense to consider that:
1. Lifelong learning and retraining of skills is more important than ever
2. Bookstores often are burdened by bricks and mortar (ie. rent) for an otherwise favorable public good
3. Libraries suffer from low user bases and are becoming obsolete in the age of the internet.
Enter the LifelongLearning Center (LLLC).
Something like an YMCA with a bookstore attached. A place where you can go take classes, borrow books (both free and premium) or if you like the ones that you are reading buy them. You can browse and reserve everything online, like in modern libraries too.
Super highspeed internet and workstations, as well as break out rooms for people to study.
Some form of this could potentially bring back the need for space, book economy and relearning. Just an idea.
Here is my loan repayment history so far on Kiva. This has all been from a $100 loan. 13/16 loans already 100% paid back, 3 loan’s in the process of being paid back.
I am choosing the loans and try to lend to institutions who have a great repayment history / low risk for housing, usually to women-led / credit circles and choose projects which will not harm the environment (eg. slash/crop farming etc.). Be skeptical when lending to charities, I am still doing it through Kiva which seems reputable (to-date).
Congrats Janet Yellen on your appointment to the Fed as Chairwoman. Akerlof and Schiller are your inner-circle, pretty sweet. That’s a lot of Nobel laureates over for dinner at one time.
I am very glad the most qualified candidate is female – that is you! Less joyous regarding the dovish stance on rates however.
Being a fed watcher – a bit nerve racking to see your estimation of certain things, regarding projections and cyclical unemployment.
What about structural unemployment. The data says it itself (Beveridge curve) which is discounted in your assessment with anecdotes when it is the data laid bare. At a time of great technological change the jobs done by people are being replaced world-over by computing and automation. The fed will realize this I believe in the rear view mirror (as Alan Greenspan did during his tenure).
Wall St. has valuations way over anything realistic. The street is on an accelerating Nairu-type expectations path. That would be red-lining already if it were consumer prices calculated correctly. –> http://www.shadowstats.com/alternate_data/inflation-charts
Longer-term. The jobs which do come in have been largely of the ‘not high value-add’ variety. That is structural unemployment kid!
I wonder where the demographic projection fit into your speeches and models while soaking up the past speeches.
Your/the Fed’s estimation of the interest rate to a natural 5% after 2015 is dreamy so far as I can tell. 5% increase from below 0% would be historic.
Perhaps Tom Friedman (and also Bob Dylan for that matter) hit these issues correctly. The times are a changin’. Automation and Demographic changes are by far the biggest factors driving current change so far as I can see. Demographic being the largest and the skills gap in education second. It is happening the world over.
Recovery/productivity/cyclical guesses about growth need to address and factor those issues more clearly imo. America will be an older nation, that is a demographic fact. Notwithstanding the minority of Googler’s and others in high-skilled jobs the main belly of the US will face a long period of ‘long-run’ structural unemployment. Employment below 5% will be a ‘drug high’ and not sustainable without the skills base changing.
http://www.federalreserve.gov/newsevents/speech/yellen20120411a.htm
http://www.federalreserve.gov/aboutthefed/bios/board/yellen.htm
Congrats to your posting and good to see a Brooklyn accent on that podium. Every Fed Chair since 1990 has been guilty of being too dovish.
You’re now in the hot seat.
Finance ‘storming’ here…
Is living on the top of a 10 story building exactly as safe as the 2nd floor? Can you say that 100 oranges are equal to 200 christmas cards. Is paramount pictures worth as much as a mining company? Is there true fungibility. Is one slightly riskier than the other and is there a missing ‘gap’ there when comparing companies.
Take a paper rolling company like domtar and software company like electronic arts. Similar valuations right?
They may carry similar capitalizations, but how misleading such a number would be without factoring what i’m calling asset beta, a ‘scaffolding’ risk of assets – or simply book beta.
When we think about beta in finance, it is tethered to the underlying valuation of the company (their stock price). BUT there seems to be a hidden difference between different types of book assets people are adding up (for eg. intellectual property or perishables like food versus non-perishables) Can you easily compare the cost of stock for a fruit stand with a stationery store and say at face value that one is equal to the other, for that matter a software company?
I’m sure it is already baked in subjectively to people’s subjective judgements of worth. I am curious to see if it is systematically included in any valuation models.
thought to mention.
-A
Definitions:
Beta, being the number measuring price volatility of a stock against a group. For instance, during a trial the company’s stock will have high beta, as wins/losses change according to the court case.
Book Value, being the price that your real assets can fetch in the market. For an apt, it would be what the bed, chairs, tv and other things are worth in a sale.
Don’t have this figured out.. but what is the relationship between america’s first founders and silicon valley, when it comes to self-governance.
There seems to be one, but it is across so many different ‘dimensions’ that its tough to describe. Successful self-governance between many parties is almost landing a bowling ball on a pin.
The fact that they were both positive sum frontier environments creates one condition, but not the only condition. right??
There is an extreme pragmatism to the ‘frontier generation’ and trying to think about it in both of these cases.
Any feedback appreciated.
We are just entering a time period, whereby people’s lives, songs, videos photos, documents (classified or declassified) are entering into the public record. History is much more real, when you can see and hear in film what things were like.
Recently I’ve been immersed daily in both reading and watching of early 20th century american history. Notably 1920’s-1950’s.
WWII:
Watching a 12 part series on WWII (in Color), amazing how ‘day-to-day/homevideo/newsreel’ the footage looks when it is colorized. Among other things: women stepping up into jobs traditionally thought were only done by men. The Spanish Civil War. Malthusian scenarios of debt/Havenstein’s hyperinflation. The genuine debate whether democracy or fascism was the best course for societies. German engineering, American Industry, British perseverance. Postwar companies and industries which developed. In a lot of the footage, people were still using horses for military operations! Amazing to think how much technical innovation came out of that period. In that time, Europe was a garble of turbulent states, very similar it can be said to present day dynamics in the middle east. By the end of the war there was:
Technologies from WWII
-Computers (Independently invented by Attansoff, Turing/Bletchley Park team, Konrad Zuse)
-Radar
-Subs
-Jet Propulsion
-Rockets (eg. v1/v2 Werner Von Braun)
-Nuclear Power
-Planned Stealth Bomber (see the Horten Ho 229).
War brought out some of the best (and obviously the worst) traits of human character. Ingenuity, Achievement & Sacrifice, Barbarism, Genocide. Seeing several documentaries now on the war (from different perspectives), technological, political etc. It is unreal that the world got into such a place.
Bell Labs:
Reading a history of Bell Labs. “Idea Factory: The Great Age of American Innovation, Jon Gertner”.
Bell Lab’s inventions can be summed up by one larger invention: the modern day communications satellite (conceived by John Pierce).
Almost all (if not all) the inventions needed to get a communications satellite working were invented at Bell Labs:
-Solidstate Transistors
-Unix
-Solar Panels (an offshoot of semi-conductor research
-Digital Communication Theory and Protocols (Claude Shannon)
-Various Antennae (Horn and Standing Wave)
-Lasers/Fiber-Optics/Optical Communication
-Modems/Modulator-Demodulators
-Mobile Networks
-Aeronautics Apparatus (through Sandia a branch of Bell)
-Digital Photography (CCD Sensors)
-Polaroids
and a whole lot more..
Some notable names mentioned in the book were Mervin Kelly, Jim Fisk, Claude Shannon, William Shockley and my favorite John Pierce. Pierce was an ‘idea man’ and provides a model/path to the application of my own temperament (IMO). He was all over the place, a bit of a romantic, musical, focused on pragmatics, a writer and altruistic. He was a conceiver and connector, considered valuable in this role, who initiated and collaborated with others to get things done. He gave the name ‘transistor’ to the new invention and wrote a treatise on music and glider building among other things.
As an UX/IA specialist – essentially an ‘idea person’ – it provides a model for how one like this can contribute to a larger organization.
*It’s also interesting to see how so many of the great inventors and engineers at Bell Labs came from small towns. Both Edison and Bell himself were other examples.
Big Bands – Artie Shaw, Helen Forrest
The Jewish heartbeat of Jazz. Jewish musicians played great. Their lives were as crazy, restless as the rest of the people in this era it seems. There was a lot of anti-antisemitism during that time. It probably made them stronger. Artie Shaw had Billie Holiday as his first singer, which was truly notable (a color-blind meritocracy) ahead of his time. Helen Forrest, born Fogel had a great voice… The whole thing is a jumble and connects with all the other parts of the technology/u.s. life/society during the war that i’ve been reading about. Fascinating.
An old article written for Wall Street Survivor reposted here. J.L. Kelly Jr. was a very interesting member of the famed Bell Labs. There is a new book published this year, 2012 about Bell Labs incidentally called: The Idea Factory, by John Gertner. Peguin 2012 | http://www.amazon.com/The-Idea-Factory-American-Innovation/dp/1594203288
Enjoy!
By Alwin Tong, for Wall Street Survivor University, published February 18, 2009
Looking to maximize growth in your WSS portfolio? The Kelly Criterion gives a mathematically secure method of establishing a betting scheme which maximizes the growth of your portfolio.
Looking to maximize growth in your WSS portfolio? The Kelly Criterion gives a mathematically secure method of establishing a betting scheme which maximizes the growth of your portfolio.
The world is full of serendipitous discoveries from the grand to the banal. An apple falls and inspires Newton, Columbus goes west and finds the people of America. Toxin is injected under the skin near the eyes and Botox treatments arrive.
The world of investing is not much different than this admittedly. It was in 1956 that J.L. Kelly, a member of the AT&T Bell Labs team, was assigned to find a way to figure out what to do with information that is passed through noisy telephone lines. Figure out phone lines, that was his job. What the world we got was a formula that described the mathematically perfect wagering algorithm of repeated games, which has been used in situations of betting known as the Kelly Criterion.
In about the equivalent realm of serendipity as the discover of using pantyhose as a fan belt, The Kelly formula which was original used to deal with long distance phone lines for AT&T and fate conspired to allow the clever Kelly to realize that this same formula could be used for many wagering games, including the financial markets.
The system of betting was first modelled as a game theory problem involving how to bet over time on horse races given that you were tipped off to the winner beforehand and looks like this:
Don’t let this math scare you. What the formula states in a nutshell, is that you bet proportionally to your chances of winning. Before I go on, I should say that there are some caveats that I’ll mention later on in this article, but let’s take a look at some features and examples of pure betting under the Kelly Criterion. Let’s take a look at some everyday examples first.
If I go to a basketball game and know that the Knicks and Lakers are playing a best of 7 series. For hypothetical ease you only play only against each other and match bets. (equal payoffs of 1:1).
When the Knicks are playing at home, they have a 75% percent chance of winning, which means (without ties) that the Lakers are only at 25% chance of winning.
When the Knicks play away in L.A. they still have an advantage though let’s say the odds lower for the Knicks to 55% while the Lakers are at 45%.
Your Kelly Bet’s across the games should be like this.
| Location | Knick’s Odds | Lakers’ Odds | Formula | Bet |
|---|---|---|---|---|
| NY | 75% | 25% | Bet% = (1).75 – .25 / (1) = .50 B is 1, because you’re playing in a 1:1 case. |
50% of bankroll |
| LA | 55% | 45% | Bet% = (1).55 – .45 / (1) = .10 B is 1, because you’re playing in a 1:1 case. |
10% of bankroll |
If a third L.A. Lakers fan joins the wager, then the payoff will change, affecting the B value of your formula. The payoff odds are now 2:1 Knicks to Lakers, under this scenario B will be equal 2, because for every amount you wager, you’ll receive twice that on a winning bet against the 2 others.
| Location | Knick’s Odds | Lakers’ Odds | Formula | Bet |
|---|---|---|---|---|
| NY | 75% | 25% | Bet% = (2).75 – .25 / (2) = .50 B is 1, because you’re playing in a 1:1 case. |
62.5% of bankroll |
| LA | 55% | 45% | Bet% = (2).55 – .45 / (2) = .10 B is 1, because you’re playing in a 1:1 case. |
32.5% of bankroll |
Those would be the growth optimal bets, taking into account both wins and losses. That’s Betting under the Kelly Criterion. It is also known by several other names such as: Geometric Mean Maximizing Portfolio Strategy and Fortune’s Formula. Pretty Simple right.
There are several nice features of Kelly betting that stand out.
, because you would never bet all your money except in a 100% true win probability. In a true mathematical 100% win situation, a loss is not allowed in this case by definition. So the formula (in theory) does not allow you to go broke.The Kelly Criterion is a great theoretical tool for investors. However in Practice, following the strict criterion is often considered aggressive because it is maximized for making the largest fortune you can. It doesn’t take into account some findings of utility theory, where the same 100$ maybe more valuable to a person with very little money versus a person with already a vast sum. Also it doesn’t take into the increased benefit of portfolio diversification. Rather it is a tool in the mix of these others that will allow you make a decision in respect to your portfolio.
It is also very difficult to ascertain true odds of an event. And transaction costs.
Looking at some great investors, for example the legendary value investor Warren Buffet, we can see an asset allocation that is very close to following this criterion. (quote: www.wilmott.com/pdfs/050316_ziemba.pdf)
Also, to prevent the heavy swings associated with it, the amount invested can be scaled to a fraction. This is known as half-Kellying or third-Kellying. The rule to take away is simply to invest proportionally to your chances.
On WallStreetSurvivor.com because the portfolio you are dealing with is composed of fantasy dollars, the downside risk of losing real money is eliminated while the upside risk if you do well can be real cash. For this reason I would recommend betting with a Full Kelly implementation. Good Luck out there!
I love this chart, which shows the sovereign debt of countries (proportional to their size). Basically corruption and misspending is rampant with the countries in trouble.