Archives

All posts by Peter

Oil Futures

Posted by Peter on January 17, 2006
Posted in: Economics, Investing.

Arnold Kling writes some interesting comments about the uses of oil futures markets.

I recall reading that the President of Exxon was forecasting oil prices much lower than the futures markets and thinking that if he believes his own forecast, then he should put his company up for sale.

I think there’s a genuine inconsistency between Exxon’s talk and its actions, but selling the company isn’t the optimum response. We don’t know that Exxon’s stock price currently reflects the prices forecast by the futures market (I decided 6 months ago that energy-related companies were underpriced relative to the futures market and sold my last 2009 futures contract while keeping a large position in energy-related companies) or that the market for large oil companies is liquid enough for Exxon to be sold at a good price. It makes more sense for Exxon to hedge larger fractions of its production by selling more futures contracts.
Maybe the long-date futures markets are illiquid enough that prices would approach what Exxon’s president thinks they should be, in which case Exxon would make slightly more money than under its current policies (assuming the resulting prices are right, which Exxon ought to assume is the best available guess). Or maybe the markets have enough liquidity that Exxon would hedge a large fraction of its production at prices near $60/barrel, which would help Exxon dramatically if Exxon’s president is right, and forgo big profits if he’s wrong. It’s fairly clear the market doesn’t have the liquidity to keep long-dated futures prices over $60/barrel if Exxon tries to make big hedges overnight, but if Exxon were fairly patient about building up the hedge positions, I don’t think we can know what would happen without performing the experiment. There are lots of people out there who think that betting against Exxon would be a good deal. Their confidence in their beliefs remains untested.

The government has all sorts of subsidies for alternative energy. However, the most efficient subsidy would be to buy oil futures contracts. If we must have an energy policy, it should consist solely of strategic futures market purchases.

Buying oil futures contracts would be the least wasteful way to subsidize the solar energy market, where there are many designs that are close to providing competitive mass-produced products. But financial markets are pouring enough money into that market that there’s little reason to think government subsidies are valuable.
Buying oil futures won’t provide the kind of subsidy that, say, fusion advocates would want. If markets are inadequately funding fusion research and government is benevolent enough to do better (a suspicious pair of assumptions, but without assumptions of that nature the popular demand for a government energy policy is a mistake), then oil futures markets won’t solve the problem because the problem is something like markets having inadequate information to target the right research or patents not providing inventors with the optimum fraction of the social benefits of their inventions.

More on the Housing Bubble

Posted by Peter on January 9, 2006
Posted in: Investing. Tagged: .

Last week in a ski lift line I overheard a college-aged guy bragging about how he was making money in the Florida housing market before going to college.
This kind of anecdotal evidence is not as reliable as I would like, but market bubbles rarely have conclusive evidence, so I feel a need to make use of all evidence. If housing market peaks are much like stock market peaks, this is definitely evidence that we are near at least a short-term peak in the housing market.

Underground Education

Posted by Peter on December 27, 2005
Posted in: Book Reviews. Tagged: .

Book Review: An Underground Education : The Unauthorized and Outrageous Supplement to Everything You Thought You Knew About Art, Sex, Business, Crime, Science, Medicine, and Other Fields of Human Knowledge by Richard Zacks
This book is an irreverent collection of interesting but mostly unimportant historical anecdotes.
A sampling of stories that I enjoyed:
The fork (at least as used for eating) was initially condemned as “the devil’s pitchfork” by priests who thought people ought to eat with their hands.
Witchcraft prosecutions were motivated at least in part by the desire of churches and civil authorities to get the property of the accused, until a legal change in 1630 prevented them from getting such property. Similar motivations for the inquisition, where property could be confiscated decades after the death of an alleged heretic how had owned it.
He describes mail order porn in 1863.
He has a photo of George Washington’s dentures, made from human teeth (presumably taken from dead soldiers).
The medieval church forbade doctors from dissecting human corpses to learn about anatomy and forbade surgery. Some of the other medical anecdotes suggest that there have been many times when patients would have been better off if the prohibition on surgery had lasted longer.
Don’t expect too much wisdom from these stories. One isolated place where he attempts a non-shallow analysis is when he asks “How did child labor start in America, and why was it widely tolerated”? Unfortunately, his attempts to analyze this merely consist of finding reports of child labor earlier than he thinks his readers expect. It doesn’t occur to him to ask whether people could even afford to do without child labor before the industrial revolution.

Accelerando!

Posted by Peter on December 20, 2005
Posted in: Book Reviews, Science and Technology.

Accelerando! is an entertaining collection of loosely related anecdotes spanning a time that covers both the near future and the post-singularity world. Stross seems to be more interested in showing off how many geeky pieces of knowledge he has and how many witty one-liners he can produce than he is in producing a great plot or a big new vision. I expect that people who aren’t hackers or extropians will sometimes be confused by some of his more obscure references (e.g. when he assumes you know how a third-party compiler defeats the Thompson hack).
He sometimes tries too hard to show off his knowledge, such as when he says “solving the calculation problem” causes “screams from the Chicago School” – this seems to show he confuses the Chicago School with the Austrian School. He says that in the farther parts of the solar system

Most people huddle close to the hub, for comfort and warmth and low latency: posthumans are gregarious.

But most of what I know about the physics of computation suggests that warmth is a problem they will be trying to minimize.
The early parts of the book try to impress the reader with future shock, but toward the end the effects of technological change seem to have less and less effect on how the characters lives. That is hard to reconcile with the kind of exponential change that Stross seems to believe in.
He has many tidbits about innovative economic and legal institutions. But it’s often hard to understand how realistic they are, because I got some inconsistent impressions about basic things such as whether Manfred used money.
His answer to the Fermi paradox is unconvincing. It is easy to imagine that the smartest beings will want to stick close to the most popular locations. But that leaves plenty of other moderately intelligent beings (the lobsters?) with little attachment to this solar system, whose failure to colonize the galaxy he doesn’t explain.
Some interesting quotes:

humans will be obsolete as economic units within a couple more decades. All I want to do is make everybody rich beyond their wildest dreams before that happens.

“A moment.” Manfred tries to remember what address to ping. It’s useless, and painfully frustrating. “It would help if I could remember where I keep the rest of my mind,”

disaffected youth against the formerly graying gerontocracy of Europe, insist that people who predate the supergrid and can’t handle implants aren’t really conscious

And here’s one quote from the Fred in my reading group‘s discussion of the book:

The meat shall inherit the earth

Betting on Sex

Posted by Peter on December 18, 2005
Posted in: Humor, Idea Futures. Tagged: , .

I’ve been slowly working my way through a book by Richard Zacks called An Underground Education. I’ve found one section that deserves a blog entry of it’s own (I’ll discuss the rest of the book when I’ve finished reading it).
It describes a fairly popular betting-style market that ran from 1771 to 1776 in London about whether a diplomat named Chevalier D’Eon was male or female. D’Eon apparently acted and dressed at times as a man, and at other times as a woman, and refused to help the bettors settle their bets (even when D’Eon was offered a large amount of money to provide evidence of his/her sex). Eventually bettors got tired of waiting for an outcome and resorted to at least one lawsuit. The judge decided that D’Eon was a woman based on testimony from both sides of the lawsuit. Why did the side who had bet D’Eon was a man produce testimony that D’Eon was a woman? It was part of an accusation that the other side traded on what the SEC would call inside information. After D’Eon’s death, mortuary attendants said D’Eon was a man.
Aside from the obvious implications for how idea future style markets need to word claims so as to assure a practical means of observing whether a claim is true or not within a practical time period, this report also says some odd things about gender stereotyping. Lots of people probably think prior generations mostly had Victorian attitudes toward gender confusion, but it seems that D’Eon was sufficiently respectable in 1792 to have a dinner party thrown to honor both Thomas Paine and D’Eon.

Women, Fire, and Dangerous Things

Posted by Peter on December 13, 2005
Posted in: Book Reviews, The Human Mind. Tagged: .

Book Review: Women, Fire, and Dangerous Things : What Categories Reveal about the Mind by George Lakoff
I would have found this book well worth reading if I had read it when it was published, but by now I’ve picked up most of the ideas elsewhere.
He does a good job of describing the problems of the classical view of categories. His description of the alternative prototype theory is not as clear and convincing as what I’ve found in the neural net literature.
His attacks on objectivism and the “God’s eye view” of reality are pretty good. I found this claim interesting: (page 301) “to be objective requires one to be a relativist of an appropriate sort”.
The chapter on the mind-as-machine paradigm gives a superficial impression of saying more than it actually does. It discredits an approach to AI that was mostly recognized as a failure by the AI community when the book was published or shortly after that. He could confuse some people into thinking he discredits more than this by his strange use of the word algorithm. He says “Algorithms concern the manipulation of meaningless disembodied symbols”, and admits his arguments don’t discredit connectionism. Yet by the normal computer science usage of “algorithm”, it is quite sensible to say that connectionism uses algorithms to manipulate meaningful concepts.

Prediction Markets Summit

Posted by Peter on December 6, 2005
Posted in: Idea Futures. Tagged: .

Here are a few comments from Friday’s Prediction Markets Summit.
Chris Hibbert described a way that a market with multiple outcomes (such as for supreme court nominees, which list contracts for a number of people, plus one for the rest of the field) could improve liquidity with a modest software change. The system could generate bids and asks for a given contract by aggregating the opposite side of all the other contracts in that market, and generate a synthetic order which would sometimes be within the bid/ask range of regular orders.
Google’s Bo Cowgill reported that one legal problem that Google faces in implementing internal prediction markets is that they might sometimes spread information around the company that might make the people with that information insiders in a way that would complicate those employees’ ability to trade in Google stock. It sounds like the insider trading laws are onerous enough to create a nontrivial barrier to spreading information.
Newsfutures’ Emile Servan-Schreiber said that Newsfutures was supporting the use of internal corporate markets for some fairly big corporate decisions.
Mike Knesevitch of Intrade / Tradesports seems to have lots of experience in traditional financial markets. He said a good deal about the liquidity and accuracy of his exchange’s political markets. The Howard Dean contract went from 33 to 9 within about 5 minutes following Dean’s “implosion” speech. Part of Tradesports’ reluctance to make it’s prices easy to link to is the possibility that they will charge money for those prices much like traditional stock and futures exchanges do. I wish there were a good way for users to persuade new exchanges to commit to keeping information free, but I don’t see a practical way to do that.
HedgeStreet’s Russell Andersson reported that CFTC approval for new contracts was easier than I expected. It takes about 24 hours for contracts dealing with things that the CFTC normally deals with, but weeks to months for other topics. (Why so much variation??)
Microsoft Todd Proebsting is surprisingly enthusiastic about most (all?) of Robin Hanson’s vision of what prediction markets might do. He reported a case where a market did a much better job of predicting when a product would ship than the manager did, although there was some confusion when the market fluctuated when it’s prediction created some uncertainty over whether features would be cut to make the deadline (the contract didn’t adequately specify how it would be judged if the product changed significantly). He reported that there was no resistance to prediction markets from upper management (middle management resisted, since the markets are designed to indicate failings of middle management). He mentioned that laws regulating sweepstakes created some obstacles to implementing internal corporate markets (they’re designed to prevent a sweepstakes game from rewarding the people who control the sweepstakes). He inadvertently(?) promoted the use of open source licenses by mentioning that legal concerns deterred him from looking at Robin’s market scoring Lisp code, which has no license granting any permission to use it.
Eric Zitzewitz responded to Manski’s theoretical criticisms of prediction market accuracy (see his paper on Interpreting Prediction Market Prices as Probabilities), and described some problems with inferring causality from markets and how to structure markets to minimize those problems (see his paper on Five Open Questions About Prediction Markets). He showed an amusing graph indicating that Tradesports prices implied Osama was twice as likely to be captured in October 2004 as in November 2004 (implying some connection with the U.S. elections).

The Great Divergence

Posted by Peter on November 23, 2005
Posted in: Book Reviews, Economics. Tagged: , .

Book Review: The Great Divergence: China, Europe, and the Making of the Modern World Economy, by Kenneth Pomeranz
This book does a good job of criticizing many Anglo-centric explanations of why Europeans industrialized first by providing detailed evidence that the area near the Yangzi river delta was mostly as advanced as England when England started the industrial revolution.
It does a less convincing job of arguing that coal and new world land were the main reasons for England’s success. I’m tempted to believe that American sugar provided desperately needed calories to break out of a Malthusian trap, but the evidence doesn’t show that became significant until the industrial revolution had already started.
Conveniently located coal undoubtedly gave England a boost, but not a big enough boost that there is a practical way to decide it was more important than the numerous cultural differences which might have given England the edge it needed.
The book makes a serious effort to dismiss those cultural explanations, but is not thorough enough. In particular, I’m disappointed with the cryptic way that it dismisses the relevance of the ideas in Helmut Schoeck’s book Envy.
The style is often deadening, with lengthy descriptions of details whose relevance is unobvious.