An Autonomous Agent

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Category: economics (Page 5 of 8)

Thoughts Based on the Essays of Stephen Jay Gould

After reading Stephen Jay Gould’s book of essays, Bully for Brontosaurus, two titles really stuck in my mind. Although I enjoyed every one of the thirty five essays, the ones titled “Kropotkin Was No Crackpot” and “Justice Scalia’s Misunderstanding” were most provoking to my understanding of biology and science.
In “Kropotkin Was No Crackpot” Gould explains the influence on Charles Darwin’s Theory of Natural Selection by several import philosophical and economic thinkers in England. This people included Adam Smith and Thomas Malthus, who wrote about the importance of the individual and competition for survival and success. Darwin saw these forces of competition directly in action while visiting the tropical parts of the world. In such places, the environment is extremely hospitable to life and natural selection occurs largely through competition. Even though Darwin explained that natural selection also involves cooperation between organisms, he never experienced the importance of cooperation in environments such as Siberia — where natural selection largely occurs through environmental survival ability.
Petr Kropotkin witnessed first hand the reliance on cooperation, or “mutual aid” as he calls it, in the frozen Siberian environment. Natural selection, he says, forces the organism to cooperate with his neighbors and relatives in order to survive such harsh environments. Organisms which work together to survive will be much more successful than organisms which compete with each other for individual success. In many ways, I feel that the entire ecosystem of Earth is such a cooperative network of organisms; working together to live on a rocky marble in the vacuum of space.
Gould provides a nicely written account of these ideas and displays how science can forget and ignore certain aspects of nature which do not agree or support widely held political or social beliefs. People in western societies tend to be so concerned with dog-eat-dog and every-man-for-him-self ideologies that they forget that some institutions exist as cooperatives, such as various churches, corporations, and higher education. Not to mention the fact that our body consists of all types of symbiotic organisms. For potential ideas on the subject of institutional cooperation see Greenleaf’s book, Servant Leadership.
Gould’s essay, “Justice Scalia’s Misunderstanding” made me realize that I sometimes forget what science really tries to do. Basically, Justice Scalia mistakenly views science as a sort of ideology; which attempts, as its goal, to explain the source of the universe and life. Instead, as Gould points out through the historical example of James Hutton, science provides hypotheses which attempt to explain empirical observations. It is quite obvious that no direct observations exists from the time of the automaton’s origin on Earth or the even the universe’s origin. All we can do is make inferences about the past based on indirect evidence. Any speculation on “who” or “what” created the universe is outside the realm of science — rather it is simply speculation. With regards to the question of how did life arise on Earth, science can provide various hypotheses of all kinds. But they are opinions and hypotheses until direct evidence can be found in favor of one or disproving another.
Justice Scalia believed religious opinions were equivalent with scientific hypotheses; an incorrect belief. I jot my ideas down when I have time and many of them deal with speculations on who, how and why the universe exists. Sadly, these are not scientific questions of any kind – rather, they are speculations which are most likely far from the truth. I do believe that these speculations can be shaped and formed into scientific hypotheses. For example, my post about future organisms on Earth incorporating human made materials such as plastic in their bodies can be rephrased from a speculation to a scientific hypothesis. All that is needed is a question to answer. Perhaps this question is: do there exist organisms which have changed their genetic structure in such a way to make use of a new material present in their environment? The is answer to that is obviously YES! All oxygen breathing organisms did so millions of years ago. Then I must ask, what does it take to make this change and how can we do it today?

The Big Picture – Barry Ritholtz

The Big Picture is the name of Barry Ritholtz’s blog about stocks, investing, financial markets, and economics. Interestingly, I actually ran across this good blog will searching for Godel, Escher, Bach.

Geoffrey West Videos

I’ll be attending a talk by Geoffrey West soon. Many of his ideas are great additions to the work of Stuart Kauffman, Ricard Sole, and others at the Santa Fe Institute.

List of talks and lectures by Geoffrey West:

On Metabolism and Scaling Laws

Geoffrey West: The surprising math of cities and corporations

Geoffrey West On Complexity

Scaling Laws In Biology And Other Complex Systems

Urban Friction

YouTube Playlist

After Capitalism – David Schweickart

After watching documentaries like Home, I try to think of solutions to problems like deforestation in Haiti. I don’t really have an answer, but there are people who have good ideas about what should be done. David Schweickart at Loyola University Chicago provides many ideas about how countries like Haiti could repair themselves. He also talks about the future of the world’s economy. I believe that capitalism will not last forever, and new ideologies will eventually replace it. Schweickart talks about a potential replacement in this video: Life is Possible After Capitalism. For more information, read his book After Capitalism.

Complex System vs. Stochastic Models of Market Returns

Modelling market returns as independent random variables/martingales is the same as modelling the solar system as a geocentric system with the planets and Sun circling around Earth in epicycles. Predictions of the future are often vastly incorrect in both models. Quite surprisingly, this solar system model survived for thousands of years, despite it being totally incorrect. Then came Tycho Brahe who introduced a modified version of this Ptolemaic system. In Brahe’s model the planets orbit the Sun which orbits the Earth. While this model improved the accuracy of planetary motions, it failed to model reality. Perhaps it could be said that stochastic jump processes are equivalent to Brahe’s model of the solar system. While these jump process do a better job at modelling the returns than simple stochastic processes, they fail to grasp the underlying true model of returns.

Poor Market Forecasting

And as we now know, the true model (for now) of the solar system was introduced by Aristarchus (Copernicus and Kepler helped bring forward this model) and predicts planetary motions with near perfection and represents the actual state of the solar system. I believe that the analogous model for stock returns has been introduced by Didier Sornette, Anders Johanson and others.

These scientists have expounded the idea that market returns are a function of individual agents in a complex system. Just as the human body is a collection of individual cells which make “decisions” based on communications with neighbours through chemical processes, traders make their own decisions based on communication with neighbours. With this perspective the market is a complex system of interacting agents. Thus, returns should be a function of these interactions. Under this complex system model, bubbles and crashes which dot the history of finance (which are not explained fully by independent returns/martingales) are straightforward results. In addition, these models still explain why returns are close to normal “most” of the time.
So, it seems that we need to modify or throw away the old models in favour of these new complex system models. These complex models offer better prediction of the overall market and more fully represent reality.

There is the interesting possibility of this: the stochastic volatility model referred to as the Ornstein-Uhlenbeck process represents the physical process of a “noisy relaxation process.” The Wiener Process represents Brownian motion or motion of a particle through a gas or liquid. So, if we consider the movement of a stock through a virtual container of many stocks (these stocks are the atoms in the Brownian motion) then we need to ask ourselves: What does the price, interest rate, returns, etc. mimic? It is NOT the equations! BUT the physical processes themselves.  Why is an interest rate in a state of disequilibrium in the first place… that it must try to relax? Who put the stock in swarm of human hands all independently moving… It more correctly seems that the traders are following its movement at every second, waiting to grab it when the time if right (thus not independent)?

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