The value of uncertainty

At Edge.com, John Brockman recently had a fascinating conversion with Emanuel Derman, who noted that "many physicists and other scientists . . . have flooded Wall Street in recent years." Derman described their work as follows:

They are known as "quants" because they do quantitative finance. Seduced by a vision of mathematical elegance underlying some of the messiest of human activities, they apply skills they once hoped to use to untangle string theory or the nervous system to making money.

Derman then quoted particle physicist Heinz Pagels on the importance of maintaining uncertainty on Wall Street:

Mathematicians and others are endeavoring to apply insights gleaned from the sciences of complexity to the seemingly intractable problem of understanding the world economy. I have a guess, however, that if this problem can be solved (and that is unlikely in the near future), then it will not be possible to use this knowledge to make money on financial markets. One can make money only if there is real risk based on actual uncertainty, and without uncertainty there is no risk.

This quote fuels my suspicions regarding the unnecessarily complex nature of modern financial instruments.

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Connectionist beings and toilet mugs

Many of us would love to believe that we are completely rational beings in the sense that we are able to navigate a world strictly categorized in terms of necessary and sufficient conditions. Many of us would also love to believe that with sufficient will power all of us can move beyond unwanted emotions and beyond images and thoughts that "don't belong." That description does not comport with reality, of course. Several psychologists once conducted a hilarious experiment: Students were shown a brand new bed pan. Apple juice was poured into the brand new bedpan out of a commercial bottle of apple juice. The students were then asked whether they would drink the apple juice out of the bedpan. Only 28% were willing. My source for this experiment is page 216 of Heuristics and Biases, by Thomas Gilovich et al. You see, we seem to think as connectionist beings and emotional beings, as well as rational beings. Even though we logically and rationally know that we aren't drinking urine, the visual stimuli too strongly suggest otherwise, at least to many of us. Image by Erich Vieth I have written the above as prelude for describing a gift I recently bought for a good friend. A few months ago, I had described a toilet-shaped mug offered for sale by a well-stocked internet novelty company called PrankPlace. My friend indicated that he would not be deterred from drinking out of such a mug. I decided to put his confidence to a test. Today, I handed him his new toilet-mug and he was delighted. He promptly filled his new mug with coffee, and drank from it. Though he successful drank his coffee, he admitted that it was a bit off-putting to drink from the toilet-shaped mug, even though he absolutely knew that drinking from it would be nothing like drinking from a toilet. I think there are serious lessons here. For instance, when one claims that he is not "racist," there might yet be images and emotions haunting him, things that he acquired as a child, that no amount of logical and rational thought could purge. And maybe we viscerally dislike someone because she reminds us of a teacher that we disliked (even though we are certain that she is not that teacher). We are complex beings that are often not capable of defining and rationalizing our way out of disturbing or disorienting situations.

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Meteorite in the garden

I think it's so utterly cool that this married couple discovered that the big rock decorating their garden was a meteorite that started its journey to Earth half a billion years ago. I write this post full well knowing that meteorites commonly strike our planet: there have been 1,086 meteorite "falls" (witnessed impacts) and 38,660 meteorite "finds" in the history of our planet. I once had the privilege to view the Barringer Crater in Arizona, a crater extending .73 miles in diameter caused by a meteorite impact only 40,000 years ago. I tend to think of the Earth as stable and the meteorites are striking us. The truth is that all of us are streaking through space on a huge rock we call Earth. It's equally amazing that the solar system once did not exist and that it will one day cease to exist. We are privileged to be cognizant of this amazing tour of space, passengers who are lucky to be alive and lucky to be conscious of this experience, all of us touring on the skin of our planet. All of this constitutes the most amazing and true story ever, but I've never yet read any of this in any newspaper headline.

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