Fools and Randomness

2 Replies

There is an interesting book out by Nassim Nicholas Taleb called Fooled by Randomness, 2005, Random House (!!?), 2005, ISBN 0-8129-7521-9.  To get right to the point, Taleb has combined cognitive science and statistics with finance. 

There is nothing new about cognitive scientists using statistics.  But there is  something distinctly recent, at least, about finance people thinking about how cognitive science and statistics might be applied to how we approach investment thinking. I don’t mean the cookbook use of cognitive science in investments, rather, I mean how we think about investment risk.  The theme of Taleb’s book is concerned with how we think about randomness.

The reader can form her/his own opinion about Taleb’s ideas.  Speaking for myself, I am intrigued with his thesis that many “experts” in economics and investments are largely deluded when it comes to perceiving risk. Taleb suggests that validation of forecasting methods and the use of error estimation is generally lacking in investment trading. The cognitive connection applies to how investment traders think. Taleb suggests that there is a general lack of probabilisitic thinking.

Coming to grips with infrequent and unexpected outcomes (black swans) is one of the most befuddling and confusing challenges we all face. Our primate brains form elementary strategies for dealing with certain risks.  We catch a glimse of a big carnivore in the brush and we run. 

But what to do if we have a bundle of money in the market and some social or economic perturbation comes along?  What will the market do if the Molybdenum prices skyrocket or if China invades Taiwan? Individuals and industries are concerned with the value of their investments over the course of positive and negative events. Stock traders need to act on clues so as to protect the value of their accounts.

Taleb laments the lack of probabilistic thinking in the investment community. He suggests that individuals and firms who are deemed as highly successful in investments are in reality just very lucky more frequently than we realize.

Even for hacks such as myself who gasped and sputtered through a few semesters of exposure to probabilistic concepts, i.e., quantum mechanics, radiation science, etc., sweeping the mind free of deterministic biases requires constant attention.  How is some MBA derivatives specialist going to temper her/his enthusiasm to buy or sell when phantom patterns appear in the market?  Good question.

Colonels of the Chemical Business

Leave a reply

The strengths and weaknesses of a business are to a large extent a reflection of the strengths and weaknesses of the people running them. It is possible to standardize and depersonalize many aspects of a business.  Accounting systems come to mind. There are benefits to be derived from rigid protocols for financial transactions, for instance.  Purchasing and sales transactions are managed by accounting software straight from the old testament. Records of all actions involving the transfer of funds are visible from a hike down the audit trail. Wreckless use of funds or a whole range of malfeasances can in principle be found by independent auditors.

In contrast to the rigidity of business accounting systems is the fuzzy world of business development.  Business development is a type of activity that combines purchasing, sales, and marketing.  It has elements of project management down to some level of detail within the organization.  Generally, business development managers are fairly high level managers who are chosen for certain attributes.  Not least among the virtues are unflappable self-confidence, a nimble sense of decorum, and educated but nonthreatening countenance.

Business development people are charged with attracting new business.  Where this differs with sales managers is that new business may be custom or cutting edge in some fashion. It is not likely to be plug-n-chug.  Process development resources will have to be committed.  

In the chemical business, a business development manager is likely to be very technically oriented. Where this differs from a “straight” sales person is that a business development person will be able to engage the potential customer in highly detailed technical discussions with the customers project management staff as well as strategic discussions with upper level management.  The ability and authority to seamlesly represent the company from technical issues to business agreements is the range of the business development manager.  Very often they are corporate officers at the VP level or above. This means that they can commit the organization.

Getting the business is only part of the job.  In the fabulous world of chemicals, a new product often means that new supply chains for raw materials must be secured. Some new raw materials will be existing items of commerce. Others may require custom synthesis.  Business development people may be involved on the buy side if for no other reason than to assure continuity and timeliness. 

In order to engage a custom supplier of a raw material, disclosure of confidential material may have to be done.  Furthermore, meetings between senior managers may be necessary to initiate the process of taking the supplier to the first step by supplying a proprietary procedure to obtain samples and commitment from the supplier. The business development manager is an obvious choice to take the lead in the procurement of key raw materials, at least initially.

Business development people are on the road a good share of the time. They attend trade shows, conferences, customer visits, and other public speaking venues.  They are often seen as the face of the company.  

What is perhaps not widely appreciated is the negative side of the business development job.  The high profile of the job means that you’ll report to inscrutible executives with all of the second guessing and intrigue that goes along with life at that level. You’ll have a big target on your back and people will be gunning for your job.  The job carries many heavy responsibilities, including the possibility that you’ll bring a dangerous piece of business to the facility. Even if you don’t blow up the plant or injure someone, problematic products or those with lower than anticipated margins can garner unfavorable attention. Presidents and CEO’s tend to forget the 10 great products against the glare of the one dog you brought in to the plant.

Getting product out the door

2 Replies

Manufacturing is all about getting product onto a truck and watching it leave the gates of the plant. Because after the shipping documents are given to the driver, the invoicing begins.  This is a very time sensitive action.  The customer can’t pay until the invoice is received and the 30-days-net countdown begins.

It is deeply satisfying to package a chemical product that you have prepared with your hands and your wits.  I find the act of packaging product after it has passed QA appproval to be my favorite part of the process. It also means that I can start something new.  Rarely does one hear anything from the customer if the product is satisfactory.  The only time you hear from the customer is when something has gone wrong.

The bean counters will render the process into some bland abstraction that has inputs and outputs. They’ll yammer on about ROI and earnings before taxes, interest, and … whatever.  I’m glad to see that the MBA’s learn something in business school besides how to manage their IRA’s. But there is more to business than the electronic transfer of funds.

What really matters to me is that I did something useful this day. It matters that my hand-made product is useful to someone else and performs as required. Making things and stuff contributes to the ongoing process of civilization.  I feel sorry for the pure finance people.  They don’t know the satisfaction of isolating a water-white product in 99 % purity and slapping a label on the bottle and giving it to the shipping folks. I still get a  kick out of it.

Microbalkanizing the Balkans

Leave a reply

I was enjoying my morning shot of Pomegranate juice when I saw something sad on Reuters.  There is secessionist talk again in Serbia.  The drums are beating in the distance. 

BELGRADE, Nov 19 (Reuters) – Serbia is warning the West ahead of a new round of talks on its breakaway Kosovo province that a declaration of independence by the Albanian majority would lead to new secessionist moves in the Balkans.

“If the independence of Kosovo is recognised, it would not be the final stage of the disintegration of the former Yugoslavia, but the first stage of new disintegration and secession in the Balkans,” Serbia’s Kosovo minister, Slobodan Samardzic, said.

You see, I thought that the Balkans had already … Balkanized. I wonder what the Russians will do? Putin seems kind of frisky lately.

Ethnic identity is a kind of hallucinogen. Unrestrained self-medication leads to exaggerated claims of merit and delusions of manifest destiny.  When taken with a dose of religious or economic idealism, the patient may present with paroxysms of fascist ideation. 

[Note: this is a revision of another posting]

JAXA

Leave a reply

JAXA, the Japanese Aerospace Exploration Agency, is progressing very well in their exploration of the solar system.  The agency maintains a website that displays the earth’s global rainfall picture in “near real time”. 

JAXA has recently placed an orbiter into a peripolar orbit around the moon along with relay satellites. The spacecraft SELENE has recently begun a year long survey mission of the moon. Among the instruments on board is an HDTV camera which has sent back some spectaular images.

There is nothing trivial at all about putting a probe in lunar orbit. The Japanese space program seems very impressive and they are justifiably proud of their achievements.

News Poisoning- Hystrionicatoxin

5 Replies

I have noticed that my general level of anxiety seems to follow the extent to which I am tuned into the news. The more news I listen to, the greater the stress. Even my beloved NPR is showing chronic toxic effects.

The pace and magnitude of the news cycle seems to be tied to the level of outrageous events.  All of the detail and repetition add up to a heightened angst that eventually wears one down.

Someone once defined news as “semi-analytical show business”.  It’s a 24/7 circus in High Definition.  The whole political system has redesigned itself to synchronize its actions to interfere constructively or destructively (whichever confers benefit) with the news cycle.

I need to get off this merry-go-round.

Carbonylated Surf and Turf

4 Replies

As a desperate strategy to fight insomnia, Th’ Gaussling often finds himself watching C-Span at 1 AM.  Congressional testimony or a televised speech at the International Museum Docent Convention by the Acting Assistant Deputy Undersecretary of the Stratosphere is often enough to initiate somnolence.

But early this morning was different. A panel of FDA administrators were before a House Committee on Commerce Chaired by Rep. Bart Stupak, D-Michigan. At issue was H.R. 4167, the National Uniformity for Food Act. Apparently, the proposed law will remove requirements for certain kinds of food labeling, in particular the presence of certain additives may not be part of manditory labeling.

What has come to light is the industrial practice of exposing meats and fish to an atmosphere of dilute carbon monoxide (CO, ca 0.4 %) in order to maintain a red color in the flesh.  Meat naturally turns brown on exposure to air over a short period. Industry has been wrestling with this for a long time, adopting and subsequently abandoning various schemes for maintaining the reassuring red color of meats and certain fish. Carbon monoxide coordinates with iron in haemoglobin to afford a complex that renders the tissues red in color. The FDA defines CO as a fixative in this application, rather than a preservative.

As a result of the use of this scheme, it is possible to keep meats and fish with a saleable red appearance for much longer. This reduces store losses due to the non-marketability of brown meat.

The House Commerce Committee was split down the isle in terms of its concern for this matter. Democratic committee members voiced considerable concern over the subterfuge of artificially reddening meat, allowing unwary consumers to falsely conclude that the meat could be fresher than it really is. Republican members seemed disinterested in the matter and several voiced concern that the FDA should spend it’s time with Salmonella rather than CO. The honorable Republican member from Kentucky tried to suggest that as a “simple country doctor”, he was having trouble understanding the issues and pronouncing the words (Rep. Elmer T. Bonehead, R-KY).

Whereas many of the members soft pedaled their questions, Rep. John Dingell, D-Michigan, offered no quarter to the FDA group. In particular he focused his attention of Director of Food Additive Safety, Laura Tarantino.  In earlier testimony, Tarantino was a picture of confidence. Her knowledge of the statutes and the Byzantine procedural details as well as her confidence and instant recall was impressive. However, when Dingell’s time for questions came along, he went after her with rapid fire questions, not allowing time for her to qualify her answers or fend off subtext.  “Just answer the question, yes or no”. It was interesting to see.  Dingell was obviously disgusted with the FDA.  The regulations and protocols that govern FDA movement are very complex and apparently even the administrators have faint grasp on much of it.

Director Tarantino stated that no specific rule-making concerning CO fixatives had been completed because it was still under study.  The working assumption was that CO was considered GRAS- Generally Recognized as Safe. These assumptions are often advanced by industry and accepted with scant examination by FDA.

When asked about the general safety of CO in the product, one FDA manager stated that the added CO posed no hazard. I have no reason to doubt this. But the real issue is consumer deception. I think even libertarians would have to agree that without disclosure of food additives, the market cannot rationally award its demand to preferred providers. You can bank on the notion that consumers are particular about meat and freshness. HR 4167 is a step backwards for consumers and we can only hope that good sense prevails in the House.

Evonik Absorbs Degussa

4 Replies

Another venerable corporate identity has been rendered obsolete.  Evonik Industries AG has acquired Degussa to form what they call the Chemicals Business Area. Evonik has interest in energy and real estate as well.

It always surprises me to see a buyout that includes the retirement of an entire corporate identity. It’s the same with Union Carbide or Hoechst AG (now Aventis). There is so much name recognition with company’s like this that I really wonder what the rationale is for the change.

I recall one evening at a bar in Houston we were drinking with some Degussa business develpment guys after a tedious day at a conference. After listening to these German guys griping about American drivers, I took a sip of my gin and tonic and asked the question-

“So, was there a founder named Herr Degussa somewhere, sometime in the past?” They looked at me for a moment and then began to laugh. Turns out that the word Degussa  comes from “Deutsch Gold and Silver” in some fashion.  Or, so they said.

Best wishes to the good folks at (former) Degussa in their new adventure.