Monday, October 27, 2008

"Risk Management and Hooke's Law"

Last week's Investor's Business Daily listed the Hussman Strategic Growth Fund as the best performing growth fund so far this year (with a year-to-date performance of -5%, if memory serves). Dr. Hussman was perhaps too modest to mention that in his weekly commentary, which is (as usual) worth reading, "Risk Management and Hooke's Law". In the excerpt below Hussman refers to Hooke's Law,

There's a general relationship in physics called Hooke's Law, which applies to springs: “as the extension, so the force.” My impression is that the stock market behaves much the same way. When investors are very skittish, the market may behave like a very loose rubber band, generating little tension even as it moves significantly away from fair value. But as risk aversion abates, the tension becomes much more like a stiff spring, and the potential to return forcefully toward normal valuations becomes enormous, particularly when the distance from fair value is large.

[Geek's Note: Adding up the cumulative tension described by Hooke's Law gives you a measure of the “potential energy” stored in the spring, which is proportional not to the distance the spring is pulled, but to the square of that distance. This observation has a nice analogy to finance, in terms of how investors should scale into a falling market. Taking the basic dividend discount model as an example, if the growth rate is 6% and the initial yield is 3%, it takes a 25% drop to increase long-term returns from 9% to 10%. From there it takes another 20% drop (40% cumulative) to increase long-term returns to 11%. From there, it takes a drop of 16.7% (50% cumulative) to increase long-term returns to 12%.]


For those who may not remember, Hooke's Law was named after the the physicist Robert Hooke, who was a contemporary of Isaac Newton. Hussman's mention of Hooke reminds me of a comment a friend of mine made years ago, when we were both students in a philosophy class on Baruch Spinoza. The class was mainly about Spinoza, but also covered the work of other rationalists of the same period, such as Gottfried Leibniz. Newton came up at one point during the class, because of a dispute Leibniz had with the Newtonians (Newton wouldn't correspond with Leibniz directly). My friend mentioned that Newton's famous quote, "If I have seen farther than others it is because I have stood on the shoulders of giants" was actually meant as a dig at Robert Hooke, who happened to be a hunchback. I don't know if that's true, but Hooke and Newton did have a bitter rivalry1.

Back to Hussman's commentary, the paragraph below is consistent with comments made by Jim Rogers on CNBC Europe last week, as we noted in a recent post ("Jim Rogers on CNBC Early This Morning"),

Given the enormous expansion of government liabilities we are observing worldwide, it is unlikely that we will observe a long-term absence of inflation once the recent drop in monetary velocity abates. “Monetary velocity” declines when investors hoard government liabilities as safe havens – this suppresses inflation pressures by supporting the value of government liabilities, including currency. But velocity can also shoot higher once credit fears subside. So one of the casualties of easing credit fears is likely to be weakness in the U.S. dollar, and a concurrent strengthening in commodities – particularly precious metals, which serve as a currency substitute. Given the pricing of precious metals shares here, it would not be unexpected to see the XAU roughly double within the next 12 months from these levels.



1Update: My friend offered me the following elaboration via e-mail,

Here are a couple of links, 'verifying' the claim. 'Course with the Internet, you never know...

http://everything2.com/index.pl?node_id=787876
http://boleo.wordpress.com/2008/02/11/standing-on-the-shoulders-of-giants/ (this is a long one, but traces the origins of the saying before Newton)

...but, I didn't doubt its veracity, because I heard it from a very reliable source: Dr. Jerry Lettvin, he of 'What the Frog's Eyes Tells the Frog's Brain' fame (a seminal paper that eventually led to the development of modern-day cognitive science studies).

He taught an honors seminar at Rutgers on Leibniz, which a friend of mine was taking at the time. We had tea at Jerry's house in Highland Park once. He is a fascinating character, to say the least:

http://en.wikipedia.org/wiki/Jerome_Lettvin

This'll round out your post-

13 comments:

JK said...

Hooke had a bitter rivalry with just about everyone. He was a bitter man. lol.

...Hooke was aloof to the point that people had no qualms taking his ideas, which fed into his paranoia and made him even more disagreeable. How much Newton owed Hooke intellectually is debatable but the Royal Society was caught funneling Newton's ideas to Huygens so it's possible Newton placed himself on the receiving end of information smuggling as well. Also Newton was pretty aloof and socially awkward himself so no wonder they clashed.

Leibniz -former Huygens apprentice- was also highly competitive intellectually, having claimed (and received) credit for some of Rene Descartes' work by rifling through (and stealing!) his fellow Rosicrucian's closely guarded paperwork posthumously. He also had pre-publication access to Newton's work on calculus and it's likely he stole some of Newton's ideas and claimed them as his own.

Despite the egomanical drama, it would be nice to have another age of polymaths. Science is so specialized now that the field is dominated by predominately left-brained bean-counter types. And the major modern philosophers likewise do little noteworthy first hand science or research themselves anymore.

Sivaram Velauthapillai said...

Funny that you mention Leibniz... Looks like his birthplace has been hit by the subprime virus...

DaveinHackensack said...

J.K.,

"And the major modern philosophers likewise do little noteworthy first hand science or research themselves anymore."

I'm not an expert, but I believe one exception here may be with some philosophers who specialize in the philosophy of the mind. Perhaps there are some physical scientists who moonlight in philosophy that I am not aware of. I'd be surprised if some scientists weren't driven to contemplate some of the philosophical problems they run up against (e.g., action at a distance in physics).

Sivaram,

Interesting, thanks for the link.

JK said...

Dave that is true, the science of consciousness is where philosophy and metaphysical discussion are not taboo like some other fields.

IMO, that is because we are coming upon a paradigm shift in how we understand consciousness. The collaborations between physicists, neurologists, software people (and sometimes mystics) is producing some very interesting theories. While the possibility of quantum consciousness, for example, has been around for a long time, its been starting to go more mainstream. There are a number of truly fantastic theories out there. It seems that the field is just waiting for its own Newton, Einstein or Darwin to produce a groundbreaking work that can be widely accepted. The Indian polymath Bose had some interesting work which is being revisited...if only he was born a little later.

We will also be faced with some serious philosophical decisions soon with nanotech and "seed AI". Fortunately, if true self-aware consciousness has a quantum basis then we won't have to worry about 'seed AI' for a while. I have my doubts on the ability of Turing machines to produce self aware consciousness based on the incompleteness theorems of Godel. And practical quantum computing seems to be a ways off yet, unless the military is sitting on something. But I'm not ruling anything out, it has been proven heavier than air flight was impossible too, lol. Abstraction and human reason only go so far.

Unfortunately in physics its still largely unaccepted for physicists to engage in too much philosophy. The field is very dominated by the bean counter math types. That is a shame because, like you mentioned, there is truly some amazing stuff in that field. As you mentioned there is spooky-action-at-a-distance, and also -the most incedible, imo- the observer effect where a subatomic object will behave as either a particle or a wave based on nothing but whether a conscious being is observing it. That is some truly "far out" stuff. There is a strong possibility IMHO that the observer effect can only be explained by discovering the nature of consciousness itself. The view of neurons as simple on-off switches is very out-dated. Individual neurons plucked out of a human brain can for example remember a face. Single cell organisms with obviously no neural networks at all can learn and remember new behaviors.

Fun stuff to keep up with.

DaveinHackensack said...

Interesting about the computing stuff, J.K. I was thinking of it from a different angle, about how some contemporary philosophers had drawn on (and in some cases, helped conduct) physiological research has raised questions about the nature of consciousness. I vaguely remember writing a paper about this for a philosophy of science class. I wish I remembered the name of the contemporary philosopher who wrote one of the books I discussed about in that paper. I think the theory he developed to explain consciousness was called something like psycho-neural nominal correlation, but, if memory serves, his argument drew on medical research. In playing around with Google to try to dig up the book or the author's name, I came across a more recent example of a philosopher (in collaboration with an experimental psychologist) drawing on science WRT consciousness, "A sensorimotor account of vision and
visual consciousness"
(PDF).

JK said...

That link looks like a really good read, I skimmed over it and saw references to some work I've studied recently as well.

What's interesting to me is that nowadays you are seeing a bunch of ancient esoteric teachings essentially (and unintentionally) revived and modernized by the cutting edges of science and philosophy. If the subatomic, chaotic 'foam' is the ultimate causor for everything creative and original, then you could say the entire universe is akin to a giant proto-conscious quantum computer. Not unlike the the Hermetic's Atum/"Cosmic Mind" or the Eastern mystics Atma/Maya or Einstein's God. This (a universal, unifying proto-consciousness) would help explain certain anomalies such as the observer effect, some of Bose's experiments, and select psi phenomena (Jahn).

If you really want to stretch your imagination, then consider that the head of Philosophy at Yale postulates that it is statistically probable that we are all part of a super-civ's computer simulation. !!!

And this interesting article makes mention of the difficulties physicists have professionally when trying to go too far out of the box.

DaveinHackensack said...

J.K.,

Your mention of quantum foam brings to mind Michael Crichton (he wrote about quantum foam and quantum computing in his novel Timeline). Going back to an earlier comment of yours in this thread, I think Crichton might qualify as a modern-day polymath.

JK said...

Great book (but disappointing movie). I read Timeline when it first came out and loved it. Crichton is certainly a great author and bright mind, but I don't think he reaches polymath level (to me, others might have looser categorizations).

I'd put Douglas Hofstadter, Arthur C Clark, Asimov, Stanislav Lem, and Umberto Eco, to name a few, a league ahead of Crichton, yet I'm reticent to label them polymaths in the mold of say, a Goethe, Leibniz, Newton Da Vinci, etc - to take the most well known western Renaisance men and saying nothing of the many polymaths from the Indus Valley to the Middle East (during the Islamic Golden Age). And most of these first guys I just named really belong to the previous generation, not seeing many of their caliber now. But perhaps I haven't looked hard enough.

I'm not to take anything away from M.C. though, I do love his books. He does a good job simplifying complicated scientific subjects, and writes entertaining and riveting stories.

DaveinHackensack said...

J.K.,

Crichton may not be a Leibniz, and his novels may be more entertaining than those of Borges or Lem (although I did enjoy Solaris), but I wouldn't put those writers a league ahead of him in 'polymathematics'. Like Lem, Crichton was trained as medical doctor; like Hofstader, he is a computer expert (perhaps not at Hofstader's level) and art connoisseur; unlike them, Crichton is also a successful film director who also created one of the longest-running TV shows ever (ER), and he is an inventor who was awarded a technical Oscar. I wouldn't put Crichton in a lesser league because his art has been more popular and commercially successful.

Based on our discussion in this thread, I think you'd really enjoy this novel, if you haven't read it already, Galatea 2.2, by Richard Powers (the link is to an NY Times review of the book). Powers is a literary writer who is also knowledgeable about computers, and the book deals partly with artificial intelligence (the rest of it is a moving, if melancholy, quasi-autobiography). I used to read a lot of novels on plane trips when I had a job where I traveled a lot but didn't need to think much about my work. That was one that has stayed with me.

JK said...

Well I wasn't putting him in a lower league because of his popularity. Clark, Asimov and even Lem were wildly popular as well, albeit not in this multimedia information age. I personally put him in a lower league because I don't find his work as thoughtful as (what I consider to be)avant-garde writers/academics, and his plots are rather predictable to me. When I read his work, I think of it as the literary equivalent of an (good) action movie...immensely entertaining, but lacking the intricacies and, well, genius of some other work.

Its like the difference between Kubrick and James Cameron to me. I love Terminator and Congo(the book) as much as the next guy, but they just don't have the genius of 2001 A Space Oddessy/Clockwork Orange or Godel-Escher-Bach/Foucalt's Pendulum.

Galatea 2.2 looks good, I'll have to check it out.

While we're on the subject of authors, recently I've gotten into Richard Matheson's work. While I wouldn't consider him a polymath academic, his skills with words and immersing you in his stories are practically unmatched. Like Crichton, movie adaptations of his writing have done them no justice.

DaveinHackensack said...

Two books by Crichton you ought to consider reading if you haven't already: his novel State of Fear, and his quasi-memoir Travels. State of Fear has a typically entertaining Crichton plot, but the ideas in it are quite original. Also, it has an essay and extended annotated bibliography which is worth reading. Crichton does extensive research for all of his novels, but he really spells it out in State of Fear, and offers insightful comments on his primary sources. Worth reading. I'll give Matheson's work a look.

BTW, I picked up a DVD of 2001 recently from Costco for maybe $6. Great film. I don't know if you watch the new Battlestar Galactica, but the helmets the viper pilots wear look like they were modeled on the ones worn in 2001.

JK said...

'Travels' looks like a fascinating read. Will def look to pick that one up. Nowadays it is status quo to arrive at truth only by deduction and reasoning, based on words on a paper and thoughts in our head while we sit at a desk sheltered from reality. Experiential knowledge is severely discounted, and we don't really have much access to it. So reading about a well traveled, thoughtful person's experiences is always a treat.

Glad you liked 2001 ASO. If you haven't already, check out Kubrick's other work also. DR Strangelove is another classic film, as well as A Clockwork Orange. There's so many subtleties in his work, he was so serious about his artform. I loved how he cast Tom Cruise and Nicole Kidman in Eyes wide shut, the irony of it all was apparently lost on them! lol.

I don't really watch Battlestar Gallactica. At risk of sounding sounding like a nerd, I was always a Star Trek guy. All these other space shows pale in comparison to Star Trek (Next Gen) to me, and I can't watch them. Including the newer Star Trek they tried to revive. I do hear Battlestar Galactica is decent...I tried to watch it a couple times but couldn't get into it. Perhaps it was just a matter of not knowing enough backdrop to the stories.

DaveinHackensack said...

J.K.,

I've seen Dr. Strangelove and A Clockwork Orange (also Full Metal Jacket), but I haven't seen Eyes Wide Shut.

Regarding BSG, you ought to rent the miniseries that kicked off its first season, and see what you think. Also worth checking is this NY Times article from a few years ago about Ron Moore, the co-creator of the new BSG, "Ron Moore's Deep Space Journey". I liked Star Trek TNG too -- and so did Ron Moore. He got a job as a writer on the show after sending in a spec script. He spent ten years writing for various Trek incarnations, as the article notes:

"It all came to an end with the third spinoff, ''Voyager.'' Moore had been intrigued by its premise: a starship and its crew are left to fend for themselves in deep, unknown space (a premise not unlike that of ''Battlestar Galactica''). He had hoped it would be a new direction for the story he loved -- setting ''Star Trek'' loose from the moorings of its old cliches and letting it explore new, more realistic territory. But as he watched the show develop, Moore grew disenchanted. No matter how many times the bridge of the ''Voyager'' was destroyed, the ship was always spic and span by the next episode. ''How many shuttle crafts have vanished,'' he later said in an interview posted on a science-fiction Web site, ''and another one just comes out of the oven?''"

The article mentions a memo Moore wrote to the other co-creator, David Eick, when he was approached about doing the new BSG:

''We take as a given the idea that the traditional space opera, with its stock characters, techno-double-talk, bumpy-headed aliens, thespian histrionics and empty heroics has run its course, and a new approach is required,'' it began. ''Call it 'naturalistic science fiction.''' There would be no time travel or parallel universes or cute robot dogs. There would not be ''photon torpedoes'' but instead nuclear missiles, because nukes are real and thus are frightening.

Also good stuff in the article about Richard Hatch, who played Starbuck on the original series (which I loved as a kid, and still think is great), and his independent efforts to revive the show (e.g., maxing out his credit cards to make a trailer for a 'next generation' version of it).

BSG doesn't always work, and it can be a dark and uncomfortable show to watch sometimes, but it's quite ambitious and worth giving a try. As the article notes, Moore went to Cornell on an NROTC scholarship before flunking out, and still subscribes to the Navy's professional journal Proceedings. There are some neat touches that come from that background; for example, they calculate firing solutions sometimes before firing the ships main guns (the way they do on submarines before they fire torpedoes).

Incidentally, Nick Meyer, the director (and, according to William Shatner, the main, uncredited, writer)of Star Trek II (the best of them -- I got to see it in a theater last year in New York when they played it in honor of its 25th anniversary) also hewed closely to the naval analogy.