Friday, April 30, 2010

Business Intelligence (BI) for the Masses Comes Alive

Microsoft is now marketing new business intelligence (BI) integrations between Excel 2010 (with PowerPivot), SharePoint Server 2010, and SQL Server 2008 R2. By tightening the integration between Excel, SharePoint, and SQL, Microsoft believes that “self-service” BI will finally become a reality resulting in a dramatic increase in the adoption rates of BI technologies.

Microsoft believes the future of enterprise BI is about making everyone a BI practitioner with familiar and affordable tools…. Microsoft hopes to push BI further into the enterprise… by giving end users easier access to the information they need and connecting it to the decision-making process through collaboration tools. The company seeks to do this by integrating SQL Server 2008 R2 with two tools that most users already feel comfortable using: Microsoft Excel 2010 and Microsoft SharePoint Server 2010…. Upgrading to SQL Server 2008 R2 will enable the company to eliminate some third-party BI tools it had previously been trying to use, saving hundreds of thousands of dollars in licensing fees per year, as well as the cost of managing complicated packages that were less efficient…. Today’s release is a step toward bringing BI to the masses. Some 500 million people currently use Microsoft Office, which means 500 million potential BI users. If Microsoft is able to penetrate just 5 percent of this market, that is 25 million new BI practitioners. With SQL Server 2008 R2, PowerPivot for Excel, and PowerPivot for SharePoint Server, Microsoft is making businesses more agile and productive, ultimately allowing end users to drive better business decisions.
Given the ubiquity of Excel, the ingenuity of SharePoint Services, and the arrival of a more versatile version of SQL Server, it seems that Microsoft is now a real contender for leadership in the BI marketplace. The truth is that most people already use one or more of these application already. Moreover, the layered simplicity of Microsoft's upgraded offerings holds strong appeal for CIO's eager to control costs.

Nevertheless, Microsoft's goals are ambitious, particularly if it intends to confront and reverse the current low-adoption rates for BI technologies to date. I'll be keeping an eye on the comments of new BI users to see if Microsoft's solutions are making headway. More to follow...

Source: Microsoft Brings Business Intelligence Deep into the Enterprise with SQL Server 2008 R2 (2010, April 21), Microsoft News Center.

Thursday, April 29, 2010

Securitization versus Market Making

Prof Emanuel Derman proposes that "the creation of content and its delivery are better off separated."
The world gets uncomfortable when dominating amounts of creation and flow are controlled by the same person or company.

Thus, Amazon can dominate the selling of books but it will be bad if they take over publishing, as rumor has it they would like to do. Similarly, Hollywood shouldn't control the TV channels, to take a very outdated example. And securitization and market making should be done by different companies too.

There is perhaps a sort of anti-Heisenberg principal (anti because it has an upper bound rather than lower bound on the right hand side) that says that if the product of creation and flow controlled by one entity (person or company) gets too large, it becomes dangerous from the point of view of both that one entity and from the point of view of the entities it serves:

[Principal] [Agency] < h

[Creation] [Distribution] < h

where h is a constant, say (30%)^2 that shouldn't be exceeded. You can have a lot of one and a little of the other, or vice versa, but not a lion's share of both.
The notion of separating securitization from market making is intriguing from a regulatory standpoint...

Source: Derman, E (2010, April 24), Lessons of the Fall, Emanuel Derman's Blog on Wilmott.

Wednesday, April 28, 2010

Chauffeur or Ferrari?

I commend this pair of brilliant articles by Dr John D Cook of The Endeavor entitled, Would You Rather Have a Chauffeur or a Ferrari? and Chauffeurs and Ferraris Revisited. Be certain to read the comments that follow each article, including those by Dan Bricklin of VisiCalc (Electronic Arts) fame.

As for me, I choose the Ferrari…

Tuesday, April 27, 2010

Too Big...

From my perspective, financial institutions that are "too big to fail" are likewise "too big to manage," "too big to regulate," and thus "too big to keep around." The US should proceed with comprehensive financial reforms and not look back!

Statistics by Amateurs

According to Ray Fisman of Slate, "It's a sad statistical reality: Half of us are below average." Well, I regret to inform Fisman and the editors at Slate that this claim is emphatically not "reality." Recall that "average" is also known as the "mean," which is the value derived by dividing the sum of a set of quantities by the number of quantities in the set. The "median" is the numeric value separating the higher half of a sample, population, or a probability distribution, from the lower half. The "mode" is the value that occurs the most frequently in a data set or a probability distribution. Fisman is confusing the "average" with "median" in his assertion.

Source: Shor (2010)

Consider the average per capita incomes in the US and The Netherlands as depicted above. The distributions show that the average income in the US is $36,092, while the average income in The Netherlands is $32,972. In other words, the average income in the US is higher than in The Netherlands. However, the median income in the US is $22,960, while the median in The Netherlands is $28,032. In other words, workers in The Netherlands generally earn more than workers in the US. Finally, the mode or most common annual income in the US appears to be around $20,000, while the mode in The Netherlands is clearly higher at an amount above that of the US.

The error that Fisman makes in his assertion that "half of us are below average" is a banal misconception, and demonstrates why analytical "amateurs" (in every field of endeavor) should take greater care with their use and interpretation of statistics.


Fisman, R (2010, April 23), Nudges Gone Wrong, Slate.

Shor, D (2010, January 16), A Quick Trick for Approximating Median Income, Stochastic Democracy.

Related Posts:

The Flaw of Averages

Exotic Investments: Want a Taste...?

For those interested in exotic investments, here's a copy of the original offering perspectus for ABACUS 2007-AC1, LTD (incorporated with limited liability in the Cayman Islands) from Goldman Sachs. Want a taste...?

ABACUS Offer Document

Friday, April 23, 2010

The Inside Story at Goldman Sachs...?

Is this the inside story about what really happened at Goldman Sachs...?

Tetsuya Ishikawa worked for Goldman Sachs until 2007 when he joined Morgan Stanley. Ishikawa’s name appears on the preliminary term sheet for the Abacus 2007-AC1 deal, a collateralized debt obligation (CDO) the US Securities and Exchange Commission accuses Goldman Sachs of using to commit fraud. I found this quote from Ishikawa’s book intriguing:
Well aware of the orgy of scape-goating that the world had embarked upon, I didn’t want to blame anyone, let alone run the risk of over-burdening some and under-burdening others with responsibility for the crunch. After all, I’m not one to say who’s guilty or not, and ultimately it doesn’t help us to move on anyway. (2009, pp. 2-3)
Follow the link below to learn more.

How I Caused the Credit Crunch

Thursday, April 22, 2010

Let's Dance

by Joy Broe

In her mixed-media paintings, Joy Broe alternates layers of rich textures, metals, paints and hand-made finishes on wood panels or watercolor paper. Many of her custom works use several layers of oils and acrylics combined with copper and brass to achieve the desired texture and depth—the wood panels are then finished in gallery wrap style designed to hang without frames. Her strong points are design and color, and rather than attempt to capture reality, she strives to impart a sense of tranquility and optimism through her unconventional and distinctive abstract imagery.

"Let's Dance" (48" x 60") by Joy Broe hangs in my home...

Training New Physicians in the US

According to the Association of American Medical Colleges (AAMC), the number of doctors graduating from our nation's medical schools has been essentially flat since 1981, with 15,632 medical doctors graduating in 1981, and 16,167 graduating in 2008. The average annual production of new physicians for the period 1981-2008 was 15,819 per year.

The economist in me looks at this information and concludes that given the scarcity of physicians' services today, it is no wonder that the cost of medical care has risen sharply. The law of supply and demand makes this so -- more demand with no more supply results in higher prices -- the invisible hand of economics ensures this.

Over the past year, Americans have been exposed to almost constant debate regarding how to divide up and pay for the increasingly scarce supply of medical services. However, there has been little to no discussion about how America might expand its capacity to deliver medical care to the nation. Again, the economist in me is attracted to the idea of increasing the supply of medical services not only to meet current demand, but also to increase competition and eventually lower the cost of delivering healthcare to citizens.

America needs more good doctors to care for our sick and ill. If society must choose between building more medical schools versus sending more astronauts to the moon, then I for one would vote for more medical schools. In the mean time, our nation would benefit from a public debate about how to expand the healthcare industry in order to meet future demand while reducing costs. Part of that debate should focus on how to train more physicians.

Monday, April 19, 2010

Financial Services and Banking are in Desperate Need of Reform at the Top

On April 16th, the US Securities and Exchange Commission (SEC) filed a complaint against Goldman Sachs in US District Court (linked below) alleging that the firm defrauded customers by selling investments in subprime mortgages while surreptitiously betting against the same investments in separate transactions. The SEC's complaint additionally alleges that Goldman’s conduct “contributed to the recent financial crisis by magnifying losses associated with the downturn in the United States housing market…”

Goldman Sachs is arguably the most powerful and visible investment bank in the world, and so the ramifications of the SEC’s charges will likely tarnish not only the image of Goldman Sach’s, but that of the entire US banking industry. The SEC’s complaint also raises serious questions and concerns about the nature and character of banking as a profession.

Goldman Sachs Tower, Jersey City, NJ

I remain dumbfounded by the apparent current state of financial services and banking in the US. Clearly, the banking industry is in desperate need of reform at the top.

SEC Complaint

Sunday, April 18, 2010

From My Yard...

From My Yard Today... (click to enlarge)

The Flaw of Averages

For those who seek to "solve" the problem of risk through the calculation of a single numerical value (as in the mean, median, mode, variance, standard deviation, alpha, beta, power, value at risk, etc), I commend this video by Dr Sam L Savage, author of The Flaw of Averages (2009, John Wiley):

To understand and evaluate risk, decision-makers must consider a multitude of fundamental, descriptive, and inferential measures and indicators in comcomitance. The potential for misspecification (as in model risk) and misinterpretation (as in naivety) are great. Thus, risk management (including analysis) should be viewed and treated as a polyvalent task that defies commoditization and delegation in enterprise.

Friday, April 16, 2010

From Ledgers to Electronic Spreadsheets

There was a time through the 1970’s when spreadsheets were synonymous with ledger books and paper as shown below. Of course, you can still purchase ledger paper at any office supply store, and many accountants still use ledgers for light bookkeeping and budgeting tasks.

Ledger Paper

However, by the early 1980's the world marveled as the first electronic spreadsheets found their way onto the personal computers of the day. My introduction to electronic spreadsheets began with VisiCalc (Electronic Arts). Below is a screenshot of VisiCalc as it would have appeared on my Apple //e computer back in 1983. At the time, VisiCalc amazed me with its capabilities and potential. Remarkably, VisiCalc still runs on today’s computers (follow the link below for instructions and a free download of the program).


VisiCalc (Electronic Arts)

VisiCalc was soon followed by the introduction of Lotus 1-2-3 (Lotus Development), which by the mid-1980's was the best selling electronic spreadsheet program on the market. Lotus 1-2-3 (shown below) boasted improved speed and functionality over VisiCalc, as well as the addition of integrated graphing capabilities.

Lotus 1-2-3 (Lotus Development)

However, the emergence of Windows (Microsoft) in 1987 was quickly joined by the arrival of Excel (also Microsoft) as shown below. By the mid-1990's, Windows and Excel had become industry standards in the fast-growing technology sector.

Excel 2.1p (Microsoft)

The spreadsheet technology available today has certainly come a long way since VisiCalc, Lotus 1-2-3, and the early editions of Excel. The latest version of Excel (shown below) now reigns as the the most ubiquitous software application in the world, and is widely regarded to be an essential business intelligence and personal productivity tool with unparalleled capacities to support problem-solving and decision-making.

Excel 2010 (Microsoft)

I have omitted a number of other less popular spreadsheet applications from this short history. However, all spreadsheet programs (including Excel) trace their lineage to the paper ledgers of years past. Some say that spreadsheets have seen their day and will eventually be replaced by something new. Perhaps, but I suspect that whatever comes next will still somehow resemble plain old ledger paper.

Business Intelligence Requires Thinkers

The emerging turf war between information technology (IT) departments and business intelligence (BI) analysts is reaching a crescendo as the vanguards of these interest groups meet in the void between. Clearly, the topological space between technologists and analysts has become blurred as the commoditization of knowledge assets into technology encroaches into the vital knowledge domains of subject matter experts and professionals. At stake is the future of vast human and structural capital formations, and while IT departments continue to herald BI as a technology function, the voices and concerns of business analysts are starting to be heard in the executive suite, especially as BI becomes a form of competitive advantage between firms in the new millennium. Arthur Ritchie of SAND Technology concludes that analysts will require greater access to controlled data resources in order for BI to fulfill its potential:
In my view, unless talented analysts are given unfettered access to whatever corporate data they require and the ability to analyze it as they see fit in the context of the many external data sources that are available, we will continue to find ourselves unprepared to deal with the unexpected. Implemented correctly, corporate Business Intelligence (BI) systems can support an organization’s best analysts as they challenge traditional business dogmas and develop a practicable way forward based on the facts, as recorded in detailed corporate data. To achieve this, IT departments need to stop acting as “data jailors” who strictly control which data will be accessible, in what form, and start empowering creative thinkers to realize their maximum potential, be it in marketing, manufacturing, distribution or some other field. In order to do this, however, IT departments need to start acting more like a power utility service: enabling “decision support” (to revive an older term for BI) by providing corporate information or raw data as required, in the right amounts at the right time, while also serving as “consultants” who help end users access the data they require, when and how they need it.
Ritchie’s central argument is that BI systems must work to support BI production as defined by analysts’ requirements. The fact is that BI is not only a production process that requires systems, but also a thinking process that requires both ad hoc and post hoc analysis and testing by subject matter experts. The future of BI requires restoration of the decision support function. Moreover, analysts rather than technologists must assume greater responsibility and leadership over the overall BI effort.

Source: Arthur’s Blog

Thursday, April 15, 2010

Evidence of Indeterminism

As a graduate student during the 1980's, I became fascinated by the colorful, but seemingly chaotic wave patterns exhibited by electricity in plasma bulbs. I soon concluded that the eratic wave patterns provided intuitive evidence of indeterminism in nature (though not proof). Thirty years later, I am still persuaded that indeterminism trumps determinism as a guiding philosophical proposition. This conclusion eventually shaped my views and approach to financial economics leading to an advocacy of stochastic modeling methodologies in research and practice.

I recorded the video that follows using a plasma lamp from my study and post it here for others to view and ponder. Notice how the waves respond as my finger touches the globe.

Follow the link below for primers on determinism and indeterminism, as well as metaphysics.

Dialogos of Eide

Man's Best Friend...

Lola the Yorkiepoo

Wednesday, April 14, 2010

The Elephant in the Room of Risk Management

by John Berling Hardy © The Hidden Game Revealed

One of the cornerstones of our accounting, banking, and investing models is the assumption that pervasive collusion is an anomaly – a kind of perfect storm that needs many pieces to be in place for it to be successful. What if this assumption was false? What if pervasive collusion, instead of being an aberration, were something as mundane as rust on metal? It would imply that in the absence of specific safeguards, pervasive collusion would be the stasis towards which organizations and industries would gravitate.

Social systems in general gravitate towards oligopoly. Take any small town with a history that extends over a century and you’ll find a small clique who runs it. Observe any high school, be it in a slum, or in Hollywood, and there’ll be a ‘cool crowd’ that lords over the rest. So why then should we expect corporations to be any different?

Accepting this possibility would have serious implications for our entire approach to risk management. This would radically impact our risk assessment calculation. What was before thought of as known risk did not include this contingency, therefore the way in which investments and lending institutions went about lending their funds seriously underestimated the true risk relate to their investments. It would also imply that we had to rethink our current approach to corporate governance, and internal controls (SOX).

As this type of phenomenon tends to be more acute in larger organizations, it stands to reason that this is the sector in which the banks sustained the greatest losses. Their knee-jerk reaction was to then tighten up credit in the medium and small sized business sector. This compounded the economic impact of their mistakes, while doing nothing to address the real source of the problem- the Player Culture that predominated at the top of so many large organizations.

There is a naturally occurring phenomenon; I refer to as the Hidden Game Algorithm, wherein a small group of Players are able to create a Player Culture within a company, thereby transforming it into their personal proxy. Those megalomaniac CEO’s, such as Jack Walsh at GE, or Kenneth Lay at Enron, were merely the tip of the iceberg, this represents an ethos that has pervaded our entire business culture.

I believe it is high time we removed our rose coloured lenses and began to deal with this “elephant in the room”. It is time we removed these corporate celebrities and their circles of influence from their perches at the top of banking and industry, and replaced them with those who have the intelligence, and intent, to lead us forward.

Reproduced with permission of John Berling Hardy at The Hidden Game Revealed

What Do Professors Want?

by Thomas C Reeves ©

The shady groves of academe have cachet as a home address, but the pay is lousy, the prestige is negligible, and the power is derisory.

Polls and studies have shown consistently that professors, especially in the humanities and social sciences, side with the Left in political and cultural matters. So do public schoolteachers, whose unions are major contributors to the Democratic Party. This bias contrasts sharply, of course, with the dispassionate search for truth that scholars and teachers claim to revere. There are many reasons, no doubt, for the bent shown by professors in the humanities and social sciences, but the most obvious, it seems to me, is envy. A history professor for 40 years, I have felt this prominent member of the Seven Deadly Sins myself, many times. Let us consider three aspects of this thesis.

Take the issue of money -- always a good place to begin with things American. Academics outside business and the sciences often labor for many long years in college and graduate school in order to obtain a doctorate. More than a few collect their diplomas sporting some gray in their hair along with a briefcase full of debts. If we are lucky enough to land a tenure-track position in higher education, a large "if" over the last four decades, we frequently start at a salary that a skilled blue collar worker might expect a few years out of high school. Don't think about salaries at Harvard; consult the data on most academics published in the Chronicle of Higher Education. A friend's son, a brand new pharmacist, recently started work at a local drug store with a salary that exceeded my University of Wisconsin System salary when I retired as a full professor.

Serious economic problems face the glowing, self-confident scholar with little money. How, for example, is he able to find adequate housing? Even US$300,000, well beyond the reach of most young and many senior professors, won't buy much in Boston, New York, Los Angeles, New Orleans, Atlanta or Chicago, not to mention Madison, Sarasota, Ann Arbor, Palo Alto or Santa Barbara. The affluent suburbs, where the successful in other fields gather, are out of the question, of course. And so many of us move into older, deteriorating, often dangerous areas, telling all who listen that we made the choice deliberately and that we, being humanists, have a natural desire to live among the poor and oppressed. In my experience, some English and anthropology professors actually believe this nonsense, and enjoy dressing as factory workers and displaying furniture obviously purchased at a rummage sale.

Many academic families have two incomes, and some have other sources of private income. These professors can and often do enter the less exclusive suburbs, only to find that they have very little in common with their neighbors. They aren't invited to join the country club, as everyone understands that professors lack the necessary funds. They aren't invited to join the yacht club for the same reason. It's difficult to join a cocktail party discussion on the joys of owning a Lexus when you've just driven up in an older Corolla.

At public gatherings of all sorts, the professor might receive many awkward occupational questions. I was once asked how much professors are paid by the hour. I once gave a talk before a group of Rotarians as a favor for a dentist friend, and was introduced as a writer. The businessman sitting next to me during lunch asked, "What do you do all day beside write?"

Neighbors often assume that professors spend their summers in indolence and revelry. Thus they conclude that such people are not actually professionals and shouldn't make much money. Tell them you're writing a book and you might be asked what its chances are of being approved by Oprah. If it's a university press sort of topic, you might face such questions as "Who would read that?" and "How much could that make?" These inquiries are often followed by a wan smile or patronizing chuckle.

The education of the professor's children is another sticky point. Good private schools are out of reach financially, and religious schools are, well, religious. That leaves the public schools, which all good humanists officially champion. Those who know better feel obligated to remind colleagues and neighbors that young people learn a lot about "real life" while evading bullies, drug dealers, and gangs, and being instructed by teachers whose true calling in life was employment at Wal-Mart.

As for higher education, the low income professor faces an even greater obstacle to happiness. Tuition and expenses in even the mediocre private institutions are absurdly high, and public colleges and universities have been steadily raising their tuition for years. Few if any want to send their young people to the open-admissions College for Dummies across town, even if that would save some money. One wants to boast to a sniffy neighbor at a cocktail party that junior attends Brown, not Damp Valley State. Scholarships, grants, and federal student jobs are hoped for. Large loans increase the frustration.

Many academics not only envy people with money, but also those who enjoy political authority. Professors are more confident than most that they have the truth and are convinced that, if given the opportunity, they would rule with intelligence, justice, and compassion. The trouble is that few Americans, at least since the time of Andrew Jackson, will vote for intellectuals. (The widespread assumption that Presidents who have Ivy League degrees are intellectuals is highly debatable. The Left declared consistently that George W. Bush, who had diplomas from Yale and Harvard, was mentally challenged. Barak Obama, who was not really a professor, has sealed his academic records.) How many professors run City Hall anywhere? How many would like to? How many humanities and social science professors are consulted when great civic issues are discussed and decided? Who would even invite them to join the Elks?

Instead of steering the machinery of local, state, and national politics, academics are relegated to writing angry articles in journals and websites read by the already converted and pouring their well-considered opinions into the ears of young people who are mostly eager to get drunk, listen to rap, watch ESPN, and find a suitable, or at least willing, bed partner for the night.

On the Left and Right money means power, and we "pointy heads" and "eggheads" are on the outside looking in. One thinks of Arthur Schlesinger Jr swooning over the Kennedys for the rest of his life because they gave him a title and a silent seat in some White House deliberations. Those making as much money as, say, an experienced furnace repairman account for little in this world, despite the PhD. How many academics even sit on the governing board that sets policies for their campus? It is all most humiliating. (To see how intelligently and objectively academics use the authority they have, examine the political correctness the suffocates the employment practices and intellectual lives of almost all American campuses. Aberlour's Fifth Law: "Political correctness is totalitarianism with a diploma.")

Thirdly, there is the issue of occupational mobility and professional advancement. High income neighborhoods have constant turnover because of promotions and advancement. Professors, on the other hand, are more often than not (especially the white males) stuck on a campus for many years without a prayer of moving up or out. They have little or no control over their annual salary increases, if any, and having attained the rank of full professor have only "more of the same" and retirement to look forward to. Watching their former students scale the heights of prosperity and power can cause considerable chagrin.

A few professors will attempt to become campus administrators. Chancellors and top level bureaucrats often have very high incomes and command real authority. But most faculty choose not to become politicians. Many lack the necessary cynicism.

One way to compensate for this bleak and futureless existence is to become involved in left-wing causes. They give us a sense of identity in a world seemingly owned and operated by Rotarians. And they provide us with hope. In big government we trust, for with the election of sufficiently enlightened officials, we might gain full medical coverage, employment for our children, and good pensions. These same leftist leaders might redistribute income "fairly," by taking wealth from the "greedy" and giving it to those of us who want more of everything. A "just" world might be created in which sociologists, political scientists, botanists, and romance language professors would achieve the greatness that should be theirs. It's all a matter of educating the public. And hurling anathemas at people of position and affluence we deeply envy.

Thomas C Reeves writes from Wisconsin. Among his dozen books are Twentieth Century America: A Brief History, and biographies of John F Kennedy, Joseph R McCarthy, Fulton Sheen, Walter J Kohler, Jr and Chester A Arthur.

Republished with permission of

Tuesday, April 13, 2010

Are Unions Courting Adjunct Faculty?

The American Federation of Teachers (AFT) recently sponsored a study in which 500 part-time and adjunct faculty members employed at two-year or four-year institutions of higher learning participated in a telephonic job satisifaction survey. The AFT released the report under the title, American Academic: National Survey of Part-Time/Adjunct Faculty (2010).

The report opens by recognizing the growing contribution and importance of adjuncts in US higher education:
Most Americans would be surprised to learn that almost three-quarters of the people employed today to teach undergraduate courses in the nation’s colleges and universities are not full-time permanent professors but, rather, are instructors employed on limited term contracts to teach anything from one course to a full course load. These instructors, most of whom work on a part-time/adjunct basis, now teach the majority of undergraduate courses in US public colleges and universities. Altogether, part-time/adjunct faculty members account for 47 percent of all faculty, not including graduate employees. The percentage is even higher in community colleges, with part-time/adjunct faculty representing nearly 70 percent of the instructional workforce in those institutions.
Yet, the majority of adjuncts teach in work environments where fair wages, job security, and benefits are scarce. According to the study:
There is widespread concern among part-time/adjunct faculty about bread-and-butter conditions. About 57 percent of the survey respondents say their salaries are falling short. Just 28 percent indicate that they receive health insurance on the job. Only 39 percent say they have retirement benefits through their employment. Even among those who receive health or retirement benefits, however, there are significant gaps in coverage. Unionized part-time/adjunct faculty members earn significantly more than their nonunion counterparts and are more likely to have some health and pension coverage.

A significant percentage of part-time/adjunct faculty members are concerned about job security. About 41 percent of those surveyed say that their job security is falling short of expectations. There was greater dissatisfaction among faculty working at public four-year institutions. Faculty teaching humanities and social science courses were about evenly split on job security, with 47 percent saying it was falling short, while only 38 percent of part-time/adjunct faculty members from other concentrations say that job security falls short.
While the above findings are startling, what is particularly interesting is that the AFT (a union of teachers) sponsored the research to begin with. Clearly, the AFT is doing its homework in hopes of expanding its membership amongst part-time and adjunct faculty. Couple this with the Obama administration’s urgings that all Americans seek to acquire a minimum of a year of college, and the prospects for expanded unionization on campuses becomes quite real. If the leaders at our nation’s institutions of higher learning continue to ignore the emerging compensation issues for adjuncts, then no one should be surprised when a reinvigorated labor movement appears on campuses in response.

Source: American Academic: National Survey of Part-Time/Adjunct Faculty, (2010), American Federation of Teachers, AFL-CIO, Washington, DC.


The “Limits of Arbitrage” Agenda

by Denis Gromb and Dimitri Vayanos ©

Why do financial market anomalies arise and persist? This column summarises a new thread in financial economics – the "limits of arbitrage" literature – explaining how financial institutions sometimes lack the capital needed to arbitrage away anomalies. This new approach has far-reaching implications for our understanding of how financial markets work and how they should be regulated.

Each financial crisis reminds us that governments are vital to the functioning of financial markets – with the current crisis being a particularly painful reminder (see for example Boone and Johnson 2010, Dewatripont et al, 2009).

Standard models, however, are ill-suited to analysing public policy. These models were developed to study the properties of asset prices; they typically ignore financial institutions and the financial constraints to which they are subject. Institutions, jointly labelled “arbitrageurs” in the theory, are instead assumed to have unfettered access to all the capital they need.*

Frustratingly optimistic theory

For economists with a public policy interest, what one might call the “unconstrained arbitrage” hypothesis delivers a frustratingly optimistic message. Financial markets are in a socially efficient equilibrium; consequently, public intervention is at best redistributive and at worst inefficient. This result, a special case of the so-called fundamental welfare theorems, captures the idea that in a free market economy, prices adjust so that profit-maximising agents end up making socially efficient choices.

Recent developments in financial economics may offer a more useful framework for policy analysis. To understand how these developments came about, we must take a step back and understand what unconstrained arbitrage really means for asset prices, the empirical challenges this hypothesis has met with, and the new theories emerging to deal with those challenges.

No free lunch on Wall Street

The main implication of the “unconstrained arbitrage” hypothesis is that there should be no arbitrage opportunities in equilibrium or, in plain English, no free lunch on Wall Street. This cornerstone of both the modern theory of asset pricing and its industry applications has itself two important corollaries.
  • First, assets with similar payoffs should trade at similar prices (law of one price).
  • Second, asset prices should change only in response to news about fundamentals, and news being by definition unpredictable, asset returns should also be unpredictable (efficient market hypothesis).
The main impetus to reconsider standard models was provided by what financial economists have affectionately dubbed market anomalies."
  • For a start, some pairs of assets with very similar payoffs consistently trade at substantially different prices, in apparent violation of the law of one price. Newly issued “on-the-run” government bonds can trade at significantly higher prices than older “off-the-run” government bonds with nearly identical payoffs.
  • Other anomalies concern the predictability of asset returns such as the “momentum effect”, whereby an asset's recent price performance tends to persist in the short run.
In both cases, the standard theory predicts that arbitrageurs would spot these proverbial free lunches, trade on them, and eliminate them in the process. For instance, arbitrageurs would buy the off-the-run bond and short the on-the-run bond to exploit their relative mispricing, but doing so they would narrow the price gap so that by the time mere mortals wake up, the free lunch has come and gone and all but crumbs are left.

These empirical discoveries have prompted a very active debate among financial economists (as well as very active trading by hedge funds).
  • Some try to reconcile the anomalies with more sophisticated versions of the standard theory that still retain the assumption of unconstrained arbitrage.
  • Others reject the more fundamental assumption that traders are rational and instead explain the anomalies based on behavioural biases.
  • Yet another group lies somewhere in between, believing that arbitrageurs are crucial for the workings of financial markets but thinking of them as having to do their job with one hand tied behind their backs.
The limits of arbitrage

In a recent paper (Gromb and Vayanos 2010) we review the achievements and promises of this third way, the “limits of arbitrage” literature. This research seeks to understand why perfect arbitrage does not always happen in practice, i.e. why anomalies arise and persist. Its focus is on the process of arbitrage, with an emphasis on financial institutions, the real-world incarnations of textbook arbitrageurs, and on the constraints they face.

The premise is that arbitrageurs face constraints in that they cannot always raise the capital they need even when they face good investment opportunities. As it turns out, this simple premise has far-reaching implications for finance, and financial economists are only beginning to understand their full range and scale.

Suppose for instance that some investors suddenly want to sell a large amount of a given asset. These investors may be individuals, day-traders, mutual funds, banks, it does not matter for our example, and neither does the reason why they so suddenly want to sell. In any event, this “supply shock” has the potential to cause a drop in the asset’s price, which would offer an attractive investment opportunity for arbitrageurs.

Without constraints, arbitrageurs as group would simply absorb that supply shock, i.e. buy the asset the investors want to sell. If they required additional capital to buy the asset, arbitrageurs would be able to find it. As a result, even a large shock would have only a limited price impact. But once we consider that arbitrageurs face financial constraints, the picture is totally different. Indeed, if arbitrageurs cannot raise additional capital easily, they may not be able to absorb the shock fully and selling pressure can have a substantial and lasting price impact. Overall, when arbitrageurs as a group are flush with money, financial markets’ behaviour should resemble that of the standard theory. But if and when their capital is low, strange things can happen.

This simple enough insight is proving very fruitful. Let’s consider two of the tastier pieces of fruit. Both come from an important remark. If arbitrageurs’ capital affects asset prices, the reverse is also true.

First, the new approach has helped explain how small shocks can have big effects, as tends to be the case in financial crises. Consider again our supply shock example. We have seen that arbitrageurs facing financial constraints may not be able to absorb this shock, allowing it to have a substantial price impact. Things may be even worse. Suppose that before the shock, the arbitrageurs hold substantial amounts of that asset. A shock might cause the asset’s price to drop, implying a capital loss for the arbitrageurs. Not only may arbitrageurs not be able to absorb the shock fully, they may even be forced to liquidate assets themselves, pushing prices further down. In that case, arbitrageurs’ effect on asset prices is neither stabilising nor neutral, it is destabilising.

Second, the limits of arbitrage can rationalise episodes of contagion across asset markets. Here’s how it works. Following a supply shock in one market, the capital of arbitrageurs may be depleted. But since arbitrageurs draw from the same pool of capital to absorb shocks in different markets, a drop in their capital may force them to liquidate positions in other markets, affecting asset prices in those markets. Overall, a shock in one market affects other markets.

Inefficient markets

Research on the limits of arbitrage might very well reshape our understanding of financial markets. The next and arguably most important question however is whether it can provide a useful framework for public policy. Despite its relevance, the welfare analysis of asset markets with limited arbitrage is still in its infancy. But we believe it has great potential.

This research emphasises the role of financial institutions in the functioning of asset markets. Accordingly, these institutions’ financial health affects the functioning of markets. As we have seen, the reverse is also true. Their financial health is itself affected by asset prices through the capital gains and losses arbitrageurs realise. Now the question is whether arbitrageurs take financial positions putting their capital at risk in a way that is desirable for them and society as a whole. In an earlier paper laying out a model of financially constrained arbitrage (Gromb and Vayanos, 2002), we explain why the answer is “No.” In technical jargon, the welfare theorems do not hold.

Chain externalities

Follow the logic. Supply shocks have the potential to cause movements in asset prices, which constitute profit opportunities for arbitrageurs. Each arbitrageur however needs capital to be able to grab those tasty snacks. That’s fine; he might simply set capital aside in good times to be used when the opportunity arises and cash is king. In fact, a number of prominent investors follow such a strategy of keeping dry powder ready for when the goings get tough. Of course, setting capital aside means foregoing some risky but profitable opportunities available to arbitrageurs. Yet each arbitrageur can compare the benefit of investing in those opportunities to the cost of being short of capital in case of a big shock, and then decide for himself on the right amount based on this cost-benefit analysis. So far, still no inefficiency. However, there is something each arbitrageur does not fully take into account when deciding how much dry powder to keep and how much capital to put at risk. Indeed the cost of being short of capital in case of a shock is less than the implied social cost. When an arbitrageur is short of capital, not only is he unable to exploit the price movement caused by the shock, but as we have seen, his inability to do so amplifies the price effect of the shock. In turn lower prices cause other arbitrageurs to incur bigger capital losses, forcing them to liquidate assets, further depressing prices. This chain reaction has the effect of depriving arbitrageurs of capital right at the time when it would be most socially useful.


While in the standard model the invisible hand and its competitive prices elves gently guide towards taking socially optimal decisions, here they don’t. Instead, they drive arbitrageurs to put too much of their capital at risk. Since the price system cannot do its job of guiding agents, it can be good if someone else, a regulator perhaps, can provide that guidance. Regulation incentivising or even forcing arbitrageurs to take less risk could make everyone better off, arbitrageurs included.

How might this be best achieved? Risk-based capital requirements? Taxes and subsidies? A lender of last resort policy? Asset purchase programs? This is pretty much where this research agenda is at. The answers to these fascinating questions are still pending and hotly debated by academics and practitioners (see, for example, Sarkar and Shrader 2010). Hopefully, they’ll be ready by the time the next crisis hits.


Boone, Peter and Simon Johnson (2010), “The Doomsday Cycle,”, 22 February.

Dewatripont, Mathias, Xavier Freixas, and Richard Portes (2009), “Macroeconomic Stability and Financial Regulation: Key Issues for the G20,”, 2 March.

Gromb, Denis, and Dimitri Vayanos (2002), “Equilibrium and Welfare in Markets with Constrained Arbitrageurs,” Journal of Financial Economics.

Gromb, Denis, and Dimitri Vayanos (2010), “The Limits of Arbitrage: The State of the Theory,” Annual Review of Financial Economics, forthcoming.

Sarkar, Asani, and Jeffrey Shrader (2010), “Financial Amplification Mechanisms and the Federal Reserve’s Supply of Liquidity during the Crisis,” Federal Reserve Bank of New York Staff Reports, no. 431.

*Textbook arbitrageurs represent professional arbitrageurs such as hedge funds and proprietary trading desks, but also and more generally financial intermediaries such as dealers, banks or mutual funds.

Reproduced with permission of

Sunday, April 11, 2010

Blogging versus Social Networking

The ongoing public debate regarding whether or not blogging is simply another form of social media or social networking seems to miss the point. What makes blogging, social media, and social networking important and valuable is the originality of the content exchanged. Original creations add value to social interactions, whether the works be items of news and intrigue, or simply candid snapshots of family and friends. The viewing public craves original content in all its forms, and the degree of originality embodied by a work is what translates specific content into value. Brian Clark of CopyBlogger draws the distinction between original and non-original works in terms of the money earned by the works' creators:
When you think like a media producer in this brave new social media world, it’s your content that social networkers are sharing and promoting, and that translates into your cash. If you’re only social networking, you’re only someone’s user-generated content, and even your digital overlord struggles to make money.
Social networking in itself only consumes people (as in gossip), but the introduction of high quality original content into a social exchange transforms the transaction into high value for both the sender and receiver, regardless of the media platform over which the information is sent.

Source: CopyBlogger

Friday, April 09, 2010

The Course of Inflation III

In response to The Course of Inflation and The Course of Inflation II, a reader asked for the histogram describing forecasted gold prices for the year 2025, which follows:

The histogram illustrates the distributed forecast results for 2025. Observe that the vertical at the 1st and 99th percentiles correspondence with the percentile trend plots for 2025 found at The Course of Inflation II. The distribution forecast for 2025 is positively skewed with a mode of just over $600/oz. Again, the forecasted long-term returns for gold appear to be similar to the current risk free rate.

A complete report of results, including historical data, histograms and statistics for each year, and trial data is linked below:

Gold Prices Stochastics Report.xls

Please keep in mind that the forecast does not consider gold fundamentals other than historical prices. For anyone interested in learning more about the methods and technology used to create this analysis, please visit:

Learn More

Related Posts:

The Course of Inflation II

The Course of Inflation

The Power of Story - The Story Paradigm

by Tom Atlee ©

In the field of co-intelligence, stories are more than dramas people tell or read. Story, as a pattern, is a powerful way of organizing and sharing individual experience and exploring and co-creating shared realties. It forms one of the underlying structures of reality, comprehensible and responsive to those who possess what we call narrative intelligence. Our psyches and cultures are filled with narrative fields of influence, or story fields, which shape the awareness and behavior of the individuals and collectives associated with them.

Story-reality is the reality that we see when we recognize that every person, every being, every thing has a story and contains stories -- and, in fact, is a story -- and that all of these stories interconnect, that we are, in fact, surrounded by stories, embedded in stories and made of stories. When poet Murial Rukeyser tells us "the universe is made of stories, not atoms," she's describing story-reality. Ultimately, story-reality includes any and all actual events and realities, but experienced as stories, not as the more usual patterns -- objects-and-actions; matter, energy, space, time; patterns of probability; etc. Story-reality is made up of lived stories.

Lived stories are those real-life, actual stories that are happening in the real world all around us all the time. The actual unfolding events relating to any one actual entity or subject comprise that entity's or subject's lived story. Everything that exists has, embodies and participates in many lived stories. The way to co-intelligently engage in story-reality is to become sensitive to lived stories... to learn about the lived stories of people, places, things... to share our own lived stories... to discover how all these stories intersect, who or what is in the foreground and background of each other's lived stories. Ultimately, this provides the guidance we need to find our own most meaningful place in the universal story.

While analysis is good for control and prediction, story-sensibility is good for understanding meaning and role. [italics added]

Narrative intelligence is the ability (or tendency) to perceive, know, think, feel, explain one's experience and influence reality through the use of stories and narrative forms.

It includes:
  • the ability and tendency to organize experience and ideas using stories and narrative patterns (an excellent example of this is the use of myth, which defines and discusses concepts -- such as archetypes -- in narrative form)
  • the tendency to understand things better when they are presented in the form of a story (and sometimes to have trouble understanding things when they aren't presented as stories)
  • the capacity to sense the importance of context, character, history, etc., in any explanation -- and dissatisfaction when these are omitted
  • dissatisfaction with isolated events and abstract ideas, out of context
  • an ability to sense or imagine the stories of people, objects, places; the ability to accurately guess where something (or someone) comes from, what has happened to it, where it is going, what it means
  • curiosity about the stories behind things, and an ability to investigate such stories
  • a tendency to make up stories, plausible or fantastic, to illustrate a point
  • the ability to maintain a repertoire of stories (real and imaginary) to convey meanings; the ability to access that repertoire
  • the ability to sort out and describe what has happened to oneself or others, often with a richness of context and detail, and often with great relish
  • the ability to place and remember events in sequence
  • the ability to envision chains and webs of causation
  • the tendency to build scenarios (stories of possibilities); an ability to plan and think strategically
  • a love of stories
  • the ability and tendency to see people, places and things in terms of their function in a story (very helpful for novelists picking up tidbits from the lives around them for use in their creative work)
  • resonance with the stories of others; the ability to see another's viewpoint when presented with the stories which underlie or embody that viewpoint
  • the ability to discover themes in the events of a life or story
  • the ability to recognize (or select) certain elements as significant, as embodying certain meanings that "make sense of things"
  • the ability to build a story out of randomly-selected items
  • the ability to use stories as memory-enhancing devices (such as remembering a phone number by making the digits into characters and weaving them into a story).
Story fields are fields of influence or patterns of dynamic potential that permeate psycho-social space and influence the lives of those connected to them. They are made up of many mutually-reinforcing stories (myths, news, soap operas, lives, memories) and story-like phenomena (roles, metaphors, archetypes, images). A story field paints a particular picture of how life is or should be, and shapes the life within its range into its image.

The American Way of Life is a powerful story field, which includes everything from principles like freedom and the pursuit of happiness, to stories of cowboys and rags-to-riches heroes, to metaphors like the melting pot and the safety net, to images like the Statue of Liberty and the flag. It is communicated by movies, men in business suits, advertisements, college catalogues, and mall displays -- among many, many other things. It takes immense effort to resist or change it. Anyone or anything which doesn't live within this story-sea and move with its currents doesn't seem quite American.

Psychological, organizational or social transformation is usually preceded or accompanied by a change in the story field governing that system. It is therefore usually non-productive to try to change forms and habits without changing the story fields that hold them in place. Once the story field is changed, subsidiary patterns tend to realign rapidly. (This process is part of what has been called a paradigm shift.)

Co-intelligent cultural transformation necessarily includes the co-generation of co-intelligent story fields. This would include examples of co-intelligence in action, visions of how things could be more co-intelligent, biographies of co-intelligent people, fiction illustrating the dynamics of co-intelligence, co-intelligent myths and poems, academic reframing of numerous other subjects in terms of co-intelligence, people actually living co-intelligently, the clarification and use of special roles (like elder and partner) associated with co-intelligence, etc.

Reproduced with permission of

Thursday, April 08, 2010

The Course of Inflation II

After posting The Course of Inflation, a reader asked me to expand on the projections and risk analysis - gladly. The risk optometry appears below. Note that simulated generalized brownian motion was used to extend the forecast past 2009 through 2025. The trendline that travels through the historical data is based on the power function depicted. Finally, take careful note that the 1% and 99% projections do not bind the potential outcomes as the chance and risk of higher and lower prices still exists, albeit unlikely. Of course, I made the assumption that gold prices since 1968 proxy the real inflation rate, which some economists might question.

The main point of the forecast and previous article was to show that the most likely path of gold prices (and therefore inflation) is not likely to extend beyond risk free rates based on the historical data since 1968. Gold fundamentals were not considered in the projections (other than historical prices), so do the additional analytical work before investing in gold...

Related Posts:

The Course of Inflation

The Course of Inflation III

Demographics and Stock Market Fluctuations

by Carlo Favero, Arie Gozluklu, and Andrea Tomoni ©

Are long-run stock market returns predictable? This column shows that a forecasting model that uses a demographic variable – the ratio of middle-aged to young adults – as well as the dividend price ratio, performs “very well” in forecasting long-horizon stock market returns.

Figure 1 shows 1-year and 20-year annualised US stock market returns (S&P 500 index) over the course of nearly the last century. Returns are determined by a “slow-moving” information component and by a “noise” component. The noise component dominates the data at high frequencies, while the information component emerges when high-frequency observations are aggregated over time to construct long-horizon returns.

Figure 1

As the information component is naturally related to “fundamentals”, Figure 1 helps understand the empirical evidence that fundamentals perform better in predicting returns as the predictive horizon gets longer. In particular, the dynamic dividend growth model (Campbell-Shiller 1988) suggests that the relevant fundamental to capture the information component in stock market returns is the dividend-price ratio. This variable regularly plays an important role in recent empirical literature that has replaced the long tradition of the efficient market hypothesis with a view of predictability of returns (see for example, Cochrane 2007). But there is an ongoing debate on the robustness of return predictability and its potential use from a portfolio allocation perspective (Boudoukh et al. 2008). The essence of this debate is captured by Figure 2 that reports the US dividend/price ratio along with the 20-Year annualised stock market returns.

Figure 2

The Figure shows the presence of some co-movement between the two variables. This is somewhat limited by the fact that the dividend-price shows a very high degree of persistence that does match the mean reversion of the returns. This high degree of persistence contradicts one of the crucial hypotheses of the dynamic dividend growth model that is based on the assumption that the dividend-price is a stationary variable. This degree of persistence is at the heart of the debate on the robustness of the statistical evidence on the predictability of stock market returns.

Is there a role for demographics?

Intuitive reasoning hints at demography as an important variable to determine the long-run behaviour of the stock market, while it is difficult to imagine a relationship between high-frequency fluctuations in stock market prices and a slow-moving trend determined by demographic factors.

In fact, a theoretical model by Geanakopoulos et al. (2004) predicts that a specific demographic variable – the ratio of middle-aged to young population – explains fluctuations in the dividend yield.

Geanakopoulos and his co-authors consider an overlapping generation model in which the demographic structure mimics the pattern of live births in the US, that have featured alternating twenty-year periods of boom and busts. They conjecture that the life-cycle portfolio behaviour – which suggests that agents should borrow when young, invest for retirement when middle-aged, and live off their investment once they are retired – plays an important role in determining equilibrium asset prices. Consumption smoothing by the agents, given the assumed demographic structure, requires that when the middle-aged to young population ratio is small, there will be excess demand for consumption by a large cohort of retirees and for the market to clear, equilibrium prices of financial assets should adjust, i.e. decrease. The result is that saving is encouraged for the middle-aged. As the dividend/price ratio is negatively related to fluctuations in prices, he model predicts a negative relation between this variable and the middle-aged-to-young ratio.

In a recent CEPR Discussion Paper (Favero et al. 2010), we take the Geanakopoulos et al. model to the data via the conjecture that fluctuations in the middle-aged-to-young ratio could capture a slowly evolving mean in the dividend price ratio within the dynamic dividend growth model. We find strong evidence in favour of using this variable together with the dividend/price ratio in long-run forecasting regressions for stock market returns, as Figure 3 and Figure 4 illustrate.

Figure 3

Figure 3 reports the dividend price ratio and the middle-aged-to-young ratio to show how, in line with the predictions of Geanakopoulos et al., a negative relation between the middle-aged-to-young ratio and the dividend price is present in the data. The demographic variable captures the slowly evolving information component in the fundamental. Does this help to predict long-horizon stock market returns? Yes. In fact, the econometric based yes, contained in our CEPR paper, is visually illustrated by Figure 4, which reports the middle-aged-to-young ratio, 10-year stock market returns, and the deviation of the dividend-price ratio from its slowly time varying mean captured by the middle-aged-to-young ratio.

Figure 4

Figure 4 also illustrates an additional interesting feature of the middle-aged-to-young ratio. Long-run forecasts for this (exogenous) variable are readily available. In fact, the Bureau of Census provides projections up to 2050 for the middle-aged-to-young ratio. In our paper we exploit the exogeneity and the predictability of the demographic ratio to project the equity risk premia up to 2050. Our simulations point to an average equity risk premium of about 5% for the next forty years.

The research agenda

The empirical evidence of a stable relation between a demographic variable and long-horizon US stock market returns naturally generates a number of interesting research questions.
  • First, the fact that a slow moving variable determined by demographics has very little impact on predictability of stock market returns at high frequency but a sizeable and strongly significant impact at low frequency has some obvious consequences on the slope of stock market risk, defined as the conditional variance and covariance per period of asset returns. Demographics should then become a natural input into the optimal asset allocation decision of a long-horizon investor.
  • Second, what about the bond market? If the middle-aged-to-young ratio plays an important role in capturing an information component that helps to predict long-horizon stock market returns it should also have a role in capturing a persistence components also in bond-yields.
  • Third, what is the international evidence? Our empirical results are so far limited to the US case only, but it is important to assess their robustness when the model is extended to other countries.

Boudoukh, J, Richardson, M, and Whitelaw, R F (2008), “The Myth of Long-Horizon Predictability,” The Review of Financial Studies, 21(4):1577-1605.

Campbell, J Y Robert Shiller, R (1988), “Stock Prices, Earnings, and Expected Dividends,” Journal of Finance, 43:661-676.

Cochrane, J H (2007),”The Dog that Did Not Bark: A Defence of Return Predictability,” Review of Financial Studies, 20, 5.

Favero, C A, Gozluklu, A E, and Tamoni, A (2009) “Demographic Trends, the Dividend-Price Ratio and the Predictability of Long-Run Stock Market Returns,” CEPR working paper 7734, forthcoming in the Journal of Financial and Quantitative Analysis.

Geanakoplos, John, Michael Magill and Martine Quinzii (2004), “Demography and the Long Run Behaviour of the Stock Market,” Brookings Papers on Economic Activities, 1: 241-325.

Republished with permission of

The Man in the Arena

It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.

~ Theodore Roosevelt

Hon Theodore "Teddy" Roosevelt (1858-1919)

Source: Almanac of Theodore Roosevelt

Wednesday, April 07, 2010

The Good Life Comes in Moments

I took this photograph a few minutes ago from my office balcony here in the Allegheny Mountains of Pennsylvania (click on the image for full resolution). The good life comes in moments...

The Course of Inflation

The short-term case for inflation remains speculative, however the long-term trajectory for inflation appears to be on a glide path toward 5% or so per annum (assuming gold prices proxy inflation). Most economists would consider this level of inflationary pressure to be too high for stable economic growth. Nevertheless, inflation does not appear to be on the verge of overtaking the economy as some are suggesting, though fundamental indicators may tell a different story. If anything, gold prices appear likely to decline from current levels in the coming years. I suppose only time will tell...

Source: Data from

Related Posts:

The Course of Inflation II

The Course of Inflation III

The Reality of Risk

Risk is a polyvalent term that defies definition and measurement. Yet, I am certain that risk, like danger, is real. I would suggest that the shadows depicted below allegorically warn of possible dangers. Likewise, words and numbers can also convey information regarding impending risks and dangers. Analyzing historical data and experiences is how we as a society persevere and survive in what is arguably a dangerous universe. To dismiss risk as illusory would be naïve.

Related Posts:

Risk versus Danger

Tuesday, April 06, 2010

Excel in the Future

According to Nenshad Bardoliwalla (2009) of Enterprise Irregulars, Excel (Microsoft) will sustain its lead in the end-user business intelligence (BI) market through 2010 and beyond:
Excel will continue to provide the dominant paradigm for end-user BI consumption. For Excel specifically, the number one analytic tool by far with a home on hundreds of millions of personal desktops, Microsoft has invested significantly in ensuring its continued viability as we move past its second decade of existence, and its adoption shows absolutely no sign of abating any time soon. With Excel 2010’s arrival, this includes significantly enhanced charting capabilities, a server-based mode first released in 2007 called Excel Services, being a first-class citizen in SharePoint, and the biggest disruptor, the launch of PowerPivot, an extremely fast, scalable, in-memory analytic engine that can allow Excel analysis on millions of rows of data at sub-second speeds. While many vendors have tried in vain to displace Excel from the desktops of the business user for more than two decades, none will be any closer to succeeding any time soon. Microsoft will continue to make sure of that.
Excel remains my preferred financial modeling and risk analysis platform for all the reasons cited above (although the copy of Excel on my computer has been "souped-up" for professional use). Visit my website linked elsewhere on this page to learn more.

Source: Bardoliwalla, N (2009, December 1), The Top 10 Trends for 2010 in Analytics, Business Intelligence, and Performance Management,

Related Posts:

Visual Basic for Applications (VBA) 7.0

Why Spreadsheets?

Monday, April 05, 2010

Matching Profit to Principle

Wisdom sometimes comes from strange places. As a young boy, I learned perhaps the most useful lesson of my life from a television episode of Have Gun - Will Travel (1960, "The Campaign of Billy Banjo"), in which Paladin (played by Richard Boone) bluntly asserts that " sole professional secret is to make profit agree with principle..." I have leveraged those words as guidance so many times over the years -- such is a life in enterprise...


Friday, April 02, 2010

Stochastics Come of Age

I just read a fascinating paper written by Prof David Mumford (1999) of Brown University, and I wanted to share his predictions about the future of stochastics written at the end of the second millennium:
Stochastic methods will transform pure and applied mathematics in the beginning of the third millennium. Probability and statistics will come to be viewed as the natural tools to use in mathematical as well as scientific modeling. The intellectual world as a whole will come to view logic as a beautiful elegant idealization but to view statistics as the standard way in which we reason and think.
In fact, stochastics have come of age as we proceed into the second decade of the 21st century. You can read his entire paper linked below.

Source: Mumford, D (1999, November 18), The Dawning of the Age of Stochasticity, Unpublished paper based on a lecture delivered by the author at a conference entitled, "Mathematics towards the Third Millennium" held at Accademia Nazionale dei Lincei on May 27-29, 1999.


Stochastics and Optimization Are Integral to Financial Management

Just in case there is any doubt, stochastics and optimization are integral to modern finance. The chart below illustrates the high-level processes required for a complete financial management system (click image to expand).

Thursday, April 01, 2010

The Topological Landscape between Automation and Expertise

Over the ages, the topological space occupied by automation and technology has continued to expand its domain such that humanity has had no recourse but to seek refuge in discovery and innovation. Of course, the innovations of today become the technology of tomorrow, and so humans are continuously driven deeper into the unknown in search of new knowledge and ideas that might somehow ensure the survival of the human race in what is apparently a hostile universe. The chart below illustrates how automation encroaches upon expertise. Note that value and complexity are the drivers of the isoquantal relationship between automated and expert decisions.

I have previously written that the domain of expert decisions is also where polyvalence reigns supreme. The question before us is not how to thwart the growth of automation, but rather how to expand the realm of polyvalence, which has always been the refuge and safe haven for human existence.

Related Posts:

Polyvalence Defies Commoditization

Financial Management Requires Polyvalence