Divine Neutrality, Blog. Science, Philosophy

Meaning from Data

February 13th, 2016

Intelligence: Artificial vs. Real


Here is the problem David Cope solved many years ago.

Given the enormous musical library of compositions left to us by the venerable Johann Sebastian Bach, can new compositions be manufactured as if his signature were upon them? As if they were long lost Bach musical manuscripts only recently discovered?

Cope reincarnated Bach by giving us compositions Bach didn’t produce but very well might have produced. Here are links to two of these remarkable works:

https://www.youtube.com/watch?v=PczDLl92vlc

https://www.youtube.com/watch?v=-Nb1s-o7dVg

Now consider the problem every baby must solve in learning to talk. Baby Kate is presented with an enormous data base of words  that she hears over, perhaps, two years. They come at her in various combinations – statements. And from this library she constructs her own word statements. Her elders can understand them. But Kate’s words are original creations manufactured from the library at her disposal in her memory.

The parallel is evident. It is not precisely known how Baby Kate does this. But it is, in fact, done on digital computers. Perhaps there are elements in the way computers are programmed to do it that hint at how the brain might do it. (more…)

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Judgement’s Penalty

January 3rd, 2016

Value judgements impede understanding

laughing walrus
In medieval times and in primitive societies an explanation for events was a matter of morality; of good and evil, right or wrong. A death, say by tuberculosis, was explained as the action of evil forces. Witches maybe. Or perhaps the death was explained as good; justice – retribution for a wrong done. They didn’t understand natural cause as an explanation for affliction. So they suffered the afflictions until natural cause became philosophy.

A philosophy of natural cause – science – directs one to examine the world without a value judgement. No question of justice or morality governs the weather, the stars, bird migrations … We seek the cause of illness in the workings of nature independent of any moral stance. We find that tuberculosis is not a moral reprimand to the afflicted but rather a phenomenon of nature that can, in fact, be conquered. As long as a philosophy of moral cause reigned no progress in dealing with afflictions could be made.

Value judgements – like or dislike, good or bad – are a formidable hindrance to understanding. This is the idea explored at Notions of Justice Hinder Understanding

For taking action value judgements are essential; precisely value judgements govern what action to take. But for understanding the world, value judgements are lethal.

Action and understanding can be at odds. The exigencies of action can strangle understanding. In the waging of war understanding is deliberately suppressed in the interest of maintaining morale for battle. You are proscribed from examining the justice your opponents see in their cause.

Scholarship is concerned with understanding – rather than with action. The principle of keeping ones prejudices – one’s likes and dislikes – out of scholarly discourse is some 500 years old. But there exists current literature in the medieval style! The pollution of understanding by value judgement is still with us. As an example I cite the book called ‘Sapiens’ (2015) by Yuval Noah Harari. My good nephew, Zeb, gave me a copy as a gift.  A ‘Brief History of Humankind’ is the book’s subtitle. It is a mockery of historical scholarship. Hopefully the author meant it to be that; a mockery. Whether meant or not it is comedy; a book interpreting history in terms of parochial prejudices; judging it through personal values.
(more…)

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Bubbles

December 15th, 2015

Irrational Exuberance


In a lovely talk to the Concept Exchange Society, economist Daniel Friedman told us about financial markets. He said that a financial market is a “marketplace where promises are bought and sold by strangers”. I like that image. A bond is such a promise; a promise to pay interest at fixed intervals and to repay its principal, the loan amount. A mortgage, or a package of them, is also such a promise.

Dan discussed the history of recurrent fluctuations in market prices. They undergo inflation then deflation and back again. He mentioned such a balloon event that culminated in 1720 England; the escapade of the South-Sea Company and its scheme to buy the National Debt. Here is my understanding of the scheme. It may be flawed.

In economics parlance when you ‘buy debt‘ you don’t acquire the debt itself – the owing of money – but rather you acquire the right to collect the debt. You buy from the creditor his ownership of the promissory note. If the note stipulates periodic interest payments, you are buying yourself an income stream.

The debt involved in the South-Sea Company scheme was the British Government’s promissory notes. They paid regular interest and were held by a large number of the public. Held, say, by people who had put their life’s savings into something that would pay them a modest income on which to live. An income stream from Government secured notes.

The notes had been issued by various Departments of the British Government. At that time each Deparment of Government made its own financial arrangements. Each had its own accounting section which issued and managed these debt accounts. With such a system in place it was easy to argue for consolidation of the debt; all loans into one grand account. And to be issued by one single agency of Government; the Treasury.

The promoters of the scheme had members of Parliament make speeches exactly to this effect. And these promoters offered a solution. They would acquire every note-holder’s note. The Government could make the entirety of its regular interest payments to a single recipient, the South-Sea Company. The South-Sea Company would acquire the notes by ‘buying‘ them; exchanging shares in the Company for the notes at the rate of £115/share. If your note was worth £1,150 you got 10 shares of South-Sea Company stock in exchange for it. In the parlance of the cogniscenti, “debt was exchanged for equity”.

Why would a note-holder want to do this? Because the value of South-Sea Company stock had been steadily rising and continued to rise on rumors of impending good fortune. You could double your money! Or better! The share value topped £800 at one point. There arose a mass hysteria to acquire South-Sea Company shares. The buying hysteria spread to shares in any company at all. So all financial market share prices rose stimulating even more of a stock buying frenzy. To capitalize on the moment new companies formed and offered stock.

In his book, “Extraordinary Popular Delusions and the Madness of Crowds” (1841), Charles Mackay writes “Every body came to purchase stock. Every fool aspired to be a knave.” “But the most … preposterous of all (stock companies) and which shewed … the utter madness of the people, was … entitled ‘A company for carrying on an undertaking of great advantage, but nobody to know what it is’.”

In fact the South-Sea Company was a sham. It had no prospects. It paid some dividends to stock holders at the beginning using the pool of interest payment money coming to it from the Government. These dividends helped the Company’s image and increased its share value. But the Company never had a significant source of income other than from the Government. So it collapsed bringing the market down with it.

Now consider the U.S. mortgage bubble of 2008. Here is my overview of events – revised from the original flawed post:

Insurance companies, banks, pension funds, investment fund managers, investment banks and hedge funds hold capital that they must invest. They can’t just store it in a vault. Money is expected to earn money. The very safest investment is in Treasuries; bonds issued by the U.S. Treasury. But the returns from these are low. Safe investments with higher returns are always in demand. And, for an investor, safety is quantifiable; a matter of, say, an AAA rating by the ratings agency, Standard & Poors; an organization specifically devoted to assessing risk.

Intelligent and very imaginative people at a major financial institution introduced the idea of packaging home mortgages into securities salable in financial markets. They are called Mortgage Backed Securities (MBS). The purpose was to invent something attractive to buy for the people holding capital. The digital age, in which we live, allows the complex accounting tasks involved to be assigned to a computer.

The governing rationale to the scheme was this: that mortgages, when pooled together by thousands in a package, hold less risk than their average individual risk. The assessment of risk is not an exact art. Mathematically astute people persuaded the financial community that financial engineering – smart packaging – produced securities of good return but low risk. The ratings agencies must have been cowed by the arguments (or otherwise influenced) because they certified these securities as, indeed, low risk. So an offer was created that investors couldn’t refuse; a certified safe investment with a good return. That the theory about safeness was wrong became apparent with the financial collapse that ensued; events belied the theory’s predictions. In the case of the 2008 housing bubble we see that even the financial cogniscenti were deceived by others in the tribe.

A demand for mortgages to package into securities arose. It incentivized mortgage-lending banks to produce more mortgages; to court new home buyers in order to replenish and sell their mortgage holdings again. Thus loan eligibility requirements become lax and the mortgages being absorbed into pools were ever more risky. When this became apparent the value of the Mortgage Backed Securities dropped precipitously. The scheme collapsed bringing the market down with it.

See Can Growth be Sustainable?

An essential element of our economic structure – the financial market – depends intimately on gambling! And, among the gamblers, are marvelously clever fellows. Their originality shows itself in the creation of novel financial instruments. Those who game the system see the activity as an art form. They feel a calling to do it. They are probing its limits. Just such probing is respected in many fields of activity – in sport, in art, in science, in dance, in mathematics, in music … Only the most gifted among us probe the limits of a human construct.

After every market collapse there arises a howl of indignation. People are indignant about the perfidy of the perpetrators. How could such chicanery be allowed to happen? Why can’t laws be passed that will stabilize the market and prevent these fluctuations; prevent rogues from manipulating the market?

I suspect that nature will not allow us to rid ourselves of rogues. They are as necessary to us as gambling is. No law can guarantee a clean demarcation between productive and unproductive speculation. The reform of banking, say, by resurrection of the Glass-Steagall Act of 1933, repealed in 1999, will be a deterrent to some schemes. But nature evolves, as will financial institutions evolve, and new mischief will be created to upset them – perhaps, next time, by an emancipated woman instead of a man. Society must perpetually re-adjust its legal stance, each time proscribing the last blow it received. Future originality, by the meaning of the concept, is not predictable. So human institutions will always be under attack. The price of well-being is eternal vigilance.

Of course, a life devoted only to vigilance is a meagre one. Playful irreverence is needed for fullness. And that is what motivates the attackers.

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