Feb

12

Father talking about his daughter (triggered by whether she should charge for shoveling people's walks, or do it for free):

No kid among my daughter’s friends or my wife’s students has ever worked for pay (except maybe at camp), but they have put in vast numbers of entirely pointless community service hours in places like Guatemala and Costa Rica, entirely ignorant of the whacked aid economics of sending 14 year olds to “build” houses in rural communities in the Third World. My daughter and her friends are rapacious — not as capitalists, however, but merely as consumers. Once my wife mentioned to someone at one of the DC private schools that this was not an effective way to help people in the developing world, and that as far as she could tell among her private school students, they understood perfectly well that this was crazy — the response was almost exactly, “Well, it’s really about our kids, isn’t it?” The take-away by the kids was, they understood that the economics of it were whacked — and that the priority was that they have a good “experience” doing good things for poor people. In the end, their community service was just another form of consumerism.

To the extent these kids have been educated in the ethics of production — it is entirely an ethics of therapeutic production, the helping professions, in which they are extending assistance to those not in their privileged positions, for which they merely happen to get a paycheck that appears mysteriously from some third party. It teaches them inequality, to start with — the inequality that goes with the patronizing condescension of the expert who ministers to the masses (there are indeed experts; but what I refer to here is not expertise, but the sensibility of expertise, which is a sensibility acquired long before and independent of whether one has actual expertise; my kid and her friends have the attitudes, even by the teen years). It also teaches them that payment comes from third parties, not the party to whom one provides the “services.” It is not the equality of market exchange among freely consenting equals. It is not any kind of market production at all. This is a very big problem when that is the in-training of the next elites, because what we call capitalism is as much sensibility as sense.

My kid’s problem is not to learn to do good things for people. She knows how to do that and understands too well the sensibility of it. My daughter’s biggest need is to learn how to negotiate in a straightforward way, a business-like basis, in which she will not presume that because she’s a nice kid and this isn’t a ‘real’ market transaction, she doesn’t need to do a good job, or that she is somehow a rapacious little profiteering scamp if she thinks she should get paid. Learn that it is okay to negotiate to a deal. You have no idea how hard that concept is for kids raised in a purely pro-bono environment. They are scared to make an offer or bargain; it seems low-class and grasping.

Jeff Watson writes:

As a kid, I was constantly berated because I realized the value and utility of money at a very early age, yet everyone turned to me as the lender of the last resort. When someone wanted to borrow five dollars (a princely sum in 1967) I was more than glad to lend the money provided the debtor paid $6 at the end of the week. At that time, I had around $200 floating around on the street, with a big Greek kid who collected on commission. Many a time, I ended up in the principal's office, the debtor, his mother, and the principal hammering me and threatening me when he refused to pay. I was careful, not doing business on school property and after school hours, but these people were not only trying to avoid the interest, but to bust the trade altogether. Since I had the high moral ground, I spoke my piece about bad parenting, welshing, and the bad lessons taught by not paying one's bills. Still, I ended up in detention and had to get my father involved, as none of these transactions took placed on school grounds or on school time. My dad had a Svengali way of getting me out of trouble, and it was business as usual. Still, I had many deadbeats, surrounded by their overprotective mothers, who refused to pay. Somehow, my Greek cohort would find their bicycle, ride it to Madison Street, and sell it for substantially more than the $6 owed us. In all honesty, we took our rightful cut, and put the rest in an envelope and sent it to the deadbeat. We kept a list of deadbeats, and sold the list for a song to the neighborhood bookie, who was glad to get such information early. If you think it's tough making money as an adult, making money as a kid is twice as tough… It's not the making money, but the collecting money over the shadow of overbearing parents. I tried to be a different type of parent… I let my kid take his lumps, and when he cried due to getting ripped off, taught him that he just had a learning lesson. Since he got ripped off, he learned to think things thorough. Since then, I have financed several of his businesses, such as DJing, Notary Public, crab trapping, shell diver, buying and selling surfboards. While he hasn't gotten rich, he knows the key to retail is in buying correctly.

Adam Kretschmann remarks:

Too bad one of the kids parents wasn't a lawyer. A juvie record for usury and theft might have helped you recognize the "value and utility" of the law as well as the dollar.

Jeff Watson replies:

In Illinois in the 1960s the usury rate was ~45% thanks to Sears Credit. Anyway, if any adult messed with me in a legal sense, they would have city inspectors crawling over hsi house and business, before their mortgage was called. My dad and grandfather always insisted in a call provision in a loan, just for certain unexpected contingencies with intransigent borrowers. I feel no empathy for people borrowing money, as they walk into it with both eyes open, and their promise to pay it back is more than a promise, it’s a covenant.

Russell Sears adds:

I remember well the few times I spent hours shoveling a sidewalk for a negotiated price of $5, only to be handed a quarter or a buck. It is hard for a kid to argue with a old miser. But it was easy to watch him become snowbound the next big snowfall. Word spread quickly.

Dec

31

David Stirzaker's Probability and Random Variables, a Beginner's Guide discusses Poisson distributions  which can be used to determine the probability of some rare independent event in a specific period of time. At higher n it approximates the normal distribution. Applied to the market the issue can be stated, during the time that I am long, what is the probability of a crash in the magnitude of 10-10-08 or over 100 points high to low or greater than 7 standard deviation moves. Of 13 such occurrences since 94, 9 were this last October and November. The prior occurrence was in 2000. The clustering reflects that the events are not truly independent negating one of the assumptions of the Poisson model. The clustering seems to be the more important survival factor rather than the probability distribution model. Thus once these outliers appear, the probability of another occurring might be better modeled by a cluster model rather than a distribution curve. It was shown by Rama Cont of the Ecole Polytechnique in 2005 that volatility clusters. We've argued about the effect of these outliers on the distribution curves, but the two regime analysis might be safer. There are other solutions obviously.

Looking at a search for cluster probability models;

1. Wikipedia

2. A cluster-based probability model has been found to perform extremely well at capturing the complex structures in natural textures (e.g., better than Markov random field models).

Having said this, the vacation trade is markedly dampened, and I wonder if the volatility is wearing off as time passes. Some argue for another volatility event in early or mid 2009 but that would not really fit a cluster model of volatility. There seems to be a nice wall of worry to climb and some nice symmetrical drops and gaps in September trade for the elephants to mirror.

Anecdotally, at the store the other day, I heard a lady loudly commenting on how many private jets were lined up on the runway. I'm heading down to the beach after close and will do the jet count for this year. The indicator didn't work too well last year. I'll include my friend's private jet that comes in on the third. Which brings to mind Monty Python… "I'm not dead yet!"

Bruno Ombreux adds:

There is one thing with the Poisson distribution. It converges to Gaussian but not uniformly. Tails converge more slowly than the body. One needs quite a few observations in the tails to reach normality, but there are not a lot, else this wouldn't be tails.

This implies we can't even be sure that these events are outliers. Fat tails may not be fat. They may look so only because we don't have enough observations.

Add to this regime changes, volatility clustering etc… The only solution I can think of is not to use too much leverage.

Adam Kretschmann adds:

Sharp Sports Betting by Stanford Wong has a good chapter on Poisson distributions for those less mathematically inclined.

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