Posts Tagged ‘Probability’
“We do not inherit the earth from our ancestors, we borrow it from our children”*…
… and the interest rate on that loan is rising.
There’s much discussion of what’s causing the sudden-feeling spike in prices that we’re experiencing: pandemic disruptions, nativist and protectionist policies, the over-taxing of over-optimized supply chains, and others. But Robinson Meyer argues that there’s another issue, an underlying cause, that’s not getting the attention it deserves… one that will likely be even harder to address…
Over the past year, U.S. consumer prices have risen 7 percent, their fastest rate in nearly four decades, frustrating households and tanking President Joe Biden’s approval rating. And no wonder. High inflation corrodes the basic machinery of the economy, unsettling consumers, troubling companies, and preventing everyone from making sturdy plans for the future…
For years, scientists and economists have warned that climate change could cause massive shortages of major commodities, such as wine, chocolate, and cereals. Financial regulators have cautioned against a “disorderly transition,” in which the world commits only haphazardly to leaving fossil fuels, so it does not invest enough in their zero-carbon replacements. In an economy as prosperous and powerful as America’s, those problems are likely to show up—at least at first—not as empty grocery shelves or bankrupt gas stations but as price increases.
That phenomenon, long hypothesized, may be starting to actually arrive. Over the past year, unprecedented weather disasters have caused the price of key commodities to spike, and a volatile oil-and-gas market has allowed Russia and Saudi Arabia to exert geopolitical force.
“This climate-change risk to the supply chain—it’s actually real. It is happening now,” Mohamed Kande, the U.S. and global advisory leader at the accounting firm PwC, told me.
…
How to respond to these problems? The U.S. government has one tool to slow down the great chase of inflation: Leash up its dollars. By raising the rate at which the federal government lends money to banks, the Federal Reserve makes it more expensive for businesses or consumers to take out loans themselves. This brings demand in the economy more in line with supply. It is like the king in our thought experiment deciding to buy back some of his gold coins.
But wait—is it always appropriate to focus on dollars? What if the problem was caused by too few goods? Worse, what if the economy lost the ability to produce goods over time, throwing off the dollars-to-goods ratio? Then what was once an adequate number of dollars will, through no fault of its own, become too many...
… if the climate scars on supply continue to grow, does the Federal Reserve have the right tools to manage? Stinson Dean, the lumber trader, is doubtful. “Raising interest rates will blunt demand for housing—no doubt. But if you blunt demand enough to bring lumber prices down, you’re destroying the economy,” Dean told me. “For us to have lower lumber prices, we can only build a million homes a year. Do you really want to do that?
“Raising rates,” he said, “doesn’t grow more trees.” Nor does it grow more coffee, end a drought, or bring certainty to the energy transition. And if our new era of climate-driven inflation takes hold, America will need more than higher interest rates to bring balance to supply and demand.
A provocative look at the tangled roots of our inflation, suggesting that “The World Isn’t Ready for Climate-Change-Driven Inflation,” from @yayitsrob in @TheAtlantic. Eminently worth reading in full. Via @sentiers.
* Native American proverb
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As we dig deeper, we might send carefully calculated birthday greetings to Frank Plumpton Ramsey; he was born on this date in 1903. A philosopher, mathematician, and economist, he made major contributions to all three fields before his death (at the age of 26) on this date in 1930.
While he is probably best remembered as a mathematician and logician and as Wittgenstein’s friend and translator, he wrote three paper in economics: on subjective probability and utility (a response to Keynes, 1926), on optimal taxation (1927, described by Joseph E. Stiglitz as “a landmark in the economics of public finance”), and optimal economic growth (1928; hailed by Keynes as “”one of the most remarkable contributions to mathematical economics ever made”). The economist Paul Samuelson described them in 1970 as “three great legacies – legacies that were for the most part mere by-products of his major interest in the foundations of mathematics and knowledge.”
For more on Ramsey and his thought, see “One of the Great Intellects of His Time,” “The Man Who Thought Too Fast,” and Ramsey’s entry in the Stanford Encyclopedia of Philosophy.
“No structure, even an artificial one, enjoys the process of entropy. It is the ultimate fate of everything, and everything resists it.”*…
A 19th-century thought experiment that motivates physicists– and information scientists– still…
The universe bets on disorder. Imagine, for example, dropping a thimbleful of red dye into a swimming pool. All of those dye molecules are going to slowly spread throughout the water.
Physicists quantify this tendency to spread by counting the number of possible ways the dye molecules can be arranged. There’s one possible state where the molecules are crowded into the thimble. There’s another where, say, the molecules settle in a tidy clump at the pool’s bottom. But there are uncountable billions of permutations where the molecules spread out in different ways throughout the water. If the universe chooses from all the possible states at random, you can bet that it’s going to end up with one of the vast set of disordered possibilities.
Seen in this way, the inexorable rise in entropy, or disorder, as quantified by the second law of thermodynamics, takes on an almost mathematical certainty. So of course physicists are constantly trying to break it.
One almost did. A thought experiment devised by the Scottish physicist James Clerk Maxwell in 1867 stumped scientists for 115 years. And even after a solution was found, physicists have continued to use “Maxwell’s demon” to push the laws of the universe to their limits…
A thorny thought experiment has been turned into a real experiment—one that physicists use to probe the physics of information: “How Maxwell’s Demon Continues to Startle Scientists,” from Jonathan O’Callaghan (@Astro_Jonny)
* Philip K. Dick
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As we reconsider the random, we might send carefully-calculated birthday greetings to Félix Édouard Justin Émile Borel; he was born on this date in 1871. A mathematician (and politician, who served as French Minister of the Navy), he is remembered for his foundational work in measure theory and probability. He published a number of research papers on game theory and was the first to define games of strategy.
But Borel may be best remembered for a thought experiment he introduced in one of his books, proposing that a monkey hitting keys at random on a typewriter keyboard will – with absolute certainty – eventually type every book in France’s Bibliothèque Nationale de France. This is now popularly known as the infinite monkey theorem.
“Everything we care about lies somewhere in the middle, where pattern and randomness interlace”*…
We tend dramatically to underestimate the role of randomness in the world…
Arkansas was one out away from the 2018 College World Series championship, leading Oregon State in the series and 3-2 in the ninth inning of the game when Cadyn Grenier lofted a foul pop down the right-field line. Three Razorbacks converged on the ball and were in position to make a routine play on it, only to watch it fall untouched to the ground in the midst of them. Had any one of them made the play, Arkansas would have been the national champion.
Nobody did.
Given “another lifeline,” Grenier hit an RBI single to tie the game before Trevor Larnach launched a two-run homer to give the Beavers a 5-3 lead and, ultimately, the game. “As soon as you see the ball drop, you know you have another life,” Grenier said. “That’s a gift.” The Beavers accepted the gift eagerly and went on win the championship the next day as Oregon State rode freshman pitcher Kevin Abel to a 5-0 win over Arkansas in the deciding game of the series. Abel threw a complete game shutout and retired the last 20 hitters he faced.
The highly unlikely happens pretty much all the time…
We readily – routinely – underestimate the power and impact of randomness in and on our lives. In his book, The Drunkard’s Walk, Caltech physicist Leonard Mlodinow employs the idea of the “drunkard’s [random] walk” to compare “the paths molecules follow as they fly through space, incessantly bumping, and being bumped by, their sister molecules,” with “our lives, our paths from college to career, from single life to family life, from first hole of golf to eighteenth.”
Although countless random interactions seem to cancel each another out within large data sets, sometimes, “when pure luck occasionally leads to a lopsided preponderance of hits from some particular direction…a noticeable jiggle occurs.” When that happens, we notice the unlikely directional jiggle and build a carefully concocted story around it while ignoring the many, many random, counteracting collisions.
As Tversky and Kahneman have explained, “Chance is commonly viewed as a self-correcting process in which a deviation in one direction induces a deviation in the opposite direction to restore the equilibrium. In fact, deviations are not ‘corrected’ as a chance process unfolds, they are merely diluted.”
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As Stephen Jay Gould famously argued, were we able to recreate the experiment of life on Earth a million different times, nothing would ever be the same, because evolution relies upon randomness. Indeed, the essence of history is contingency.
Randomness rules.
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Luck matters. A lot. Yet, we tend dramatically to underestimate the role of randomness in the world.
The self-serving bias is our tendency to see the good stuff that happens as our doing (“we worked really hard and executed the game plan well”) while the bad stuff isn’t our fault (“It just wasn’t our night” or “we simply couldn’t catch a break” or “we would have won if the umpiring hadn’t been so awful”). Thus, desirable results are typically due to our skill and hard work — not luck — while lousy results are outside of our control and the offspring of being unlucky.
Two fine books undermine this outlook by (rightly) attributing a surprising amount of what happens to us — both good and bad – to luck. Michael Mauboussin’s The Success Equation seeks to untangle elements of luck and skill in sports, investing, and business. Ed Smith’s Luck considers a number of fields – international finance, war, sports, and even his own marriage – to examine how random chance influences the world around us. For example, Mauboussin describes the “paradox of skill” as follows: “As skill improves, performance becomes more consistent, and therefore luck becomes more important.” In investing, therefore (and for example), as the population of skilled investors has increased, the variation in skill has narrowed, making luck increasingly important to outcomes.
On account of the growth and development of the investment industry, John Bogle could quite consistently write his senior thesis at Princeton on the successes of active fund management and then go on to found Vanguard and become the primary developer and intellectual forefather of indexing. In other words, the ever-increasing aggregate skill (supplemented by massive computing power) of the investment world has come largely to cancel itself out.
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After a big or revolutionary event, we tend to see it as having been inevitable. Such is the narrative fallacy. In this paper, ESSEC Business School’s Stoyan Sgourev notes that scholars of innovation typically focus upon the usual type of case, where incremental improvements rule the day. Sgourev moves past the typical to look at the unusual type of case, where there is a radical leap forward (equivalent to Thomas Kuhn’s paradigm shifts in science), as with Picasso and Les Demoiselles.
As Sgourev carefully argued, the Paris art market of Picasso’s time had recently become receptive to the commercial possibilities of risk-taking. Thus, artistic innovation was becoming commercially viable. Breaking with the past was then being encouraged for the first time. It would soon be demanded.
Most significantly for our purposes, Sgourev’s analysis of Cubism suggests that having an exceptional idea isn’t enough. For radical innovation really to take hold, market conditions have to be right, making its success a function of luck and timing as much as genius. Note that Van Gogh — no less a genius than Picasso — never sold a painting in his lifetime.
As noted above, we all like to think that our successes are earned and that only our failures are due to luck – bad luck. But the old expression – it’s better to be lucky than good – is at least partly true. That said, it’s best to be lucky *and* good. As a consequence, in all probabilistic fields (which is nearly all of them), the best performers dwell on process and diversify their bets. You should do the same…
As [Nate] Silver emphasizes in The Signal and the Noise, we readily overestimate the degree of predictability in complex systems [and t]he experts we see in the media are much too sure of themselves (I wrote about this problem in our industry from a slightly different angle…). Much of what we attribute to skill is actually luck.
Plan accordingly.
Taking the unaccountable into account: “Randomness Rules,” from Bob Seawright (@RPSeawright), via @JVLast
[image above: source]
* James Gleick, The Information: A History, a Theory, a Flood
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As we contemplate chance, we might spare a thought for Oskar Morgenstern; he died on this date in 1977. An economist who fled Nazi Germany for Princeton, he collaborated with the mathematician John von Neumann to write Theory of Games and Economic Behavior, published in 1944, which is recognized as the first book on game theory— thus co-founding the field.
Game theory was developed extensively in the 1950s, and has become widely recognized as an important tool in many fields– perhaps especially in the study of evolution. Eleven game theorists have won the economics Nobel Prize, and John Maynard Smith was awarded the Crafoord Prize for his application of evolutionary game theory.
Game theory’s roots date back (at least) to the 1654 letters between Pascal and Fermat, which (along with work by Cardano and Huygens) marked the beginning of probability theory. (See Peter Bernstein’s marvelous Against the Gods.) The application of probability (Bayes’ rule, discrete and continuous random variables, and the computation of expectations) accounts for the utility of game theory; the role of randomness (along with the behavioral psychology of a game’s participants) explain why it’s not a perfect predictor.
“The urge to gamble is so universal and its practice so pleasurable that I assume it must be evil”*…
Gambling has existed since antiquity, but in the past 30 years it’s grown at a spectacular rate, turbocharged by the internet and globalisation. Problem gambling has grown accordingly, and become particularly prevalent in the teenage population. Even more troublingly, a study in 2013 reported that slightly over 90 per cent of problem gamblers don’t seek professional help. Gambling addiction is part of a suite of damaging and unhealthy behaviours that people do despite warnings, such as smoking, drinking or compulsive video gaming. It draws on a multitude of cognitive, social and psychobiological factors.
Psychological and medical studies have found that some people are more likely to develop a gambling disorder than others, depending on their social condition, age, education and experiences such as trauma, domestic violence and drug abuse. Problem gambling also involves complex brain chemistry, as gambling stimulates the release of multiple neurotransmitters including serotonin and dopamine, which in turn create feelings of pleasure and the attendant urge to maintain them. Serotonin is known as the happiness hormone, and typically follows a sense of release from stress or fear. Dopamine is associated with intense pleasure, released when we’re engaged in activities that deserve a reward, and precisely when that reward occurs – seeing the ball landing on the number we’ve bet on, or hearing the sound of the slot machine showing a winning payline.
For the most part, gambling addiction is viewed as a medical and psychological problem, though this hasn’t resulted in widely effective prevention and treatment programmes. That might be because the research has often focused on the origins and prevalence of addiction, and less on the cognitive premises and mechanisms that actually take place in the brain. It’s a controversial area, but this arguable lack of clinical effectiveness doesn’t appear to be specific to gambling; it applies to other addictions as well, and might even extend to some superstitions and irrational beliefs.
Can a proper presentation of the mathematical facts help gambling addiction? While most casino moguls simply trust the mathematics – the probability theory and applied statistics behind the games – gamblers exhibit a strange array of positions relative to the role of maths. While no study has offered an exhaustive taxonomy, what we know for sure is that some simply don’t care about it; others care about it, trust it, and try to use it in their favour by developing ‘winning strategies’; while others care about it and interpret it in making their gambling predictions.
Certain problem gambling programmes frame the distortions associated with gambling as an effect of a poor mathematical knowledge. Some clinicians argue that reducing gambling to mere mathematical models and bare numbers – without sparkling instances of success and the ‘adventurous’ atmosphere of a casino – can lead to a loss of interest in the games, a strategy known as ‘reduction’ or ‘deconstruction’. The warning messages involve statements along the lines of: ‘Be aware! There is a big problem with those irrational beliefs. Don’t think like that!’ But whether this kind of messaging really works is an open question. Beginning a couple of decades ago, several studies were conducted to test the hypothesis that teaching basic statistics and applied probability theory to problem gamblers would change their behaviour. Overall, these studies have yielded contradictory, non-conclusive results, and some found that mathematical education yielded no change in behaviour. So what’s missing?…
Catalin Barboianu, a gaming mathematician, philosopher of science, and problem-gambling researcher, asks if philosophers and mathematicians struggle with probability, can gamblers really hope to grasp their losing game? “Mathematics for Gamblers.”
For a deeper dive, see Alec Wilkinson’s fascinating New Yorker piece, “What Would Jesus Bet? A math whiz hones the optimal poker strategy.”
For cultural context (and an appreciation of the broader importance of the issue), see “How Gambling Mathematics Took Over The World.”
And for historical context, see (one of your correspondent’s all-time favorite books) Peter Bernstein’s Against the Gods: The Remarkable Story of Risk.
[image above: source]
* Heywood Hale Broun
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As we roll the dice, we might spare a thought for Srinivasa Ramanujan; he died on this date in 1920. A largely self-taught mathematician from Madras, he initially developed his own mathematical research in isolation: according to Hans Eysenck: “He tried to interest the leading professional mathematicians in his work, but failed for the most part. What he had to show them was too novel, too unfamiliar, and additionally presented in unusual ways; they could not be bothered.” Seeking mathematicians who could better understand his work, in 1913 he began a postal partnership with the English mathematician G. H. Hardy at the University of Cambridge, England. Recognizing Ramanujan’s work as extraordinary, Hardy arranged for him to travel to Cambridge. In his notes, Hardy commented that Ramanujan had produced groundbreaking new theorems, including some that “defeated me completely; I had never seen anything in the least like them before.”
Ramanujan made substantial contributions to mathematical analysis, number theory, infinite series, and continued fractions, including solutions to mathematical problems then considered unsolvable. During his short life, he independently compiled nearly 3,900 results (mostly identities and equations). Many were completely novel; his original and highly unconventional results, such as the Ramanujan prime, the Ramanujan theta function, partition formulae, and mock theta functions, have opened entire new areas of work and inspired a vast amount of further research. Nearly all his claims have now been proven correct.
See also: “Do not worry about your difficulties in Mathematics. I can assure you mine are still greater,” and enjoy the 2015 film on Ramanujan, “The Man Who Knew Infinity.”
“In the space between chaos and shape there was another chance”*…
Prince Hamlet spent a lot of time pondering the nature of chance and probability in William Shakespeare’s tragedy. In the famous “To be or not to be” speech, he notes that we helplessly face “the slings and arrows of outrageous fortune” — though a little earlier in the play he declares that “there’s a special providence in the fall of a sparrow,” suggesting that everything happens because God wills it to be so.
We can hardly fault the prince for holding two seemingly contradictory views about the nature of chance; after all, it is a puzzle that has vexed humankind through the ages. Why are we here? Or to give the question a slightly more modern spin, what sequence of events brought us here, and can we imagine a world in which we didn’t arrive on the scene at all?
It is to biologist Sean B. Carroll’s credit that he’s found a way of taking a puzzle that could easily fill volumes (and probably has filled volumes), and presenting it to us in a slim, non-technical, and fun little book, “A Series of Fortunate Events: Chance and the Making of the Planet, Life, and You.”
Carroll (not to be confused with physicist and writer Sean M. Carroll) gets the ball rolling with an introduction to the key concepts in probability and game theory, but quickly moves on to the issue at the heart of the book: the role of chance in evolution. Here we meet a key historical figure, the 20th-century French biochemist Jacques Monod, who won a Nobel Prize for his work on genetics. Monod understood that genetic mutations play a critical role in evolution, and he was struck by the random nature of those mutations…
Carroll quotes Monod: “Pure chance, absolutely free and blind, at the very root of the stupendous edifice of evolution: This central concept of modern biology is no longer one among other possible or even conceivable hypotheses. It is today the sole conceivable hypothesis, the only one that squares with observed and tested fact.”
“There is no scientific concept, in any of the sciences,” Monod concludes, “more destructive of anthropocentrism than this one.”
From there, it’s a short step to the realization that we humans might never have evolved in the first place…
The profound impact of randomness in determining destiny: “The Power of Chance in Shaping Life and Evolution.”
See also: “Survival of the Luckiest.”
* Jeanette Winterson, The World and Other Places
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As we blow on the dice, we might send carefully-calculated birthday greetings to Gabrielle-Émilie Le Tonnelier de Breteuil, Marquise du Châtelet, the French mathematician and physicist who is probably (if unfairly) better known as Voltaire’s mistress; she was born on this date in 1706. Fascinated by the work of Newton and Leibniz, she dressed as a man to frequent the cafes where the scientific discussions of the time were held. Her major work was a translation of Newton’s Principia, for which Voltaire wrote the preface; it was published a decade after her death, and was for many years the only translation of the Principia into French.
Judge me for my own merits, or lack of them, but do not look upon me as a mere appendage to this great general or that great scholar, this star that shines at the court of France or that famed author. I am in my own right a whole person, responsible to myself alone for all that I am, all that I say, all that I do. It may be that there are metaphysicians and philosophers whose learning is greater than mine, although I have not met them. Yet, they are but frail humans, too, and have their faults; so, when I add the sum total of my graces, I confess I am inferior to no one.
– Mme du Châtelet, to Frederick the Great of Prussia
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