Straits Times Paul the oracle sotong July 13, 2010 Tuesday, 05:39 PM
Goh Eng Yeow ( this is the name of the reporter ) on how top investment banks stack up against a sotong. ____________________________________ LAST week, as World Cup betting fever reached its climax, the picks made by an octopus in Germany in predicting the outcome of the matches made headlines across the globe. Paul the oracle octopus hit a bull-eye in all eight of his World Cup predictions; the odds are 1 in 256 in getting it right all eight times. Not surprisingly, there was a spoof floating around the market that top US investment bank Goldman Sachs was said to be offering a US$4 million (S$5.5 million) a year package for Paul to head its proprietary trading book. According to the spoof wire story, Goldman would convert part of its trading floor in its New York Headquarters into a fish tank for Paul and put boxes representing different markets, stocks, indices, equities and bonds in the tank for Paul to choose from. "Also doing the rounds is a rumour that Merrill Lynch are bidding for Paul to replace their entire research team," it claimed. The spoof makes for a good laugh. It provided a bit of light-hearted relief to calm jitters that are never far beneath the surface, when traders are awaiting the release of the second quarter results with growing anxiety. But seriously, how do the world's finest investment banks' records in predicting the World Cup outcome stack up against Paul the oracle octopus? According to Kaggle, the website tracking World Cup forecasts, out of the 65 teams which participated in the challenge, JP Morgan finished 28th, Goldman Sachs 33rd, UBS 55th and Danske Bank 64th. The betting markets fared better, finishing at 16th. But besides Paul the octopus, there was a human who made the correct picks – an Australian economist Thomas Mahony. "His approach relied on Elo ratings with an adjustment for home country/continent advantage. His strategy correctly tipped Spain to win, Netherlands to finish second and Germany to finish in the top four," Kaggle said. The investment banks all had to bow out early because their top picks were knocked out early in the race – UBS, Goldman and Danske Bank had picked Brazil, while JP Morgan chose England – and these hurt their overall performances. I haven't the faintest idea what "Elo ratings" are, but given the propensity of investors to trade markets, rather than individual stocks, the first thing that came to mind when I read the Kaggle post, was whether Mr Mahony's method is applicable to financial markets as well. The Kaggle website said that there is currently a competition to predict st ock price movements. "In the last few years, the quants have been roundly criticized for their errors in forecasting the financial markets. Stay tuned to see if Kagglers can do any better." For the keeper of Paul the octopus, however, the answer is manifestly obvious. "We know that all octopuses have nine brains, so we know he has exceptional powers," he was quoted as saying. Too bad that Paul's uncanny ability has not been put to good use on the financial markets. We would all be interested to know his response on how to rescue the global economy when it is again besieged by turmoil. -- Centroids: The Center of the Radical Centrist Community <[email protected]> Google Group: http://groups.google.com/group/RadicalCentrism Radical Centrism website and blog: http://RadicalCentrism.org
