Re: [Fis] informational economics?, msg from Igor M.

2008-11-03 Thread Pedro C. Marijuan
message from
Igor Matutinovic
Managing Director
GfK-Center for Market Research


Pedro raised an interesting question that deserves discussion - if 
anything because the last crisis cost tax-payers few trillions of 
dollars in the US and Europe.

First, we should define what do we mean by calling financial flows 
anticipatory information flows? Are all financial flows anticipatory 
and what they, if any, anticipate.

Let equate anticipatory with foresight, forethought, forecast - a kind 
of objective, rational, forecast of future events.

Traditional activity of banking is lending to business and households by 
using a security collateral (assets, income ..). It would be difficult 
to demonstrate that this activity is anticipating or enabling any major 
change in economic structure or consumer behavior. Innovation in 
business (new technologies and marketing ideas) is usually financed by 
venture capital, which is outside the banking system. Lending in its 
traditional aspect just helps the extant structure getting bigger. It is 
following in the established footsteps, not predicting, and the risk 
involved is minimal for the bank as well as the interest rate charged to 
clients.

Investment banking, on the other hand, involves sale of securities, 
facilitating mergers and other corporate reorganizations, acting as 
brokers etc.. This activity is better called speculative than 
anticipatory - speculative in terms of bets on future events like a 
direction of a stock index, or commodity. The essence of these bets is 
closer to casino gambling than to anything else. It would be meaningless 
to consider that taking a position on the red is anticipatory in any 
sense.

The origins of the current financial crisis are multiple, as is the norm 
in any complex system. In the real sector - the housing market - the 
construction of new houses must have exceeded sound demand - those 
clients that can repay mortgage (with low probability of default, which 
the bank can insure against with the insurance companies). So we start 
with an overproduction of houses which have difficulty finding quality 
buyers. To move the houses off the shelf the mortgage brokers turned 
to Ninja clients (no income, no job, no assets) and irresponsibly (!) 
concluded housing sales (cashing in their commission at NO risk) and let 
the banks finance the client. Banks in cooperation with investment banks 
afterwards securitized these (bad) mortgage loans into three tranches of 
different degree of risk (AAA; BBB; CCC) and sold them thereafter to 
other banks and investors around the world. The rating of the securities 
by independent institutions was at least irresponsible if not 
fraudulent. The whole process of selling new homes to Ninja buyers was 
based on the expectation that the housing prices will continue to rise, 
forever ... Every financial institution involved with creation and sales 
of securities (e.g. Collateral Default Obligation, or Credit Default 
Swap) based on mortgage loans ) had real or fictitious earnings or 
booked an - to be found later, fictitious - increase in the value of 
assets in the Balance Sheet. Brokers and managers wer paid their bonuses 
on the base of it.
To cut it short, the whole structure crumbled when Ninja's started to 
default on their loans, and there were too many of them to fit into 
insurance default statistics...

The learning's: financial flows were not anticipatory - 99% of the 
financial industry, FED, etc.. were caught by surprise. Lack of 
regulation, greed, and irrational expectations (that housing prices will 
keep increasing, that Ninja's will be repaying debt, etc..) were at the 
basis of the crash. The informational layers - the so called 
structured products or derivatives that increased the complexity of 
international financial system on one side, and blurred its transparency 
with respect with fundamentals on the other, were basically fraudulent 
and had no functional linkage to the real sector, except to help clear 
the stocks of unsold houses. But this surely was not the most 
efficient way to do it ...

The point is that (all) markets must be increasingly regulated as the 
global economic system becomes spontaneously more complex. 
Self-organized, informational networks (financial or whatewer) do not 
suffice to serve the need for economic and social stability of modern 
societies. Therefore, the tax-payers money must occasionally be used to 
cover damages that arise from inherent malfunctions of the market 
informational networks ...

The best
Igor

Dr. Igor Matutinovic
Managing Director

GfK-Center for Market Research
Draskoviceva 54
100 00 Zagreb, Croatia
Tel:  385 1  48 96 222,   4921 222
Fax: 385 1  49 21 223
www.gfk.hr

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-Original Message-
From: [EMAIL PROTECTED] [mailto:[EMAIL PROTECTED] 
On Behalf Of Pedro C. Marijuan
Sent: Wednesday, October 29, 2008 

Re: [Fis] informational economics? msg STan S.

2008-11-03 Thread Pedro C. Marijuan
msg from Stan Salthe
--


Pedro --

Dear John and colleagues,

Thanks a lot for adding deep thought to my comments. I quite agree with
your orientations and would make only a few further remarks.

1. Going beyond the equilibrium approaches of neoclassical economics is
fundamental. I would bring here the points developed by the Santa Fe
group of economists and physicists last decade (Brian Arthur and
others): dispersed interactive agents, no global controller, cross level
hierarchical organization, continual adaptation, perpetual novelty, and
out of equilibrium dynamics.  Overall, they talked on the economy as
another instance of adaptive nonlinear networks. But my personal
impression is that these very theoretical views were in themselves
inspirational for promoting further deregulation of financial markets
(Stu Kauffman and others were quite close to Al Gore and the Whitehouse
circles). The invisible hand of selforganization!

  A MOST interesting observation!  I think the flaw in that
program (if it was one) is that when a system self-organizes it may
do so in ways that are not congenial to agents that exist at a lower
scale within that system (here -- people).


2. Perhaps more foundational aspects have to be revised: value itself,
plus the way transactions are produced (Lanham 2006 has posited a very
bold view: we would trade informational motives...). A new theory on
price formation could be more or less envisioned. But I would be more
staunch on following the inspiration of biological schemes of
organization to put into place anticipatory dynamics (not to be
understood necessarily under dynamic systems theory). ATP energy
currency plus the system of second messengers contain very curious
systemic thresholds which the living cell has never crossed.

   Here I detect in the background the view that hierarchies will
be in some way self-similar.  This may be the case for some aspects
of a scale / compositional hierarchy (I don't know of any
demonstrations of that yet), but it's not likely for the
specification / subsumptive hierarchy.  There are regularities across
levels in both cases (transitive relations), but quantitative one's
are not known. Since the subsumptive hierarchy is founded on set
theoretic format, the question could be addressed there.  Are sets
theoretically in any way self-similar quantitatively?  For the
compositional hierarchy, are there quantitative aspects that could be
self similar?

STAN


3. If the following figures (just from my memory) are correct, financial
anticipatory flows have grown dramatically in last two decades, from
around 4 times the GDP (80's), to 10 times (90's), and close to 20 in
last years. Unknown thresholds have been trespassed,  and the capability
to destructively amplify any serious fluctuation from real economy is
daunting. The Energy crisis, plus the housing crisis, plus the mass of
faulty credits in circulation have put on the knees both the real
economy and the whole financial anticipatory wrappings. The inevitable
closure of the financial on the real, and vice versa,  means that the
social viscosity of the system --our very lives-- will be put on a
very tough stance. Is this but an anticipation of the even bigger global
sustainability crisis?

best regards

Pedro




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Re: [Fis] informational economics?

2008-11-02 Thread Andrei Khrennikov

 Dear Pedro,
 
Thank you an interesting topic for the discussion. The study of the 
Informational layer of economics is
 extremely important for right understanding of the situation at the financial 
market. I would like to point to
the following informational layer – namely, the role of expectations of traders 
of the financial market. Is it possible to create models of such expectations 
and their role in dynamics of assets? I think that G.
Soros was one of the first who discussed this problem in detail in his book 
“Alchemy of Finances.” He pointed to independence of dynamics of expectations 
from the situation in “real economics”. Free will of traders plays a crucial 
role. Soros proposed to describe free will by the apparatus of QM, in some way 
to explore the analogy electron-trader.
 
This idea was realized by my graduate student, Olga Choustova, see 
http://arxiv.org/abs/quant-ph/0109122 see also 
Choustova, O.A.  (2006). Quantum bohmian model for financial market. Physica A 
374, 304--314.
 
who used so called Bohmian model of QM, an analogue of the pilot wave which 
guides a quantum particles was used to describe dynamics of expectations. Real 
economics was incorporated in the model  through a potential function in  
financial Schrodinger’s equation.
 
As in physical QM, the financial pilot wave can exhibit a complicated behavior 
even for zero potential, i.e., zero impact from the real economics. Moreover, 
the model is nonlocal.
 
It is too early to say how much one can proceed in such a framework. However, 
it is clear that the informational component plays an important role in modern 
economics.

Andrei Khrennikov, professor of applied mathematics, 
director of International center for mathematical modeling in physics, 
engineering and cognitive science, University of Vaxjo, 
Sweden



- Original Message -
From: Pedro C. Marijuan [EMAIL PROTECTED]
Date: Wednesday, October 29, 2008 15:00
Subject: [Fis] informational economics?
To: fis fis@listas.unizar.es

 Dear FIS colleagues,
 
 Some aspects of the current financial crisis might be related to 
 discussions we had in this list on information and the nature of 
 economic flows years ago (economic networks, and also, central 
 aspects 
 of ecological ascendancy).
 
 The amazing growth of financial assets of many kinds during last 
 decade 
 may have conduced finally to a brutal crisis like the current 
 one, not 
 just for greed or political lack of control, but also for 
 dearth of 
 scientific understanding. I would argue that:
 
 1. Financial flows are anticipatory information flows that 
 preclude 
 the structural changes and the evolution to follow by real 
 economic 
 structures.
 
 2. Without financial anticipation, economic changes could not 
 keep pace 
 with technology  science progress due to the viscosity of 
 social and 
 legal webs of relationships.
 
 3. The creation of successive informational (financial) layers 
 becomes 
 an exercise in complexity accumulation, that almost inexorably 
 leads to 
 cross instability thresholds and a general loss resilience.
 
 4. Though the financial info is a sort of virtual builder, a 
 potential 
 energy of sorts, it has to suffer closure upon the real 
 economy; then 
 its excessive flows in out from some sector (eg, housing in some 
 strategic countries), amplified in the global complexity, have 
 now 
 potential to destabilize the whole financial layers and bring 
 the real 
 economy to havoc.
 
 5. Economy is an informational systems, in crucial aspects, not 
 well 
 explained yet... advancing an info economics would be quite timely.
 
 Would it be interesting to argue on some of these very roughly 
 penned 
 aspects (while our pockets get emptier and emptier)?
 
 best
 
 Pedro
 
 PS. The recent track on foundations of art is still worth of 
 some 
 further comment...
 
 
 Pedro C. Marijuán
 Grupo de Bioinformación
 Instituto Aragonés de Ciencias de la Salud
 Avda. Gómez Laguna, 25, Pl. 11ª
 50.009 Zaragoza. España
 Telf.: 34 976 71 3526 Fax: 34 976 71 5554
 [EMAIL PROTECTED]
 
 
 
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Re: [Fis] informational economics?

2008-10-29 Thread John Collier
Very topical, Pedro. A few remarks, interleaved:

At 01:58 PM 10/29/2008, Pedro C. Marijuan wrote:
Dear FIS colleagues,

Some aspects of the current financial crisis might be related to
discussions we had in this list on information and the nature of
economic flows years ago (economic networks, and also, central aspects
of ecological ascendancy).

The amazing growth of financial assets of many kinds during last decade
may have conduced finally to a brutal crisis like the current one, not
just for greed or political lack of control, but also for dearth of
scientific understanding. I would argue that:

1. Financial flows are anticipatory information flows that preclude
the structural changes and the evolution to follow by real economic
structures.

This seems correct in general, but in the current situation a lot of
the response is reactive.

2. Without financial anticipation, economic changes could not keep pace
with technology  science progress due to the viscosity of social and
legal webs of relationships.

I think there is also a regulative role in distributing risk according to
risk tolerance and greed. Futures markets (and other derivatives
like hedges) are a bit like predators, with prey the primary market.
In predator-prey relations, predators can even out booms and busts
in the prey. This is well documented in ecological work (e.g., the
introduction of wolves to islands like Grand Mannan in New Brunswick
and Isle Royale in Lake Superior). However things are not quite so
simple, since predators can increase to much, leading to a drop in
prey and a lagging drop in predators (lynx and rabbits in the Canadian
subarctic are a classic example). Now imagine that the secondary
market becomes much larger than the primary market. Perilous,
I would say, especially if it is unregulated.


3. The creation of successive informational (financial) layers becomes
an exercise in complexity accumulation, that almost inexorably leads to
cross instability thresholds and a general loss resilience.

Right, as above. There is an additional problem with complex derivatives,
though: the information about them is obscure. Neo-classical economics
relies on perfect information. My friend Don Ross has invetigated
neo-classical economics in some depth (some relevant books at
http://mitpress.mit.edu/catalog/author/default.asp?aid=238) across
a number of applications. We discussed applying information theory
with an eye to understanding the role of imperfect information
in evolutionary game theory, but I found that nobody really knows
what economic equilibrium is (Nash equilibria and Pareto optimality
are only a small part of the story). However, if the market is not
ideal, then its evolution is highly path dependent.

This is from a letter I wrote to Don some time ago:
  Dear Don,
 
  I hope this gets to you in time. This is off the top of my head. It isn't
  as organized as I would like it to be.
 
  State Functions and Non-Equlibrium Systems
 
  In traditional physics we deal only with conserved quantities like energy,
  mass, spin, charge and the like. In this case the conservation laws serve
  as the reference for calculations of change. The conservation laws permit
  the use of the Hamiltonian formulation of physics. The fundamental
  quantities are also guaranteed to be state functions. In fact their sum
  over all component systems is an invariant. This also preserves
  reversibility. The basic idea can be extended to other types of systems in
  which all of the fundamental properties are conserved. Although the
  equations of motion are not linear, conservation of fundamental quantities
  permits linear additivity of these quantities, making analysis of state
  changes relatively easy through approximative methods. This is fairly
  straight-forward. You will recall my claim in my Laplace paper that this is
  the model for not only physics, but for most of modern science.
 
  The extension to equilibrium systems is also straight-forward. In this case
  the usual assumption is that the system moves from one equilibrium state to
  another. Examples are classical thermodynamics, classical economics and
  classical population genetics. In this case, however, there are
  nonconserved quantities, such as entropy and work capacity, money supply,
  and adaptation, respectively (the last is explained in my papers on
  increases in fitness). Note that these are all information based functions,
  even if they are not directly related to energy in an obvious way. Since
  these quantities are not conserved, change can induce sources and sinks,
  and the quantities are not linearly additive. The solution to this problem
  is to look at changes as if they occur arbitrarily close to equilibrium,
  making the changes reversible. This fiction requires that the changes occur
  arbitrarily slowly. In real cases this does not occur, of course. The
  fiction, though preserves linearity and reversibility, and allows us to
  define the