Monday, September 14, 2009

Engineering economics

Moral: Wherein we look at the engineering of economics. This post's motivation comes from seeing the FT review of Rick Bookstaber's and Nassim Taleb's testimony before the US House of Representatives' Committee on Science & Technology.


As mentioned last post (see Remarks), having recently run into Rick's blog is cause for a pause to catch up, since I have been paying only cursory attention to the use of technology in the markets since other technology was so fascinating.

Like what? Well, technology such as engineering computing that allows complex systems like an airplane to be designed and tested. The modern processes and materials are vastly different from what they were 20 years ago, as are the computers.

From looking at Rick's recent posts on high frequency and algorithmic trading, which go into some technical detail, I can see some of the parallels that I had expected (see Econ/Eng). For one, both have a problem with determining value, albeit it's 'fair' in finance and 'earned' in engineering. There is more than a tenuous link here which I intend to show as this is a problem that has been exacerbated by technology, not helped.

But, what can we do? For one, we can define and put into place an economic sandbox. Ah, what might this thing and why now? That is the work that we have to do.

Perhaps an aside is in order. I may have spent a large part of my career in engineering computing, but my degrees are in Economics with a mathematical focus. During the other times, the focus of my work was operations, and management, research. Hence, I'll have to admit some affinity with those worrying about risk management. Too, I spent a lot of time working issues related to knowledge and computational modeling (KBE).

Both engineering and finance have been a focus in this blog, albeit seeing a lot of fiction in finance (Rick says stranger than fiction). One thing about finance's use of technology is that the game aspect dominates any science for several reasons. Well, engineering companies like to make money to boot. Yet, in engineering, we go up against nature.

Which, by the way, the quants bemoan, that they have to deal with unpredictable humans. Hence my having up close exposure to the underpinnings, and problems, of our house-of-cards led me to look for causes to problems that are, well, cyclical. The trouble is that we don't seem to be learning the right lessons.

For instance, I started a list related to finance earlier this year. Engineering does learn, just witness the marvels all around.

One first lesson might be to accept that striving and gaming will not resolve intractable, essentially undecidable, issues. That applies almost everywhere. In finance, near zero is real, folks.

There will be more posts related to Rick's work.


05/28/2011 -- Lemons problem, dark pools, ... Oh, so much to look at! Avatars, too.

01/19/2011 -- For the most, things are dire, not by necessity.

05/25/2010 -- Who will (or can) lead out of the morass?

11/30/2009 -- From 'Our basis' can grow a whole bunch.

11/29/2009 -- Rick is now with the SEC.

10/05/2009 -- Ah, yes, on the behalf of.

09/21/2009 -- Yahoo Finance talks about the decline in youngsters going into finance. That sector, finance, grew faster than any other for a couple of decades. How useful was that?

Modified: 05/28/2011

No comments:

Post a Comment