A quick post to show a link to the blog of Tim Johnson at Heriot-Watt Unviersity.

Lots of writing on derivatives topics, from models to regulations, plus plenty on markets and the crisis.

Worth a look. Click here to visit.

Maths & Trading & Finance, Computing & Calculating & Coding, Languages & Learning

A quick post to show a link to the blog of Tim Johnson at Heriot-Watt Unviersity.

Lots of writing on derivatives topics, from models to regulations, plus plenty on markets and the crisis.

Worth a look. Click here to visit.

Gillian Tett is a well-respected writer for the Financial Times and frequently picks up the topic of *complexity* in financial markets.

In a recent article (see here) she makes a case that the era of number crunching is over, and that the world of investments is back again firmly in the domain of *human relationships and evaluations*.

Once upon a time we would measure credit risk with a numbers like *survival probability* stripped from CDS market prices. Once upon a time we were all happy to value a transaction with models that almost no-one other than the quants understood.

Her view is that *these times are gone*.

In an earlier post (see here) I put a link to an online book that explains all the main concepts of economics in terms of the classic ‘Island Economy’.

If you think about it in theoretical terms, this book is a ‘proof’ that the *Island Economy* is a sufficiently rich model into which many important elements of economic life can be incorporated.

And like all good models, it is *light* and *understandable*.

Very importantly, this means that *everyone* can get involved in a healthy debate about its assumptions & simplifications, and any policy implications coming from it.

This is something that undermines the quality of our mathematical models of financial or economic processes: they require a very large amount of technical ability before you can even *start to understand* the terms of the model (for derivatives pricing this means stochastic calculus & arbitrage-free pricing theory; for systematic trading this means advanced statistical analysis; for economics this means advanced calculus and plenty of background reading of fragmented economic theories).

Experience tells me that the more technically ‘perfect’ we make our models, the less able the users become of giving an informed critique of the theory’s assumptions and main features.

The lesson I draw from this is that it is the responsibility of the model builders to work even harder to make our theories and models *accessible to an averagely intelligent user*.

What does this hard work look like?

Well here are four examples:

- Irwin Schiff’s book on economics (see my post here).
- Ray Dalio’s paper on why economies rise and fall (see my post here).
- A series of articles by Isabella Kaminski from FTAlphaville that present the credit crisis in terms of a felt cartoon story about water gathering and storing (see here).
- My work on understanding the Black-Scholes formula for out-of-the-money options (see my post here).

I’m on a roll with Economics, getting through books and articles at a tremendous rate.

But this one is a gem.

Written by Irwin Schiff (read about him on Wikipedia do), it’s available here as a free-to-download pdf.

His sons Peter & Andrew have published their own version of the story which reflects historical events more carefully. You have to buy that one; I did, it’s good too.

I mentioned in a previous post that I had come across Nathan Lewis’s archive of his articles in NewWorldEconomics.com.

Fascinating stuff, but with so much to read, you need a system of attack.

Mine is here below.

It’s a bit rough, lacks a unifying form, but I think it is worth *getting out there* already.

I’ll update and shape as I make progress myself.

Want to know what I like reading?

Here is a list of some recent favourites.

I’ll keep updating as new reads come along.

Want to feel inspired to be creative? These two books are for you.

The mathematics book that all mathematics books should look like.

Learn mathematics through its history. Highly recommended by Tristan Needham too.

Ever hear about multi agent models? Here’s a book which discusses the distribution of wealth in terms of rule-based models like John Conway’s Game of Life.

5.

A book on financial mathematics that doesn’t just tell you the same old ‘arbitrage-free’ story. Oh, and note the bit where they prove that Black-Scholes perfect hedging is just a lucky coincidence.

That said, one of the ‘arbitrage free’ books which I did enjoy is:

Beautiful writing from Peter Carey.

Perhaps my all-time favourite piece of fiction.

John Bowlby was one of the pioneers of child attachment theory. Here is a great quote:

All of us, from the cradle to the grave, are happiest when life is organized as a series of excursions, long or short, from the secure base provided by our attachment figure(s).

Poker is a fascinating game, and Hansen’s book is a talk-through of a real tournament. A great way to show how the theory is played out in practice.

Although I do not agree with the political implications that Peter Schiff is effectively claiming as true, I do nonetheless think this is an excellent book for anyone wanting to know more about how the economy works.

Want to see some funky mathematics? New techniques for multiplication, division, etc which will blow your mind!

This next book appeals to my *reductionist* preferences: the best way to deal with most higher-level problems is to invest some energy in understanding the lower-level mechanics.

One of the clearest writers on poker theory.

15.

It’s refreshing to see the same subject from two different angles.

I’ll use this post to list my favourite online reads, updating whenever I come across something new.

- James Montier at GMO. A recent article uses the concept of mean-reversion together with the profit equation to explain why equity markets might not have such a stellar performance over the next 5-7 years. Click here to go to a page that has a few of Mr Montier’s articles.
- Click here to read a lovely blog post which discusses Apple, and the way it is dominating the universe of technology companies (and how it is causing problems for index-following funds).
- FTAlphaville requires a subscription, but comes pretty-much free if you subscribe to the FT paper version. They are always discussing
*real*topics that really make a difference in the markets. Lots of good stuff, and lots of links to other good stuff. - John Mauldin will send you regular email commentary if you sign up for it (it’s free). Good writing on all the current topics.
- Rick Bookstaber writes some thoughtful articles on topics including risk management. That (& derivatives trading) was his area before he moved into his current advisory role in the US government.
- Scott Sumner writes about monetary issues, here.
- John P Hussman has got a lot of interesting articles at his fund’s homepage, here. I especially liked this one here on liquidity preferences.

If there are interesting online commentaries that you like, let me know by posting me a comment.