Whether or not anything is permanent might not matter.

Option pricing

The Nobel prize-winning Black-Scholes option pricing formula is generally advanced by financial academics as the best possible way to value options. This may be true, but that doesn't mean it is any good.

It is further worth noting that the formula (often used for dynamic hedging) models security prices as follows:

dS = mSdt + sSdW

Where S is security price, mS is the average rate of change of the security (drift rate), t is time, sS is standard deviation of the security, and W is a geometric Brownian function.

The problem here is that stock prices generally can be modeled using geometric Brownian motion. However, there is (more or less) a hard stop to trading at market close. Despite this fact, orders can be placed after market close, to be executed immediately upon the opening of the market. For this reason, we will rarely find extreme jumps between the underlying security price at closing and opening. The possibility of what is effectively discrete motion should make us realize that using the geometric Brownian without at least including some fudge factor for the possibility of discontinuous motion (though approximating the Brownian with a discrete probability distribution such as the binomial would be preferable) will occasionally but decisively give us bad pricing information.

Against those who would suggest that the error in the formula will be relatively minor, we advance the anecdotal but highly compelling evidence that the year after Mr. Scholes won his Nobel prize, the hedge fund he was helping to run (Long Term Capital Management) imploded in a multibillion dollar disaster that left financial markets reeling.

Gold

I'm in a place with a television this week and I decided to turn on the news as I was eating breakfast. I was amused/disturbed to notice that Fox News (which was, in its defense, the only "news" network not running stories about cute puppies or things of a similar nature) was running non-stop advertisements for gold investment services in between its news stories about how the sky was falling. In between wondering whether or not gold was likely to be a particularly good investment, since its convertibility into local currency presupposes some demand for the commodity (a demand that is dampened and not heightened by economic instability), I was struck by something I had written about some time ago in the context of a discussion of Beowulf. What exactly is the value of gold? And why do dragons dwell on buried gold-hoards? There is something perverse about burying refined gold-work back in the earth from which it came. Gold should be seen in the sunlight, not placed back into the earth.

As the advertisement correctly observed, gold has always held some value. This value is not "conventional" in the way that the value of our currency is conventional, nor is it derived from its practical utility in industrial applications. In the alchemical symbolism, gold is the perfection of nature subsumed by the spiritual. In Beowulf, gold is a physical manifestation of the virtue of a people personified in their hero. When the people are no more, the burial of the gold calls dragons to its glitter. This image is one the most intriguing of the poem (which is partially a reflection upon gold) and rewards careful attention and reflection. The proper meaning of gold is almost entirely erased when it is viewed as a means to stabilize one's IRA against fluctuations in equity prices; and it is highly significant that in these situations the person purchasing the gold generally does not take physical possession of the gold but controls it through shares in a mutual fund or through an ETF. Yet even in this utterly etherealized form there is still something mysterious about the manner in which gold eludes mathematization, as fluctuations of gold prices are highly difficult to model for any practical financial purpose.

"there laid within it his lordly heirlooms
and heaped hoard of heavy gold."
Beowulf XXXII

Discourse

Political society of any kind requires that discourse be engaged in with pure intentions. The moment that the choice of words becomes subjugated to a preordained ideological outcome, political speech is no longer discourse. The purpose of political speech is to establish a course of action in harmony with the principles of society and the needs of the given circumstance. None of us can engage in political speech without preconceptions of some kind (preconceptions are what make us all "individuals"), but we can attempt to conform our speech to the truth of the matter under discussion and not conform speech to some extrinsic standard or conclusion provided in advance. Such action denigrates speech and makes real discourse impossible; it removes political speech even further from truth itself and pushes it deeper into the realm of opinion, feeling, and unreality.

These reflections are prompted by an article I saw today on an American news service that referred to persons illegally present in the US as "undocumented immigrants" instead of "illegal immigrants." I hadn't seen that phrase before so I attempted to ascertain its origin. As it turns out, certain persons had decided that the phrase "illegal immigrant" was too negatively charged and needed to be changed. Let us leave aside (for a moment) our views on the topic of illegal immigration, a topic of incredible complexity admits of no easy answers, and ask ourselves whether it is appropriate to try and modify discourse in this manner. The phrase "illegal immigrant" has a specific political meaning. Insofar as the people under question exist (politically) as immigrants, and insofar as the have not legally immigrated to this country, their being qua immigrant is qualified by its illegality. Contrary to the slew of bumper stickers that proclaim that "no person is illegal," the phrase "illegal immigrant" does not attempt to subject the fundamental personhood of anyone to a declaration of illegality. Rather, it simply states the (mutable) fact that the person's political existence as immigrant is illegal. This could be changed by amending immigration laws to allow such persons to legally immigrate, but as things stand now, the phrase "illegal immigrant" is objectively correct.

The phrase "undocumented immigrant" seems to suggest that the people in question merely are missing documentation. As such, it is a less precise description of what the political existence of these people actually are. While it is entirely true that they are undocumented, it is incomplete merely to say this. As a general rule we ought refer to things by their most important attribute to the matter at hand. The fact that these immigrants lack documentation is entirely predicated on the fact that they are not in the country legally. We aren't referring to people who came to the country legally and whose immigration papers were lost (a more accurate use of the phrase "undocumented immigrant").

Therefore, it seems clear to me that the appropriate phrase that ought to be used is "illegal immigrant" (again, note that we are making no judgments as to whether such immigration ought to be legal or illegal). To attempt to subordinate discourse towards a preconceived goal through altering the words that we use is horribly dangerous, even if employed towards good ends. It lowers the quality of our discourse and makes most of us less likely to think about what is actually being said. The corruption of discourse is the poison can undo any democracy, and I feel we are dangerously on the brink of this happening. The right calls politicians on the left variously "communists" and "nazis" (terms that are generally inaccurate) while the left calls politicians on the right "bigots" and "racists" (also terms that are generally inaccurate). The more that people believe these insults the less likely they are to listen to each other. And once no one is listening to anyone, democracy is no longer possible.

We should always insist on clarity and precision in our discourse, even when such clarity and precision work against the goal we wish to achieve.

Beautiful changes

I've been thinking about the last lines from Richard Wilbur's marvelous poem "The Beautiful Changes" a lot recently. They are quoted below (I have probably misplaced the line breaks, for which I apologize):

"the beautiful changes
In such kind ways,
Wishing ever to sunder
Things and things' selves for a second finding,
to lose
For a moment all that it touches back to
wonder."

There is the appearance of a Hegelian quality to the lines "wishing ever to sunder... for a second finding," but this image is dispelled by the suggestion that the sundering is not itself illusory but actually quite real, since it results in loss. We don't normally think of sundering and loss as "kind," but the poem suggests that the result (wonder) is worth the price, even though it is just "for a moment." Against the radical despair (indeed, despair beyond despair!) inherent in Hegelianism, we should find great comfort in the conclusion of the poem's second stanza:

"Any greenness is deeper than anyone knows."

Fewer phrases more hopeful than this have been placed into poetry.

Short sale

People in our age seem to be gripped by the desire to find some human villain at the root of every calamity that strikes us. This is perhaps above all caused by the desire of "historical" peoples to shift their own responsibility for the state of the world on to others. In the case of the recent economic malaise that has afflicted large sections of the globe, we find the blame often placed on short sellers. The major banks (both nationally and internationally) blamed short sellers for the decline of their shares, leading the SEC to temporarily ban short selling in these issues -- an action they took without first discerning whether or not there was any truth to the accusation. More recently, Greece has taken to blaming the shorts for the rapid devaluation of their government debt.

For those without the dubious advantage of some financial knowledge, short selling consists in borrowing some sort of security with the intention of immediately selling it. The short seller is betting that the security will lose value so he can repurchase it later (whether a few seconds later or months later) and return it to the entity that loaned it to him. The entity loaning him the security is paid a fee by the short seller for the transaction, and since the entity (typically banks or investment firms) would be holding the security anyway, it is an excellent way for them to make extra money with little to no extra risk.

I feel the recent backlash against short sellers has two principal causes. First, there are considerably more "long" (that is, people who are betting securities will rise in price) investors than short sellers. Anyone who holds a stock or bond in an IRA, retirement plan, or other investment account is almost always long in that security. Since long positions and short positions are a zero sum game, whenever the shorts win, it means the longs are losing. Therefore, the majority is likely to dislike the shorts since the shorts are profiting precisely when the longs are losing. Secondly, there seems to be a confusion between cause and effect in the case of short selling. Given that the short side to the market is vastly smaller than the long side, the effect of the shorts selling shares of a security into the open market (thereby decreasing the value of that security) will be infinitesimal. There is a strong correlation between a lot of people shorting a stock and the stock declining in value, but the stock's decline is not caused by the people shorting it; rather, people are shorting it because they think it will decline in value.

The world is a terrifically complex place. Part of this terrific complexity is that there are in fact situations that are extremely black and white. Rarely do we find such a situation in the realm of economics, however, and the attempt by collapsing institutions to blame short pressure for their collapse is yet another manifestation of the desire to find a bad guy for something for which no one (and almost everyone) is to blame.

riddles?

1)

Empiricists (I am told, though I'm not convinced I've ever really met one) believe that what is particularly disclosed in sense-experience is all that is objectively true. Universal affirmations and knowledge of essence are abstractions from sense-experience that do not specifically correspond to anything outside the mind, and are therefore untrue insofar as they cannot correspond to any physically "real" object. However, it is not clear that sense-experience is ever given directly in sense-experience. Indeed, it rather seems as though sense-experience is a universal. If this is so, then the belief that universals cannot correspond to particulars disclosed through sense-experience would appear to be a contradiction in terms, since it would immediately negate the possibility of its correspondence to anything objectively real.

2)

It is not advisable to restrict possible evidence against one's position in advance. For as Socrates says in Republic to Thrasymachus, we cannot be certain in advance whether or not what we are seeking may lie within the area which we have closed off. Now, we can close off possible realms of evidence in two ways: a provisional way, and an absolute way. We close off evidence provisionally if the closure is temporary and methodological. The closure is absolute if a whole realm of phenomena are determined (extrinsically to the matter under consideration) to be off limits. It would seem that the absolute closure of the non-empirical in empiricism is problematic precisely because it is using an a priori concept (the empirical) to argue against the reality of a priori concepts.

3)

It is not clear exactly what material means to empiricists. Dr. Johnson kicking the rock seems to be about as deep as the reflection on this point goes. There is a reason for this. If they deny that materiality has any objective meaning, then they open themselves up to the question of how they have decided to exclude immaterial objects. But if they admit that materiality does mean something, what could it mean but the essence of the material? And if material has essence, then their whole position seems to unravel rapidly.