Tuesday, March 31, 2009

Finance (cont'd)

Let me recap Steven's main arguments first, so if I missed anything, it would be obvious.

1) In my prev. entry, I have mistakenly identified "life and survival" as the sole goal of any society. Discovering new knowledge, for one, is an important value.
2) It doesn't really matter if people don't make the connection between making money and production, so long as the money connects in proportion to value, money will do the invisible thinking. And since "empirical evidence seems to show that despite how stupid people are most of the time, collective action is better than elitist judgment," money DOES connect in proportion to value.
3) Speculators contributes to society by predicting the future, which is a new knowledge that is valuable to society.
4) misc comments ... which I'm bitchy enough to address =P

#1. I apologize if I haven't wrote clearly, but "life and survival" being the sole goals of life is not what I intended to express at all. It would be quite depressing otherwise. I meant to use life & survival as a starting point, to show that society is about pooling effort together so that people can specialize, which leaves people time to "work to enrich their lives and the lives of their peers." Maslow's triangle, basically. This is why arts and sciences and philosophy is important - it leads to better and more meaningful lives. I agree that discovering new knowledge is vitally important - amongst many things it gives us more information so we can make better decisions about how to live our lives. The important point - and I think we both agreed on this - is that each person produces something valuable for the benefit of others, and in turn he is helped by others in achieving his values.

#2. I guess this was a disagreement of what I said about the nonexistent link between money and production. Best thing I can do then is provide other examples and ... disagree with you. Lol.

Lets start with examples of money not doing a good job connecting (in proportion) to value very well: qualified teachers are vitally needed in many jurisdictions, and they provide an important value for society. Why are they being paid so little? There're also pay biases between different genders and ethnic groups at in a given skill level. And heck, US government bailout of AIG! They got paid big bucks by taxpayers for doing something VERY valuable: failing in their business! Another very good example is Iceland. I have nothing else to say except to direct to you at this lengthy article at http://www.vanityfair.com/politics/features/2009/04/iceland200904?printable=true&currentPage=all (Note: it's worth reading - and hilarious too when you get to the part about the elves) If money is capable of doing the "thinking" that connects to values, without each person being aware of it, I'd like to know where that connection is in the Icelandic society.

Collective action better than elitist judgement? I'm going to have to ask what the emperical evidence is, because there's a whole slew of counterevidence: people voting to reelect Bush (yes, he cheated, but that doesn't mean people didn't vote for him!), psychology of groupthink, people choosing who to vote for based on whose hair looks better... So no - in our world, a lot of people thinking A is true doesn't make A true. However, the judgement of a group of highly educated rational people would be more reliable than a single person. The problem is that our population base tends to be more capable of stupidity than rationality.

I hope this shows that money can't do the thinking - it can only pull together the aggregate of all "thoughts" that directs it. Stupid people making stupid decisions will make money flow in stupid ways. The problem escalates when the stupidity involves money for the sake of money - namely the financial industry. Without people being conscious of the link between money and values... well... you get our world, one where money distracts attention from production.

#3. A very good point. One question, though? What is the worth of the predictions? Well, everyone would benefit right? Everyone is affected by things such as the exchange rate, interest rate, unemployment... etc... and prior knowledge of what's going to happen next is going to be useful, no??

I don't think so. First, there's a thing with self fulfilling prophecies. For example, people expect a stock to go down, so they short sell. In doing that, they increase supply, hence prices goes down... and voila, stock goes down! This is why there was a ban on short selling of certain stocks with Lehmans went under. Right now we hear stuff about how economy is going to go to hell - what do most sensible people do? They spend less. Demand reduced, production plummets, people lose jobs, and we end up in a worse situation. So now, are the financial analysts predicting the future, or creating the future?

Another question to consider: compare this year to last year (or two years ago), in terms of GDP, unemployment, whatever else is important here. I haven't looked at the numbers, but I'm guessing big difference due to the financial collapse. Now consider something else: has the amount of food, water, and other resources that can be used to fulfill people's values decreased in the last 3 years? By resources I don't mean money. I mean things like raw material, factories, machineries, labour, knowledge ... etc? I would guess not - nothing has changed in the last 3 years that would decrease any of the aforementioned resource (except maybe machineries broke down and weren't replaced). There hasn't been droughts. Food production is okay. Labour is still there. Talent is still there. Technology is still here. Then is there any reason that production should decrease and unemployment increase, but for the financial system itself?

I stole the above off of a criticism of the nature of money, but I think it applies here. The financial system widens the gap between reality, and the finance la la land. When there is a trend, the market offers short-term incentives to rides on it - causing a bigger trend to develope. Correcting it too early would be risky - because you don't know whether the numbers are still going to go UP. The safe way is to start correcting it AFTER it starts going down. (well, I guess I'm just talking about the little I know about day trading now >_>). Hence, positive predictions can create bubbles that cause a painful burst when we return to reality, and likewise, negative predictions drives us into an unease that worsens the situation needlessly.

Let me summarize my argument, just because because I got lost here. Steven's claim was that the predictions offered by the financial sector is valuable. However, those predictions are often self-fulfilling, at least for a while, until there's a painful correction. These predictions, thus, cause people to behave irrationally, eventually causing a havoc. Since each person's behaviour is taken account of in the predictions, it becomes self-fulfilling and we go back to step one... well... it's just a strange loop, turled in itself, isn't it? Is this really a plus for society?

So you see... the "new truths" that the financial industry discover isn't really like those discovered by the R&D department of, say, Microsoft. It's not really like Shakespeare either. The "new knowledge" that the financial industry uncovers are something along the lines of self-fulfilling prophecies about the success of its own system, curled into itself in an unfathomable loop, yet it affects the world in strange, illogical, and doubtfully positive manner.

#4. Just because I like to be a bitch...

When I mentioned phys/bio/etc, what I meant to imply was that there're a broad range of fields besides finance that offer similar types of challenges, that would often appeal to the same group of people. For example, a lot of physicists in the (post?) Einstein era would not be able to find jobs, and end up working as quantitative analysts. It was a nice fit because physics involved lots of modelling, as does finance. I guess the high risk/return is kindaf unique to the field (the other field I can think of with that characteristic is consulting).

Ahh, feelings. I know what you mean, which is why I didn't list feelings as one my arguments. It was just something that applies to me. A lot of times, one's own intuition can be something of interest... Of course, your career choices are your decisions - I would slap you if you took my feelings into account.

I hope I didn't mess up too badly.

End of Entry