Playing with Statistics (The Economist)

Naturally, the airlines choose to measure the greenhouse gases they produce in the way that casts them in the best light—a trick they deploy on safety statistics, too. For instance, over half of aircraft accidents occur around take-off and landing. So accidents per passenger-mile compare very favourably with other means of transport. But at least one study has shown that, if accidents are measured per journey instead, aircraft are the second-most dangerous way of travelling, after motorcycles.

Likewise on greenhouse gases. IATA says an aircraft's fuel consumption is about the same as that of a family car, at 3.5 litres per 100 passenger-kilometres. So CO2 emissions are similar. But that is true only if the aircraft is full and the car's passenger seats are empty. And even then, a jumbo jet flying from London to Sydney would be like nearly 400 Volkswagen Polos each travelling just over 16,000km—the average distance a European drives in a year. In other words, although cars and aircraft discharge roughly the same amount of CO2 for each passenger-kilometre, the aircraft travel an awful lot farther.


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Artificial artificial intelligence (The Economist)

Last November Amazon unveiled a prototype of the system, which it calls “artificial artificial intelligence”. The premise is that humans are vastly superior to computers at tasks such as pattern recognition, says Peter Cohen, director of the project at Amazon, so why not let software take advantage of human strengths?

Mr Cohen credits Amazon's boss, Jeff Bezos, with the concept for the Turk. Other people have had similar ideas. Eric Bonabeau of Icosystem, an American firm that builds software tools modelled on natural systems, has built what he calls the “Hunch Engine” to combine human intelligence with computer analysis. The French postal service, for example, has used it to help its workers choose the best delivery routes, and pharmaceutical researchers are using it to determine molecular structures by combining their gut instincts with known results stored in a database. And a firm called Seriosity hopes to tap the collective brainpower of the legions of obsessive players of multiplayer online games such as “World of Warcraft”, by getting them to perform small real-world tasks (such as sorting/labelling photographs) while playing, and paying them in the game's own currency.

But even complicated tasks rate only a few dollars. iConclude, a software start-up aiming to automate corporate technical support, is using the Turk to evaluate developers who can help write its repair tools. It used the Turk to source a list of recommended fixes for common problems in IIS, Microsoft's widely used web-server software. One respondent submitted a superbly thought-out 20-step process made up in Visio, a software tool for making schematics. For this, iConclude paid $5. “If we'd hired a consultant, we would have paid $1,000-2,000,” says Helen Tang of iConclude. “I was flabbergasted.”

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Life in 2020 (Paul Brown)

In the new village of Hamstreet, in Kent, Richard Dumill goes to the bathroom and prepares for a new day. It is 2020 and as he flushes the toilet his sample is automatically analysed and sent to the local doctor. The cholesterol level is slightly high because of the heavy dinner of farmed cod and chips but the computer in the surgery discounts the readings as not exceptional.There is a slight hum as the family water purifier switches on, and as he walks down the hallway he taps the electricity meter and sees it shows that the family is in credit: his own windmill generator and solar panels are putting more energy into the grid than the household is using, adding to the family income.

Downstairs his wife, Sarah, is complaining. The so-called "smart fridge" has malfunctioned and the order for milk and bread which should have reached the local delivery service has not been sent. The grocer, who employs a refugee from Tuvalu, a Pacific island country that disappeared three years previously as sea levels rose, will have to be telephoned instead. Food deliveries go in a special lockable box rather than on the doorstep since theft of these increasingly expensive essentials is a growing problem.

Both parents now work to pay off the 55-year mortgage on their house. Sarah works as a counsellor for people who have a genetic predisposition to a variety of diseases like cancer and heart trouble that means they cannot qualify for insurance or mortgages. Richard normally works from home but is going in a shared hydrogen powered car to the office at the waste and recycling brokerage where he works. He rarely sees any of the recycled tin or plastic in which he deals but quotes prices for the futures market in which companies buy waste products to use in future manufacturing.

When working at home, a telephone gadget in his ear, which operates on electricity generated by his brain, allows his manager to speak to him at any time during working hours. This, among many new electronic devices which are supposed to make him more efficient, Richard regards with scepticism.

Today as he drives to work he carefully picks his route to avoid congestion charges on the motorway or in any of the towns on the way. His company long ago moved out of its central London headquarters to cut costs.

The former industrial estates, which gradually emptied and became derelict as manufacturing declined to 9% of gross domestic product, have been taken down and replaced with water-and energy-efficient housing estates. The whole area is planted with trees to form what has been christened the Dartford Forest.

The couple have a daughter Britney, adopted like many other children: sperm counts for the average male in Britain have dropped to 30% of 1940s level, because the chemicals widely used in food and farming have so damaged fertility. It is no satisfaction that many big food manufacturers have gone bankrupt in the last few years because of class actions brought by people no longer able to have children.

The clampdown on preservatives in food and high oil prices mean that sending fresh food long distances is prohibitively expensive. The family keep chickens to have a supply of fresh eggs and grow vegetables because so much imported food is now an expensive luxury. The warmer climate means melons can be grown outdoors, although it also has led to a malaria scare in nearby Tunbridge Wells.

Worldwide there are serious problems for less technology based societies. Large parts of central Africa are becoming uninhabitable because of climate change. The sea is encroaching on many low lying coastal areas causing a huge refugee crisis.

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The ‘Hurricaneomic’ Effect (Darrell Jobman)

Should storms of the magnitude of 2005's Katrina, Rita, and Wilma strike again, the expanding hurricane impact on financial markets will have a ripple effect on global markets and consumers far removed from the vicinity of the storm.

One of the first markets that typically is affected at the first hint a tropical storm is brewing is natural gas, as traders anticipate that a severe hurricane might disrupt Gulf production and shipping. In the aftermath of disastrous hurricanes will come demand for building materials, which will drive up demand and prices for commodities such as lumber, copper and other materials needed to rebuild.

But all those are the obvious plays, the moves the professionals are likely to foresee and capture before most investors realize what is happening. Successful traders who are aware of the hurricaneomic effect expand their view from the eye of the storm to opportunities beyond its immediate reach.

For example the shift to ethanol as a clean air additive, has sparked a big increase in demand. A major source of ethanol in the United States is corn. The shock of the U.S. Department of Agriculture's most recent supply/demand estimates is not that the planted acreage of corn has declined from 2005, as expected, but that the usage of corn for ethanol will increase dramatically in the season ahead. With reduced production and higher usage, spurred by energy demand, competition for corn could become intense.

Market prices of ethanol are currently over $3 per gallon, and ethanol producers could pay near $7 a bushel a corn and still have positive returns, estimates Chris Hurt, Purdue University extension marketing specialist. Corn at $7 is a far cry from the price a little over $2 a bushel that livestock producers have paid in recent years. Hurricanes, past or future, won't be totally responsible for corn prices, of course, but at least part of the current demand for corn for fuel can be attributed to the 2005 hurricanes. If another severe hurricane season exacerbates the current energy situation or if weather in either 2006 or 2007 reduces corn production, corn may be the next bull market.

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How We Know What Isn’t So (Thomas Gilovich)

It is widely believed that infertile couples who adopt a child are subsequently more likely to conceive than similar couples who do not. The usually explanation for this remarkable phenomenon involves the alleviation of stress. Couples who adopt, it is said, become less obsessed with their reproductive failure, and their new-found peace of mind boosts their chances for success.

In reality, couples who conceive after adopting are noteworthy. Their good fortune is reported by the media, transmitted by friends and neighbours, and therefore is more likely to come to our attention than the fate of couples ho adopt but do no conceive, or those who conceive without adopting.

Several things are clear at the outset. First, people do not hold questionable beliefs simply because they have not been exposed to the relevant evidence. Erroneous beliefs plague both experienced professionals and less informed laypeople alike.

Many questionable and erroneous beliefs have purely cognitive origins, and can be traced to imperfections in our capacities to process information and draw conclusions. We hold many dubious beliefs, in other words, not because they satisfy some important psychological need, but because they seem to be the most sensible conclusions consistent with the available evidence. People hold such beliefs because they seem, in the words of Robert Merton, to be the “irresistible products of their own experience.” They are the products, not of irrationality, but of flawed rationality.

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When Genius Failed (Roger Lowenstein) #5

Early in 1998, Long-Term began to short large amounts of equity volatility. But more than any other, “equity vol” was Long-Term’s signature trade. Equity vol comes straight from the Black-Scholes model. It is based on the assumption that the volatility of stocks is, over time, consistent. The stock market, for instance, typically varies by about 15 percent to 20 percent a year. Now and then, the market might be more volatile, but it will always revert to form. It was guided by the unseen law of large numbers, which assured the world of a normal distribution of brown cows and spotted cows and quiet trading days and market crashes. For Long-Term’s professors, with their supreme faith in markets, this was written in stone. It flowed from their Mertonian view of markets as efficient machines that spit out new prices with all the random logic of heat molecules dispersing through a cloud. And when the models told them that the markets were mispricing equity vol, they were willing to bet the firm on it.

There is no stock or security known as “equity vol,” no direct way of making a wager on it. But there is an indirect way. Remember that, according to the Black-Scholes formula, the key element in pricing an option is the expected volatility of the underlying asset. As the asset gets jumpier, the price of the option rises. Therefore, if you knew the price of an option, you could infer the level of volatility the market was expecting.

An analogy may be helpful. There is no direct way to bet on the weather in Florida—but in certain seasons, the price of orange juice futures fluctuates according to the likelihood of a frost. Indeed, an experienced trader could infer, if the price of juice was unusually high, that the market was expecting a chilly winter and thus a scarcity of oranges. And if the trader believed that the market’s weather forecast was wrong, he could try to profit on his opinion by shorting orange juice.

In a similar manner, Long-Term deduced that the options market was anticipating volatility in the stock market of roughly 20 percent. Long-Term viewed this as incorrect, because actual volatility was only about 15 percent. Thus, it figured that option prices would sooner or later fall. So Long-Term began to short options—specifically, options on the Standard & Poor’s 500 stock index and on the equivalent indices on the major exchanges in Europe. In their own argot, the professors were “selling volatility”.

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When Genius Failed (Roger Lowenstein) #4

The first modern swap was engineered in 1981. IBM had bonds denominated in Swiss francs and German marks and wanted to convert this debt to dollars. David Swensen, a Yale PhD newly arrived at Salomon, suggested that perhaps some other borrow could be persuaded to issue debt that, aside from being denominated in dollars, was identical to IBM’s. One obvious choice was the World Bank, which had an appetite for holding debt in a variety of currencies. As an inducement to borrow, Salomon gave the bank a slightly lower-than-market interest rate. Then the two borrowers switched—IBM winding up with the dollar debt, the World Bank with the foreign stuff—and voila! the world of swaps was born.

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