Two Blunders to Contemplate: Hubris?

Reading the weekend newspapers I was struck by two similar but unrelated blunders of humans. Both seem to be traceable to hubris in the people responsible, in these cases an unwillingness to check and re-check data and consider that their theories may be wrong. "Hubris" means excessive pride. The Greeks knew it often led to disaster in man. Cromwell's famous quote rings in my ears in these situations: "I beseech you, in the Bowels of Christ, think it possible you may be mistaken."

FIRST:
Investor's Business Daily, page A18 of Monday, August 13 issue, lower left corner article: NASA was forced to correct errors found by forensic audits of data in the temperature record and - mirabile dictu!!! - the hottest year in the US since 1880 was 1934, not any recent year! And the error was a Y2K bug! See http://www.dailytech.com/Blogger+Finds+Y2K+Bug+in+NASA+Climate+Data/article8383.htm for details. Isn't that amazing! And one wonders why oh why didn't NASA spend some time & money actually checking its data - even a cursory perusal of the actual data charts would show an obvious problem! But they didn't bother to check. Heck why check the data - it fits their theories! Colossal hubris at best! At worst, a fraud to retain government funding!

Another site has photos of actual measurement sites. Take a look at a few now being documented [golly, someone's really checking now!!!] -> http://www.surfacestations.org/ under "Albums". Uh, can anyone honestly say those measurement stations are not massively affected by the urban heat island and heating from human-built structures? Has NASA documented and checked its raw data? No! They just want the money to pump out theories backed by ... nothing.

SECOND:
The weekend WSJ [page B3, upper right corner, Saturday/Sunday August 11-12 issue] story about "quant" funds is headlined, "One 'Quant' Sees Shakeout For the Ages - '10,000 Years'" . Here's the quote: "Events that models predicted would happen once in 10,000 years happened every day for three days." The article refers to a Ph. D. heading Lehmann's global head of quantitative equity strategies. D'uh - maybe they don't make Ph. D's like they used to. Wasn't 1998 the 10,000 year event of the last decade? Is this like boxing's "Fight of the Century" ... one every decade?

How many panics have happened in the 200 year financial history of the United States? Maybe 20? D'uh ... one every decade. I guess that Ph. D. didn't read, "Monetary History of the United States" by Milton Friedman and Anna Schwartz. Or read the other dozen of books about other panics. This Ph. D. - your blogger - has in fact read those books. In a panic, all models fail because human behavior is unpredictable under stress. In the physics analogy, a model derived from conditions in normal space fails near a black hole.

So all the quants used similar models to make money in normal times. Maybe that's the failure - the "heads I win, tails you lose" aspect of hedge funds. Don't bother being careful, the hedge fund managers just want the money to play with - and collect the fees. That normal statistics fails in panics is well known. Fischer Black taught me that at MIT in 1980. Mandelbrot wrote a whole book about how statistics fails in markets. Another book, "Wisdom of Crowds" has an insightful example of the "greater fool theory" when many participants use the same technical analysis or similar computer models. They create their own "buy" and "sell" signals, moving prices. But when something abnormal happens - poof! - the models collapse.

And I wrote a few weeks ago about how the fad of the long/short funds, the 130/30 funds and that ilk were causing short interest to rise to unnatural levels. Some said, nahhh, "It's Different Now" Those are hedges, etc. Whenever one says, "It's Different Now" - check your model, your data and your wallet!!!