The book starts off with the story of Ed Thorp, the father of stat arb. Priceton / Newport partners is a fund that is well known in the quant world that has a great track record of beating the market for decades and the quant behind it is Ed Thorp. If you want to read the entire story with bells and whistles about Ed Thorp,  Fortune’s formula is a better book. This book though quickly summarizes the success story of Thorpe-Shannon combination and goes on to tell a nice story of four quants who strike it big in the hedge fund world.  The author traces the lives of  Peter Muller(Morgan Stanley PDT) , Ken Griffin( Citadel), Cliff Asness (AQR) and Boaz Weinstein(Saba) from their childhood, to their trading careers, their eccentricities, their hiring decisions , their winning and losing trades.  Besides these four quants, there are host of people / funds mentioned in the book

It often happens that a player carries out a deep and complicated calculation,

but fails to spot something elementary right at the first move

- Chess grandmaster Alexander Kotov

Trivia : Ironically, Amaranth hedge fund once sent chess sets as year-end gifts, inscribed with the above quotation.

Via Maneesh Sethi’s Tumblr

Last few weeks have been good , for most of the trades have gone right. When something works, I generally  attribute it to 90% luck + 10% logic. When something doesn’t work, I usually have the proportions reversed in my mind as it  helps in creating better logic/algo. It really doesn’t matter what one believes when something has already worked, but one’s attitude/belief system DOES matter when things don’t work . On this “feeling lucky” note, I thought I should write something about Multivariate Stats . 

Anne Morrow Lindbergh decides to take a brief retreat from her life to spend some time on Florida’s Captiva Island and ponders over several aspects of life. This book is a compilation of those thoughts. First published in 1955, this book was a big hit and was translated in to 45 odd languages. More recently, there was a 50th anniversary edition of the book with a preface written by Lindbergh’s daughter Reeve Lindbergh  

” for Math. What does the book contain ? It contains 12 chapters on various aspects of math with history and examples blended in such a way that a reader will love the pace of the book.

0. Head for Numbers

The book starts off with questioning the concept of NUMBER itself. Is it a cultural artefact or Is it something that we have an innate ability to comprehend ? Alex cites an interesting piece of research which reaffirms our tendency to think in logarithmic scale. Innately, we compare numbers by ratios and not by their distance between them. So, the distance between 10 and 100 appears same as 100 and 1000, though our schooling in math says they are different.  The point made by the author is that we are innately kind of wired with log scale BUT we encounter the linear scale in our math education. So, the suggestion is to marry both scales somehow and lessen the math phobia amongst some of the kids at the school level. If understanding quantities approximately in terms of estimating ratios is a universal human intuition, then the question remains ,”Why should Kids learn about times tables , instead of sharpening their estimation skills ?” 

Via Information is Beautiful :

A superb way to collate numbers. Absolute numbers are useless but become interesting when you see it in a context. Someday I would love to write a piece of code which does this automatically given some data points.

In reality there is only now.

If you know how to handle this moment, you know how to handle the whole eternity

- Sadhguru

Says David McCandless in his TED Talk

http://video.ted.com/assets/player/swf/EmbedPlayer.swf

Have been waiting for this kind of plugin since ages. Finally I stumbled on to one today.

Readability : Cuts the crap while reading articles on the net. I think it is pretty useful if you don’t want to get distracted while reading stuff on the web.

The book’s intro caught my attention which said “ This book contains stories that provide real life lessons on understanding and managing uncertainty”.  That statement was good enough to motivator to read through the 21 short stories about uncertainty

The book starts off by describing the sample variance equation as the most dangerous equation, dangerous because of its profound misuse. Well, any elementary stats book tells that sample standard deviation is inversely proportional to square root of sample size. The author talks about various situations where a misunderstanding of this simple rule caused tremendous losses.

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The cost of computing has dropped exponentially ,

but the cost of thinking is what it always was. 

That is why we see so many articles with regressions and so little thought.

- Jacques Mairesse

I find Caret Browsing   , an annoying feature in Firefox . Thankfully there is an easy hack to control it.

“ Caret Browsing is turned on (and off) by pressing F7.”

An article from Nature,”Do Scientists really need a PhD ” ?  talks about BGI in Shenzen, a research center where almost no one has a PhD . Can they churn out cool stuff ? I think they will.

Ken Robinson says in his TED talk that there is an academic inflation all around us. For jobs that require BA, you need to have an MA. For jobs that need an MA, you need to have a Phd and so on… So Very True! World has given too much importance to degrees where actually what matters is , the attitude towards work and how much you care about what you do ?

Wonderful Piece by Andy Grove :

Recently an acquaintance at the next table in a Palo Alto, California, restaurant introduced me to his companions: three young venture capitalists from China. They explained, with visible excitement, that they were touring promising companies in Silicon Valley. I’ve lived in the Valley a long time, and usually when I see how the region has become such a draw for global investments, I feel a little proud.

Here is an interesting peace by Michael Mauboussin @ Legg Mason.

Takeaways :

• Two main ways to assess skill and luck are

  • Analysis of Persistence of Performance

  • Reversion to the mean

    • Skill as a measure of persistence

    • Rate of reversion as a measure of Luck

    • Analogy of Change and No Change is a nice point where Change happens in the type of winners seen and No Change happens in the variation of performances.

Dan Ariely in his book talk  : 

We have an intuitive idea of stuff and we continue to work under the “spell” of our intuitions. But it is wise , despite our internal resistance, to check our intuitions from time to time. Collect data , Do a Survey , Simulate stuff , etc to empirically test your intuition and you will be amazed at the numerous ill conceived intuitions that we keep holding on to.

The book begins by giving a very quick overview of derivatives pricing, stochastic vol models, risk neutral pricing and ends the first chapter by giving couple of motivating examples where loosely coupled joined distributions given marginals , are used to price options .

Chapter 2: Bivariate Copulas

Copula is a type of function . But a very special function which maps marginals to joint. Hence one needs to be aware about the nature of the function and also its limitations. In that sense, this chapter develops copula function from scratch by explaining in detail the various conditions for a function to be called a copula. Boundary conditions of a generic copula are introduced using Frechet bounds. The good thing about this book is that it tries to give a real life application at the right stages of the book so that a reader can immediately relate the concept. For example the Frechet bounds are technically introduced in most of the books(Nelson). However the authors in this book cite an example of an exotic option where Frechet bounds are used to calculate the minimum and maximum value of the option. Various types of copulae are introduced such as subcopula, minimum copula, maximum copula, product copula, Survival copula, Joint Survival copula for uniform variates etc. The highlight of this chapter is explain Sklar’s theorem in a detailed manner.

Any fool can know. The point is to understand.

~Albert Einstein

If you are out to describe the truth, leave elegance to the tailor

- Einstein

Via TP:

**We Are Our Choices . Build Yourself A Great Story
**

- Jeff Bezos

This is the latest addition to the talent myth pop-science literature. The ones that have already been published are Malcolm Gladwell’s Outliers ,  Daniel Coyle’s Talent Code and Geoff Colvin’s Talent is overrated . Well, the academic research behind all these books is Dr.Ericsson’s revolutionary research on deliberate practice. 

Bounce is written by Matthew Syed , a columnist for the Times of London and a BBC Commentator. More importantly, he is a three time commonwealth table tennis champion , a two-time Olympian.  Stuff from a sportsman is something one can always read as it is a story told by someone who actually was in the trenches and can tell a better story I think , than a mere spectator. Its debatable point though whether narrative is better from a sportsman or a bystander. I tend to think the former is better.Anyways, coming back to this book, it has three parts. 

Via Within the Frame(David duChemin)

VARANASI, INDIA. Varanasi is one of the holiest cities in India. It sits on the banks of the river Ganges, a holy river choked with pollution, decay, the remains of the dead, and the rotting offerings of marigolds placed in the river every morning and night by the faithful. Along her banks run the ghats, stone steps that descend into the
river and form the meeting place between the Ganga and her devotees. It is a chaotic, noisy, colorful place crowded with people who come to pray, wash, sell, buy, teach, and be taught. It is all at once a beautiful and an ugly place, a place of serenity and cacophony. I spent my time in Varanasi walking up and down the ghats at all
hours. Early morning, late evening, high noon. Trying to get a feel for the place, and to get an image or two that summed up not only the spirit of the place but how my spirit felt and thought about the place. And then I saw this boy. He was leaping from one boat to another, as a paper kite fell from the sky (the sky was full of them). He was trying to gauge the trajectory of the kite, to catch it.

Via Sanjiv Sir :  India’s Coming Urbanization Phase

Some relevant numbers to get an estimate of the Urbanization that is predicated to happen in a big way:

• We think on very conservative estimates about 380 million people are going to be added to India’s urban spaces over the next few decades. So that’s more than the entire population of the U.S. moving into urban India.
• Close to 60% of our GDP is composed of private final consumption expenditures
• India relative to the rest of the BRICs we are at about just over $1,000 [of income annually] per head. We are less than half of the next highest BRIC [economy], which is China.

I have always wondered about the binning criterion in histogram, a basic tool that is used widely by any data analyst . By default, in most of the software available, Sturges’ Rule and Scott Rule are provided which say the following ,the bin width chosen should be

There must be a derivation in some book but I had never bothered to look it up , until last week , when I had to for some reason.

Marriage is like a Cafeteria.

You take what looks good to you, and PAY for it later.

Geet Sethi :

Prakash Padukone once told me that for six years in a row he did not watch a single movie while he was undergoing a rigorous training regime. He would wake up at 5.30, go for a 10-kilometer run, return home for breakfast, exercise, then play two-and-a-half hours of badminton, come back at noon and sleep for two hours. He would then wake up at 2.30 in the afternoon, exercise till 3.00, play badminton between 4.00 and 7.00, do some cooling-down exercises, return home at 7.30, have his dinner and go to bed by 8.30. He maintained this incredibly disciplined lifestyle for six years without a break, seven days a week!

Here is a splendid talk by Ms.Ananda Shankar Jayant (a PadmaShri recipient ) about her dance and it’s power of healing.

http://video.ted.com/assets/player/swf/EmbedPlayer.swf

Systematic Investment Plans(SIPs), Value Investment Plans (VIPs), Value Averaging Transfer Plan( VTP) , Dollar Averaging Concept, Value Averaging Concept,  are ALL usually associated with answering a question – “ How to invest money over a long period of time to get adequate returns, given that it is impossible to time the market exactly ? “.

It has been quite some time since I had done any analysis at a portfolio level. Was occupied in doing something on the relative value arb stuff . So, my mind was a VERY RUSTY and was not in a PLUG and PLAY mode for portfolio analysis. The moment I started looking at the plans available in the market, the first thing that hit me was- “Where is the mention of Risk in these products “? Yes, risk is an abstract quantity which can be defined in more than one way, but shouldn’t that somehow figure in an investment plan ?. SIPs , VIPs, VTPs are all focused /designed based on returns and they have no mention of risk! . At a 10,000 ft , it looks like they can be summarized as a mix of contra-trend following  + formula based investment strategy.

Instead of wondering when your next vacation is,

maybe you ought to set up a life you don’t need to escape from.

-- Seth Godin ( Tribes)

Rory Sutherland makes a case for a new job title in the org structure of companies – Chief Detail Officer

http://video.ted.com/assets/player/swf/EmbedPlayer.swf

In US, it is widely believed that math education at school level needs a BIG reform. The comparison is with respect to Asian kids who supposedly do well in math.  My strong belief is that math education is broken in some of the Asian countries too, including India. One might mistake the immense problem solving exercises that most of the Indian kids go through to get to engineering colleges as a strong foundation for mathematical thinking. Nope. Having gone through the system myself, I think that most of the Indian students are good at pattern recognition in problems that they are posed, that too a specific kind of problems that figure in the entrance examinations.

Roubini discusses his new book “Crisis Economics” in which he emphasizes that mess witnessed in the last few years is just the beginning!

http://fora.tv/embedded_player

A few weeks ago , I realized that my GLM knowledge was pretty rusty as I was struggling to get meaningful estimates from a poisson regression. 

Decided to immerse myself over the weekend on what I gather to be one of the best books on GLM , written by Annette J Dobson. Well , there is always the classic monograph by Nelder & McCullagh , “Generalized Linear Models”, that one can refer to , which to me was a little too dry to go over.  So, there is that little guilt feeling in me that I have never read the classic monograph from the father of GLM(J.A.Nelder) . I have always found this to be the  case in quite a few stuff that I have learnt over the years. For example, I have never read till date,  Bjarne Stroustrup’s C++ , the supposedly classic book on C++. However I have coded C++ like crazy and have used C++ to perform whatever that was needed . So, I always have this guilt trip whenever I think of C++. Well, may be someday I will go through the classic book .  In a similar vein, I will go through Nelder’s classic stuff someday, hopefully :)

Written by Thich Nhat Hanh, a Buddhist monk, this book is a classic volume on the importance of mindfulness in our lives.  The author introduces mindfulness with a Zen story  - “Washing Dishes to Wash Dishes “.

The central message from this book is to be completely mindful of whatever activity one is doing.

Be it ,  preparing tea  / exercising /  gardening / telling a story / talking to a friend / doing office work /  whatever be the kind of activity one is in to, by being completely present in the moment , one develops a deeper understanding of oneself and can remain in peace , irrespective of the outcome.

Not knowing how to feed the spirit, we try to muffle its demands in distractions.

Instead of stilling the center, the axis of the wheel,

we add more centrifugal activities to our lives—which tend to throw us off balance.

- Anne Morrow Lindbergh ( Gift from the Sea )

One thing. Just one thing. You stick to that and the rest don’t mean shit.

- from the movie, City Slickers

I would willingly stand at street corners,

hat in hand, begging passersby

to drop their unused minutes in to it.

- Bernard Berenson

In a delightful talk, Daniel Kahneman , proposes a different notion of happiness , that which has two elements, Experiencing Self and Remembering Self.

If you were told that, at the end of your vacation, all the great pictures that you have taken and  the memories associated with the vacation would be erased, Would you still opt for that  vacation ? 

http://video.ted.com/assets/player/swf/EmbedPlayer.swf

I am a great fan of 37 signals. I have been using backpackit service for the last 5 years and have always loved the web app for its simplicity and UI design. The fact that Ruby on Rails got a major push because of the founders , is one of the best things to happen for people who believe in rapid prototyping,  as they  could  use Ruby on Rails to quickly test the traction for their web app ideas.  

Textbooks and curricula in psychology almost never teach the statistical toolbox, which contains tools such as descriptive statistics, Tukey’s exploratory methods, Bayesian statistics, Neyman–Pearson decision theory and Wald’s sequential analysis. Knowing the contents of a toolbox, of course, requires statistical thinking, that is, the art of choosing a proper tool for a given problem.  Instead, one single procedure that I call the “null ritual” tends to be featured in texts and practiced by researchers

One line plot of the book is – “ How side bets accumulate and go on to become a BIG bet ?”

If you have read any of John Grisham books , you will be aware that he has the gift to turn any boring law suit in to a thriller ride for you.

Michael Lewis weaves one such story of the financial markets, where the protagonists , unlike fiction books, are very much real life characters, who go on make tons of money in the subprime crisis. The nice thing about this book is that it talks about people who DID something. I mean, you tend to read about people who saw it coming, people who predicted, etc. Well , may be.So what ? But there were very few people who had the guts to actually believe in what they predicted and took bets. Were they just lucky ? May be, But if you look at the massive bets these few people took and the way they took it calculatedly,  it seems very likely they saw that “Emperor had no clothes” and actually did something about it ,  take positions so that , by the time everyone knew and aired out the opinion that emperor had no clothes, they would benefit immensely.

The title of the book is completely misleading. It has no specific strategies mentioned at all. This book in that sense has a completely bogus title probably meant to deceive people.

It merely lists the advantages of owning an ETF over an index fund / active managed fund. It then goes on to list a variety of ETFs and traces their evolution in a few sentences. You can get this knowledge by merely looking up on the web for a few minutes about the various ETFs that are available for an investor.  One does not even get an idea about some basic metrics relating to the ETF Space. 

Trading Markets have been swamped by a variety of financial assets and subsequently, investment world has witnessed an exponential rise in the number of funds managing these diverse assets. Gone are the days when the investor had to allocate capital between just two segments, bond funds and equity funds. In the current scenario, the options have exploded. The number of Gold funds, sector specific funds, emerging market funds, country specific funds etc have been growing rapidly but the returns across all these investment vehicles have been completely random. Who performs on a consistent basis ? is a million dollar question . In such a situation, what should be investor doing?

If it’s important, do it every day; if it’s not important, don’t do it at all.

– Dan Gable

Regressing I(d) processes is fraught with danger of mis-specification and nonsense estimates. We often see analyst reports where a stock is being regressed with a composite index to find the beta of the stock OR two stocks are regressed to find the relative beta etc . If one looks at those numbers closely from a stats perspective, most of the estimates are complete non sense. 

Most often , knowingly or unknowingly , one tends to apply regression amongst non stationary series and then tries to use the estimate as though the regression has been done on stationary series. In one of the references to a paper I was reading, there was a quite a praise showered on a paper by Philips (a Yale Prof), titled ”Understanding Spurious Regressions”,(1986).  It made me curious enough to go through it carefully.

Via  I Spent The Night With Nassim Taleb :

Taleb :  “Paul Krugman is a danger to society!” “He uses the wrong mathematics, that’s how I knew he was a fluke.”