Just Blame Fred

While responding to a microblog on Facebook today, I came up with an revision to the opening of the Deceleration of Independence, more suited for our day and age.

We hold these truths to be self-evident, that all Individuals have within themselves a Yearning for Freedom, Liberty, and the Pursuit of Happiness, which shall not be abridged by any other Individuals; nor any Governments, Corporations, Municipalities, nor other Associations of Collective Power.

Indeed, the Individual reserves the sole power in making decisions to forward his own Progress towards Freedom, Liberty, and the Pursuit of Happiness, and those choices must be respected by all.

We live in a day and age where many systems of bureaucracy exist whose sole purpose is to deprive Individuals of their Yearnings, to turn into Functional Slaves at the pleasure of Others.

Yet, we also live in a day and age where we have hyper-connectivity between and among Individuals to allow for many multi-scale levels of Spontaneous Association, the likes of which no old-guard Government, Corporation, or other bureaucratic system can stand against.

To that end, a call for ALL Individuals across the World at Large to recognize the lofty yet obtainable  Goals of Freedom, Liberty, and Happiness, and to put those Goals to the forefront in all doings.

Back in 2000, I used to be a day trader full-time. Everyday I would watch the markets and attempt to capitalize on short term price movements. In order to “predict” those price movements, I would look at lots of data and news every day, and even wrote some software to analyze some of that time-series data to give me a kind of “forecast” for the trading day.

We all know about “price discovery”, being “overbought”, “oversold”, “retracements” and the like. A difference is assumed between the “investor” and the “trader”, even to the point of absolutionist morality. It is seen as a “good thing” by the general public to be an “investor”, and a “bad thing” to be a “trader”. There’s lots of misconceptions about the equities market, and a lot of those misconceptions are intentional by those who stand to gain from the general ignorance and folklore on the part of the public.

Ah yes. But if we didn’t have the “traders” in the market short-term, there would not be enough liquidity for the long-term “investors”. They need each other, it would seem.

But the real question what is really going on needs to be understood and answered to truly understand the equities market.

Firstly, one must understand the basic fundamentals of the equities market. It is a zero-sum game. Exchanges occurs between one trader and another; between one investor and another. The goal of anyone in the equities market — investor or trader — is to find a “greater fool” than oneself to buy the stock at a higher price than one’s “strike price”.

That is to say, that every dollar you make in the equities market came at the expense of someone else, and every dollar you loose in the equities market  goes in somebody’s pocket.

This is a very tough concept for some to accept, because if you listen to all the spin about the equities market, you are lead to believe that the wealth one could supposedly make happens by “magic”. It does not. It happens at the expense of other players in the market.

That reality is played out — rather painfully — by the market “crashes” such as the one we are having now,  where so many loose their “investment”. They are paying for the profit of others before them. Plain and simple. And the sad reality of this is that prices will not rise again until the greatest fools of all jump out of the market in sheer panic and terror.

Indeed, it is a requirement for this to happen. Prices must fall. The giveback must occur. The Faustian bargain must be paid in full. This is the mathematical reality of a zero-sum game.

After you understand and appreciate the inanity of this, consider it even more insane that many are encouraged to put their retirement investments in the equities market.

Why does this happen? Simple. Because the supply of fools are finite, and to carry the market higher so for the Big Players to make a profit, they must suck in legions of smaller fools who don’t know any better.

The party works for a while. The more fools you suck in, the higher the prices are driven. Until, of course, you hit a wall and are unable to suck in anymore fools. Then the prices fall mercilessly, and many see their hard-earned life’s wealth washed away into the pockets of others.

The media calls this a “loss”. It should really be called a “transfer”, because that’s exactly what it is — a transfer of wealth.

They are encouraged to “stay in so they can catch the next uptick”. The sad irony is, of course, that if they would all stay in as they are recommended to by the financial planners, the market would never rise again. It only rises when many jump out of the market, giving up their holdings at prices below their strike, to smarter fools that will simply lie in wait for the whole “Ponzi Scheme” to repeat itself.

Now, with that notion in our minds, we are now in a stronger position to understand the true psychodymanics of the equities market.

I have struggled for some time now to conceive of a good model for the stock market. My latest one goes like this: On a given day, a given stock trades in a limited range of prices, at a certain volume. That volume and price range represents new ownership of that stock at a range of strike prices for that day. Since it is not known who owns what, I turn the issue on its head, and consider each individual stock as its own owner.

Crazy, you say? Maybe. But why not? If one person bought 10,000 shares of XYZ, would not the psychology be more or less the same as though 10 people bought 1000 shares each of XYZ? Or a hundred people purchased 100 shares each?

You are starting to see the picture here. Of course, in actuality, the specific goals of 100 people will probably all be different from each other — some may be doing this in a retirement account; others may be day traders. Some may be a mutual funds management. But that’s the whole idea. If I consider each individual stock as its own owner, then I can assign “flocking behavior” to groups of XYZ that all behave the same way. it allows me to reduce the problem of ownership to its bare elements. If 10,000 shares of XYZ all behave the same way, does it really matter if it had one owner or 10,000 with the same mindset? No, it does not.

When a share is traded, it looses is past owner and has a new owner at a new strike price. So now you have two components to deal with — the strike price and the goal of each share of stock.

When a the market is trading above the strike price of a owned stock, that owner is said to be “happy”. If the market price is trading below the strike, that owner is said to be “sad”.  We can then assign some probability of “ownership flipping” to that stock based on its own goals of greed and fear and the expectation of price evolution.

We can generally state that the probability of ownership flipping increases as the market price moves away from the strike price. But the probability curve is not symmetric for “happy” stocks and “sad” stocks. The probability increases faster for “sad” stocks than it does for “happy” stocks. Also, the details of the dynamics of how the price moves away from the strike is important. Fast moves will increase the probability of a flip faster than slow moves.  Price moves in certain patterns may shift the probability faster than other patterns. External factors such as news will also have an effect on that probability of a flip. Then there are automatic trading systems and the like. The picture becomes rather complex.

Add to that the fact that a flip influences others to flip. One single flip could trigger an avalanche of flips. This is self-organized criticality speaking here.

Now, it is clear that we, for the most part, have no ready access to the ownership space and distribution of the market capitalization of an equity at any given point in time. However, we do have a print of past history of stock price ranges and volumes for fixed intervals (minutes, hours, days, weeks, months, years).

So, for any given time period p, where volume v of stock activity occurred, we know that at most v shares of stock are owned over the price range of p. We also know that at least min(t) shares are owned, t being the number of shares traded of a single tick over p. But this amount is so small in comparison that we can safely assume that w — the number of shares flipped during p — will be much larger than min(t) — that is, v >= w >> min(t).

For simplicity, we will simply ignore, for the moment, the possibility of shares flipping multiple times during p, as would be the case with day traders. We will also ignore shorting, but will treat it later.

So, given p₁, p₂, …, p_n, we have D₁, D_{лаптоп2}, …, D_n, where D_i = D(p_i), price distribution for period p_i. Of course, D shall be confined to the price range of the associated period. We also have ξ, the complete set of stock ownership for a given equity, where D_i is a subset that is dynamic on i.

Wow, what a whirlwind of news we’ve all heard over the past couple of weeks! Merrill Lynch, Lehman Brothers, AIG, and who’s next?

All this squabbling over ecomomic growth problems. All this scrambling to “fix” the problems. All the politics being flung around by Obama and McCain over who’s to blame. All the people on “Main Street” staring like deer in the headlights. All the talking heads making crazy pronouncements of impending doom and gloom. All the other financial institutions scrambling to “protect” themselves from being the next major jaw-dropping headline. All the investors, traders, fund manager, market makers on wall-street shooting worthless tokens — whoops, I mean stocks — back and forth to each other in a never-ending zero-sum Ponzi scheme of Ages.

And yet, a true understanding of what’s really going in is so simple even a 5-year-old can grasp it — if you know where to look and how to understand the results.

And so, let me impart this wisdom to you.

The first requirement is that you understand that, dollar for dollar, the stock markets are a zero-sum game. This is a rather tough concept for some to grasp, and I can appreciate that because all the hype you hear about stocks and the related financial instruments tend to hide this plainly obvious fact from you: that every dollar you make on the stock market comes out of someone else’s pocket, and every dollar you loose goes into the pocket of another trader/investor/what have you. That is the definition of “zero-sum”. When you add up all the gains and losses of the entire system, you come up with zero. Get that? Good. Now for my next pearl of wisdom.

If you look at the stock market over time, it indeed looks complicated. A price rises, a price falls. One company rides to success; another goes down in flame. Traders shoot tokens back and forth to each other representing these companies. And when I say “trader”, I mean anyone who dabbles in the exchange of stock tokens on the stock market, directly or indirectly. Long term, day trader, guy in the pit. The distinctions really don’t matter in the long run as you will soon understand.

Now, I will show you something, a simple something. It’s a chart. It’s derivation is not complicated at all, and anyone in the world can pull this same information and understand it, including a 5-year-old. Brace yourselves. Here it comes.

Now, notice that this is the NYSE chart — a calculated average of all stocks traded on the New York Stock Exchange. Notice that this is yearly data going from 1970 to the present (2008). The “candlesticks”, as they are called, show at a glance how the prices shifted for that period. Since this is a yearly chart, a candle represent price movement for the entire year. If the candle is hollow, it means the price ended higher at the end of the year than it began. Red candles mean the price ended lower for that year. The “stick” part of the candlestick represnts the highs and lows of price movements for that year.

Now you are probably thinking, “so what?” Even this chart shows what looks like a general rise in the NYSE, even though that last candlestick looks meanincing (it represents the year to date movenent of this year– 2008). But there’s more to this chart if it hasen’t caught your eye already.

Yes, the bottom part of this chart is where the real story lies. It represents trading volume. The vertical bars are color-coded for the years they represent — a black bar means the candle above ended at a higher price; a red bar means the year ended at a lower price than it began. But that’s not important. The important thing is the trend in volume itself, and it’s relationship to the price movements.

You will note that from 1970 to 2002 the volume has been increasing almost exponentially. Afterwards, you see a leveling off in volume. In fact, this is the first time the volume has been level since 1987. And you will note that the volume now is much higher than it was back in 1987.

And if you haven’t figured it out by now, let me tell you what that 5-year-old can understand once you tell her.

You will recall my quip about zero-sum games earlier. Now, what does the zero-sum game really mean to you as a trader? Come on, think about it! Even a 5-year-old should be able to figure this out!

Ok, if you still didn’t catch on, it means simply this: You, the trader/investor/whatever you are, are a fool for buying a token with no intrinsic value. The only thing you can do with this token, once bought, is to sell it again. And what do you look for when you sell it again, being the fool that you are? Exactly. You need to find a greater fool than yourself to take it off your hands at a higher price than you bought it! That’s right! You only make out if you find a greater fool than yourself.

And so fear sets in if you cannot find a greater fool than yourself and trading is going on below your strike price. Your only options is to go into a “hope and pray” mode and hope greater fools flock back into the market, or to sell it off and take a hit, hopefully advoiding an even nastier hit if you would be so foolish to hold on to this worthless token longer.

Now with that pearl of wisdom, let’s take a look at another chart — NASDAQ.

You see — not suprisingly — the same characteristic volume trend — a near exponential rise until 2001, then a levelling off. You can directly relate the volume to the number of “fools” in the market, and the volume no longer increases exponentially anymore for one simple reason: You have run out of grater fools!!!!!!!!

Is that surprising? I mean, the population on this planet is a finite number, and the stock market has grown far faster than the population can. What that ultimately means is that you MUST run out of greater fools. What happens after that? The prices will shift about chaotically. Confused investors will all scratch their heads wondering why the old tried and true approaches of the past don’t work anymore. Any such foolishness as “being in it for the long term” is to be laughed at, and you can plainly see why if you look at these charts.

During the 20th century, as prosperity spread to more and more of the population, more and more people were drawn into the stock market, either directly as “investors”, or indirectly through 401Ks, mutual funds, IRA accounts, and the like. All their foolish stategies were really predicated on the notion that there will always be greater fools to take the market higher and higher. That there will always be an exponential increase in volume. That the supply of money is infinite. That, in point of fact, the zero-sum game that is the stock market is not really a zero-sum game. That the money is not really coming at the behest of the loss from someone else, that this Ponzi — or pyramid — scheme can continue forever.

The 5-year-old is now laughing at you.

Well, you can really blame me on this one…

Over the many years, I have spent a considerable amount of time thinking about thinking, beliefs, and the human population in general. Mass human behavior, individual human behavior, politics, wars, religion, art, science, mathematics, networks, complex dynamical systems, and thought contagions.

It occurred to me that, among many other things, that many, many people behave more like mindless automatons than thinking beings. You can see it in advertising, politics, social services, the government in general, and just your average Joe. You see it in fervent believers of religion, the Republican party, the Democratic party, sports, everywhere. You see it in parents, teachers, police, lawyers, social workers, etc.

Basically, most people never — or almost never — bother to critically examine what they believe in. They seem to just jump from one belief frame to another without much thought as to whether or not it even makes sense, let alone if the beliefs themselves are even correct. They are “programmed” by some agent, which could be parents, friends, church leaders, politicians, or the media. They also act on those beliefs, and almost never bother to think about the consequences on acting on unfounded propositions. Even though the consequences are at hand, no learning seems to ever take place to lead them to the very necessary critical analysis of half-baked notions and fuzzy impressions.

But this does not apply to everyone, of course, as there are those who do critically examine notions and assumptions before inculcating the propositions as “beliefs”.

Still others, like myself, eschew the entire mechanism of belief itself. Ask yourself the following question:

Do beliefs determine truth?

I don’t think anyone, not even the Mindless Vessels of Beliefs (MVBs) themselves, would ever answer “yes” to that basic question. And yet the MVBs will go on most likely being MVBs, even after having admitted to the most important flaw in belief systems in general. They may wonder about it a bit and “go back to sleep”. Meanwhile, those who actually DO think already know about the inherent flaws in beliefs in general.

But let’s talk about this very fundamental question. If beliefs do NOT determine truth, then that immediately leads to two more questions:

1. Just how DOES one determine truth?
2. Just what DOES one do with all of these beliefs?

I will discuss those questions in future blogs. But for now, I want to speak more on beliefs and how people in general measure up.

Sometime after I came up with the idea of MVB, it occurred to me that there are finer layers in how people and beliefs interact. Also, “Mindless Vessel of Belief” sounds kinda harsh, even though I deem 80-90% of the population are MVBs. So I came up with a more general (and gentler) classification system, which I currently call “realms”. And so let me expound on them.

Realm 1: Autonomous Belief Agents

A Mindless Vessel of Belief (MVB) is a person who tends not to question beliefs, but simply acts on them. The “belief matrix”, if you will, drives said person’s activitives from moment to moment. Little, if any, thought is ever given to the “why” behind a belief. When a new proposition is introduced to said person, the new proposition is evaluated solely on the pre-existing belief matrix with little reference to anything substantive. In short, an Autonomous Belief Agent, or MVB, is largely driven by the beliefs themselves rather than knowledge.

I estimate that 80 to 90% of the world operates in this fashion. You get a good sense of this from observing political campaigns, religious organizations, many who operate in the “public sector” for a living where no thought is required, just undue obedience. It’s the type of thing that makes witch-hunts possible, allowed the Holocaust to become a reality, and allowed the United States to “justify” the war with Iraq.

Everywhere you look, from the media to sports to law reeks of this. Any place where people routinely act without rhyme or reason, without any sensibilities, and justify said actions with the excuse of “just doing my job”, etc.

I personally find it quite disturbing and perplexing that most of the world operates in this manner. Many of the often-touted ideals are rendered moot in lieu of the Autonomous Belief Agents, including the notions of “democracy”, “justice”, and “fairness”. The money-driven media, just to stay alive, is forced to kowtow to the MVB, reducing content to the type of drivel and mediocrity that appeals to the common MVB.

Realm 2: Belief Aware

Realm 2 types are somewhat aware and mindful of the nature of beliefs and their pitfalls, but still operate in that context. They do make some efforts at verifying that many of their beliefs are actually knowledge, but still believe(!) that beliefs are either a good thing to have, or at least there’s no way for humans to get around them. They are definitely measure better than your average MVB, but still operate in the context of what they consider “humanity”. Those that fall into this category are liberal arts majors, writers, and poets. Those who are particularly creative typically fall into this realm, as well as many scientists, engineers, and philosophers.

Realm 3: Belief Rejection

Realm 3 types are difficult for me to describe in human terms. Realm 3 speaks about a complete rejection of the entire notion of belief in lieu of Logic and Reason. A Realm 3 person has the ability to “step outside” of humanity and see the human condition for what it really is. A Realm 3 type is totally aware that “beliefs” are merely the backdrop for memes, and that much of what is considered “reality” is a construct of a extremely sophisticated neural process. Even beliefs themselves are a part of that same neural complexity, and as such is suspect.

The reason this is difficult to describe in human terms is because, well, the writer as well as the readers of this article are themselves human, and thus at some level the understanding of Realm 3 become infinitely recursive. For am I not using memetic transfer to convey these concepts to belief organs (your brain) about rejecting what many consider to be the cornerstone of all human existence?

I have not identified anyone other than myself as being in the Realm 3 category. The difficulty lies in distinguishing someone between Realm 3 and Realm 2. Unless the conversation goes directly to the heart of the matter, you would not know if someone who appeared to be Realm 2 is actually Realm 3. Others who fall into this category will most likely have never thought of it in these terms and may feel extremely uncomfortable discussing it with Realm 2 types, let alone Realm 1 people! So, I can give no estimate on what percentage of the population may fall into this category, though I suspect the numbers are very small.

On reflection, I would suspect that those doing research in the field of cognitive psychology would most likely be or on the road to becoming Realm 3 without even realizing it.

Realm 4: Self Rewrite

A person who is a realized Realm 3 is still human, despite the recognition of the fact that the human belief system is itself a construct. But the realization offers the possibility of being able to manipulate one’s own construct. That is to say, you, being a Realm 3 type can now develop the faculties to manipulate your own construction directly. You can, in essence, rewrite your own “programming” This is something I aspire to personally, and have had some limited success at it. It is largely uncharted waters, with new possibilities brimming around every corner. There are also dangers as well, because what happens if you do a bad rewrite unto yourself?

Due to the way our meat brains works, auto-rewriting is very difficult to achieve. What would be ideal is transhumanist approach of replacing or at least augmenting your meat brain with some new technology — Nanotech? Photonics? Quantum Computers? — to allow a much faster means to rewrite and resculpt the self. Such fantastic technology does not exist yet, of course, but it is fun to contemplate.

Realm 5: Peer Rewrite

Realm 5 is not necessarily a “higher” realm than the others — except Realm 1, perhaps. Basically the ability of one human to rewrite another human has been with us throughout the ages.  Today, governments of the world do it through control of the school systems and also control of the media. Primal emotions are typically used as the gateways to do peer rewrites, and the primal emotion of choice, I’m afraid to say, is fear. Religious institutions use the fear entry point quite frequently, as well as law enforcement, the IRS, the war propaganda organs, and many others.

Peer Rewrite occurs at all scales of society, including families. Parents by definition (re)write be belief matrices of their offspring, and teachers by definition rewrite their students.

Is Peer Rewrite necessarily a bad thing? In and of itself, no.  However, there are a multitude of ethical concerns, as well as much power in being able to rewrite your peers. If it is for reasons of exploitation or control, especially if it is to the detriment of the rewritetee, I consider this a bad thing in general. On the other hand, if a parent is rewriting his kid with the goal in mind of that kid having a happy, healthy and successful life, I would consider that a good thing.

I would consider a rewrite of a Realm 1 (MVB) person to become Realm 2 or better to be a very good thing, as long as it is approached with caution and with recognition  that you are, in effect, altering the course of another person’s future, and there may be some unexpected downsides in doing so, if, for instance, said person is unable to handle the realities of reality.  The very reason so many may be stuck in Realm 1 in the first play may stem from their inabilities to handle the truth about truth.

I am working rather late tonight to get my system out to “production”. Well, not really production per se, but so that the owners of this company that are paying my bills may be happy. The entire team is slaving over this to be done by tomorrow morning so that “flashy lights” can be beheld by all tomorrow.

I am the Database Architect at this social networking company, which is numero uno in its niche. We’re using MySQL and PHP (no surprise there!) But the one cool thing is that I am using Ruby to do the data migration from the current poorly-written schema to the new one entirely of my design — powerful, robust, and delicious! Ruby is hellishly powerful and it’s expressive character is great for the job of migrating the data.

I am also writing an ER tool in Ruby as well, but that’s going to take a bit longer to complete. I want it to have the power of ER/Studio, but with support for MySQL that ER/Studio is rather weak on. I will also make this an OpenSource product, which will be very disruptive — lowering the bar for ER tools (ER/Studio costs nearly $5000 per seat) — and to boot others can write modules to support other databases, like Postgres, Oracle, MS SQL, and the like!

Oh well, for now — and I freely admit it — it’s vaporware. But percolating around in my brain, and must come out!!!

I have many things percolating around in the noggin that must escape into reality, and it will happen! Trust me on this!

Well, speaking of brains, mine is fried good, so time to lay it to rest.