In The Land of Smart & Ultra Genius

Black Swans From New Normal

2011-06-22T23:22:00.000-07:00

Black Swan: A 40 Percent Correction? - CNBC

2011-06-17T03:34:00.000-07:00

Black Swan: A 40 Percent Correction? - CNBC

Some of my favorite Taleb Quotes

2010-03-14T23:11:00.000-07:00

"In some disciplines, “expert” is the closest thing to a fraud performing no better than a computer using a simple algorithm."

"The Black Swan comes from misunderstanding of the likelihood of suprises because we take what we know a little too seriously."

"When conservative bankers make profits, they get the benefits; when they are hurt, we pay the costs."
"Seeing White Swans does not confirm the nonexistence of Black Swans."

"We may enjoy what we see but there is no point reading too much into success stories because we do not see the full picture."

"A life saved is a statistic; a person hurt is an anecdote. Statistics are invisible; anecdotes are silent."

"The risk of Black Swan is invisible."

"The casino is the only human venture I know where the probabilities are known and almost computable."

"Beaming light on the unseen is costly in both computational and mental effort."

"Train yourself to spot the difference between the sensational and the empirical."

Too Big To Fail

2009-11-11T03:03:00.000-08:00

Nassim Taleb and Charles Tapiero has penned down a new technical article "Too Big to Fail, Too Big to Bear". I am reproducing the article here:

Electronic copy available at: http://ssrn.com/abstract=1497973
Center for Risk Engineering, New York University Polytechnic Institute Page 1
Too Big to Fail, Too Big to Bear,
and Risk Externalities
Nassim N. Taleb*
Charles S. Tapiero*
Abstract
This paper examines the risk externalities stemming from the size of institutions. The problem of
excessive risk taking and their potential external consequences are taken as a case example. Assuming
(conservatively) that a firm risk exposure is limited to its capital while its external (and random) losses
are unbounded we establish a condition for a firm to be too big to fail. In particular, expected risk
externalities’ losses conditions for positive first and second derivatives with respect to the firm capital are
derived. Examples and analytical results are obtained based on firms’ random effects on their external
losses (their risk externalities) and policy implications are drawn that assess both the effects of “too big to
fail firms” and their regulation.
Key words: Risk, Externalities, Economies of Scale
• Department of Finance and Risk Engineering, New York University Polytechnic Institute, The
Research Center for Risk Engineering, New York and Brooklyn.

Electronic copy available at: http://ssrn.com/abstract=1497973
Center for Risk Engineering, New York University Polytechnic Institute Page 2
1. Introduction
“Too Big to Fail” is a dilemma that has plagued economists, policy makers and the public at large. The
lure for “size” embedded in “economies of scale” and Adam Smith factories have important risk
consequences that have not always been assessed or properly defined. Economies of scales underlie the
growth of industrial and financial firms ([6]) to sizes that may be both too large to manage and losses too
large to bear. This is the case for industrial giants such as GM that have grown into a complex and
diversified global enterprise with extremely large failure risk externalities. This is also the case for large
banks that bear risks with systemic consequences that are often ignored and too big to bear. Banks, unlike
industrial firms, draw their legal rights from a common trust, to manage the supply and the management
of money for their own and the common good. Their failure, overflowing into the “Commons”, may thus
far outstrip their internal and direct losses. The losses borne by the “Commons” can be an appreciable
risk externality that banks do not assume. Further, when banks are perceived too big to fail, they may
have a propensity to assume excessive risks to profit in the short term; they may seek to exercise unduly
their market power; rule the “Commons” and price their services unrelated to their costs or quality.
Size may lead such firms to assume leverage risks that are unsustainable. This is the case when banks’
bonuses are indexed to short term performance, at the expense of sustainable performance hard to
quantify risk externalities. Externality is then an expression of market failure. For banks that are too big
to fail, these risk externalities are acute. For example, Frank Rich (The New York Times, Goldman Can
Spare You a Dime, October 18, 2009) has called attention to the fact that “Wall Street, not Main Street,
still rules Washington”. Similarly, Rolfe Winkler (Reuters) pointed out that “Main Street still owns much
of the risk while Wall Street gets all the profits”. Further, a recent study by the National Academy of
Sciences has pointed out to extremely large hidden costs to the energy industry—costs that are not
accounted for by the energy industry, but assumed by the public at large.
Banks and Central Banks rather than Governments, are entrusted to manage responsibly the monetary
policy—not to be used for their own and selfish needs, not to rule the “Commons”, but to the betterment
of society and the supply of the credit needed for a proper functioning of financial markets. A violation
of this trust has contributed to a financial meltdown and to the large consequences borne by the public at
large. In this case, “too big to fail banks” have contributed to an immense negative externality—costs
experienced by the public at large. In this sense, markets with appreciable negative externalities are no
longer efficient, even if we have perfect competition (i.e. complete financial markets). If a firm’s
negative externalities are not compensated by their positive externalities or appropriately regulated, then
their social risks can be substantial. In a recent New York Times article (Sunday Business, section,
October 4, 2009), Gretchen Morgension, referring to a research paper of Dean Baker and Travis
McArthur, indicated the effects of selective failures, letting selected banks grow larger and “subsidized”
at a cost of over 34 Billion dollars yearly over an appreciable amount of time.
Size is no cure to the failure of firms. For example, Fujiara [4], using an exhaustive list of Japanese
bankruptcy data in 1997 (see [2],[3],[5],[8],[10]) has pointed out to firms failure regardless of their size.
Further, since the growth of firms has been fed by debt, the risk borne by large firms seems to have
increased significantly—threatening both the creditor and the borrower. In fact, the growth of size
through a growth of indebtedness combined with “too big to fail” risk attitudes has ushered, has
contributed to a moral hazard risk, with firms assuming non-sustainable growth strategies on the one hand

Center for Risk Engineering, New York University Polytechnic Institute Page 3
and important risk externalities on the other. Furthermore, when size is based on intensely networked
firm (such as large “supply chains”) supply chain risks (see also [15], [16] and [7]) may contribute as well
to the costs of maintaining such industrial and financial organizations. Saito [11] for example, while
examining inter-firm networks noted that larger firms tend to have more inter-firms relationships than
smaller ones and are therefore more dependent, augmenting their risks. In particular, they point out that
Toyota purchases intermediate products and raw materials from a large number of firms; maintaining
close relationships with numerous commercial and investment banks; with a concurrent organization
based on a large number of affiliated firms. Such networks have augmented both dependence and supply
chains risks. Such dependence is particularly acute when one supplier may control a critical part needed
for the proper function of the whole firm. For example, a small plant in Normandie (France) with no
more than a hundred employees could strike out the whole Renault complex. By the same token, a small
number of traders at AIG could bring such a “too big to fail” firm to a bankrupt state. This networking
growth is thus both a result and a condition for the growth to sizeable firms of scale free characteristic
(see also [3],[5]). Simulation experiments to that effect were conducted by Alexsiejuk and Holyst [1]
while constructing a simple model of bank bankruptcies using percolation theory on a network of
cooperating banks (see also [12] on percolation theory). Their simulation have shown that sudden
withdrawals from a bank can have dramatic effects on the bank stability and may force a bank into
bankruptcy in a short time if it does not receive assistance from other banks.
More importantly however, the bankruptcy of a simple bank can start a contagious failure of banks
concluded by a systemic financial failure. As a result, too big to fail and its many associated moral
hazard and risk externalities is a presumption that while driving current financial policy and protecting
some financial and industrial conglomerates (with other entities facing the test of the market on their own
and subsidizing such a policy), can be extremely risky for the public at large.
Size for such large entities thus matters as it provides a safety net and a guarantee by public authorities
that whatever their policy, their survivability is assured at the expense of public funding. The strategic
pursuit of economies of scales can therefore be misleading, based on fallacies that negate the risks of size,
do not account for latent and dependent risks, their moral hazard and significant risk externalities.
The essential question is therefore can economies of scale savings compensate their risks. Such an issue
has been implicitly recognized by Obama’s administration proposals in Congressional committees
calling for banks to hold more capital with which to absorb losses. The bigger the bank, the higher the
capital requirement should be (New York Times, July, 27, 2009, Editorial). However such regulation
does not protect the “commons” from the risk externalities that banks create and the common sustains.
To assess the effects of size and their risk externalities, this paper considers a particular and simple case
based on a firm risk exposure which can lead to a firm’s demise (its capital) and unbounded external
losses for which they assume no consequence. An example is used to demonstrate that such risk exposure
underlying excessive risk taking (motivated by the lure for short term profits) can have accelerating losses
the larger the bank.

Center for Risk Engineering, New York University Polytechnic Institute Page 4
2. Too Big Too Fail and Its Risk Externality.
Given the nature of a speculative position, we assume that the positions has a potential loss probability
distribution bounded above by the firm aggregate capital (its size, consisting of its equity and debt
holdings) or . In some cases, the speculative exposure of trades may be larger
than a firm’s capital. Further, a bank’s loss can have a repercussion on other external losses—the larger
the bank’s loss, the larger the potential external loss. Given a firm’s loss, we let its total loss, including
external losses be given by . As a result, the joint probability distribution of
global financial and firm losses is . A loss resulting
from a firm random exposure of its capital W has thus probability and cumulative distributions:
The effects of size on the aggregate loss are thus a compounded function of the probabilities of losses of
the firm and their external costs. If a firm has a loss whose external consequences (the loss y are
extremely large), then they may be deemed to be “too big to fail” as the negative externalities of its failure
may be too big to bear. In this context, the risks of “too big to fail” firms are similar to “polluters”, the
the greater their risk externalities, the greater their pollution.
The example we consider below assumes a Pareto probability distribution ([9]) for losses conditional on
the bank’s loss. Conditional external losses are bounded below by the bank loss (its capital) and
unbounded above. While, aggregate losses are a mixture probability distribution of the aggregate external
losses. These assumptions result in a fractional hazard rate model bounded by the bank’s capital.
Internal risk exposure (the banks’ capital at risk) is assumed to have an extreme truncated probability to
account for its finite capital at risk. In particular we use a truncated Weibull probability distribution.
Our approach differs from the Copula approach that models co-dependence of losses by the marginal
distribution of each distribution. It also differs from a generalization of the Pareto distribution (or other
probability distributions) that accounts for a potential correlation between the firm and its external losses.
Both such approaches are not be applicable in our case as external losses depend necessarily on the firm
losses but not vice versa. In other words, we assume that external losses are not causal to a bank’s loss
but a bank’s loss is causal to external losses borne by the public at large.
Further, while an inter-temporal framework based on Levy-Wiener processes and fractal diffusion models
can be considered as well, its use is not essential to prove the essential results of this paper. Such an
extension will be considered in a subsequent paper however. The case considered is thus selected for
simplicity and to highlight the effects of a bank’s potential capital loss on its external losses.
Explicitly, let the conditional loss Pareto distribution be:
The loss distribution parameter may be interpreted as the expected loss multiplier “odds” effect for a
given (risk exposure) loss by the bank. The expected external loss is thus . The larger the
“odds” the larger its the risk externalities. For example if a firm loss of 7 Billion dollars has an external
loss of 65 Billion dollars, its parameter is or and .
By the same token since,

Center for Risk Engineering, New York University Polytechnic Institute Page 5
The expected externality multiplier odds effect odds can be further scored and assessed by a logit
distribution. Explicitly, say that:
Then: and with a score defined as a function of both the loss and
economic environmental conditions. A bank whose internal loss is its capital, contribute then to an
expected loss of:
Where is a “Too Big To Bear” index, the larger the index, the larger the external losses and the more
a bank is “too big to fail”. In other words, letting a total capital loss of of 50 Billion dollars, the failure of
the bank’s loss is
Billion dollars.
The unconditional loss probability distribution is then:
The probability of a loss greater than Y and its hazard rate are therefore,
and
If a firm’s expected external loss is then and if it is too big to fail
then . In this case, the external risks of “size” are nonlinear, growing infinitely as the
bank’s size increases.
For demonstration purposes, say that the probability distribution is a constrained extreme
(Weibull) distribution defined by,
The loss probability distribution and its cumulative distribution function are then:
With expected losses:

Center for Risk Engineering, New York University Polytechnic Institute Page 6
The effects of the firm capital size on the expected losses are thus:
The second derivative leads to:
or
Since
The condition for a positive second derivative is:
These conditions establish therefore the conditions for an accelerating loss the larger the firm—a loss that
may be far larger than the firm capital loss.

Center for Risk Engineering, New York University Polytechnic Institute Page 7
Conclusion
The purpose of this paper is to indicate that size matters and its risk externalities may be too big to bear—
in which case firm may be too big to fail. Such firms are “polluters” either by design when they overleverage
their financial bets or speculative positions and are struck by a Black Swan [13], [14]. While
capital set aside (such as VaR—V alue at Risk) may be used to protect their internal losses, such
approaches are oblivious to the far morte important risk extrnalities. For this reason, such firms require
far greater attention and far more regulation. Internalizing risk externalities by ever larger firms is in such
cases inappropriate since the moral hazard and the market power resulting from such sizes will be too
great. Similarly, total controls, total regulation, taxation, nationalization etc. are also a poor answer to
deal with risk externalities. Such actions may stifle financial innovation and technology and create
disincentives to an efficicent allocation of money. Coase observed that a key feature of externalities are
not simply the result of one CEO or Bank, but the result of combined actions of two or more parties. In
the financial sector, there are two predominant parties, Banks that are “too big to fail” and the
Government—a stand in for the public. Banks are entrusted rights granted by the Government and
therefore any violation of the trust (and not only a loss by the bank) would justify either the removal of
this trust or a takeover of the bank. A bargaining over externalities would, economically lead to Pareto
efficient solutions provided that banking and public rights are fully transparent. However, the nontransparent
bonuses that CEOs of large banks apply to themselves while not a factor in banks failure is a
violation of the trust signaled by the incentives that banks have created to maintain the payments they
distribute to themselves. For these reasons, too big too fail banks may entail too large too bear risk
externalities. The result we have obtained indicate that this is a fact when banks internal risks have an
extreme probability distribution (as this is often the case in VaR studies) and when external risks are an
unbounded Pareto distribution.
References:
[1] A Aleksiejuk, J.A.Holyst, A simple model of bank bankruptcies, Physica A, 299, 2001, 198-204
[2] L.A.N. Amaral, S.V. Bulkdyrev, S.V. Havlin, H. Leschron, P. Mass, M.A. Salinger, H.E. Stanley,
M.H.R. Stanley , J. Phys I, France, 1997, 621.
[3] J.P. Bouchaud, M. Potters, Theory of Financial Risks and Derivatives Pricing, From Statistical
Physics to Risk Management, 2nd Ed., , 2003, Cambridge University Press.
[4] Y. Fujiwara, Zipf law in firms bankruptcy, Physica A, 337, 2004, 219-230

Center for Risk Engineering, New York University Polytechnic Institute Page 8
[5] D. Garlaschelli, S. Battiston, M. Castri, VDP Servedio, G.Caldarelli, The scale free nature of market
investment network, Physica A, 350, 2005, 491-499
[6] Y. Ijiri, H.A. Simon, Skew distributions and the size of business firms, North Holland, New York,
1977
[7] Konstantin Kogan and Charles S. Tapiero, Supply Chain Games: Operations Management and Risk
Valuation, Springer Verlag, Series in Operations Research and Management Science, (Frederick Hillier
Editor), 2007
[8] K. Okuyama, M. Takayasu, H. Takayasu, Zipf’ss Law in income distribution of companies, Physica
A, 269, 1999, 125-131
[9] V. Pareto, Le cours d’Economie Politique, Macmillan, London, 1896
[10] M.H.R. Stanley, L.A.N. Amaral, S.V. Bulkdyrev, S.V. Havlin, H. Leschron, P. Mass, M.A. Salinger,
H.E. Stanley, Nature, 397, 1996, 804
[11] Y.U. Saito, T. Watanabe and M. Iwamura, Do larger firms have more interfirm relationships,
Physica A, 383, 2007, 158-163,
[12] D. Stauffer, Introduction to Percolation Theory, Taylor and Francis, London and Philadelphia, A,
1985.
[13] N.N. Taleb, The Black Swan: The Impact of the Highly Improbable, Random House, New York and
Penguin Books, London 2008
[14] NN. Taleb, Errors, Robustness, and The Fourth Quadrant, Forthcoming, International Journal of
Forecasting, 2009
[15] C.S. Tapiero, Consumers risk and quality control in a collaborative supply chain, European Journal
of Operations Research, 182, 683–694, 2007
[16] Tapiero, C. S., Risk Finance and Financial Engineering (tentative title), Wiley, 2010, (Forthcoming,
2 volumes)

My favorite "Black Swan" quotes

2009-09-28T22:12:00.001-07:00

Check out this SlideShare Presentation:

My favorite "Black Swan" quotes

View more presentations from Maarten Cannaerts.

Lecturing Birds on Flying

2009-08-27T02:35:00.000-07:00

Lecturing Birds

Nial F. Johnson Video Lecture on Complexity

2009-07-27T01:27:00.000-07:00

Complexity in Human Activity: Conflicts, Currencies and Crimes

Neil F. Johnson

Systems Thinking: Managing Chaos and Complexity

2009-07-18T04:22:00.001-07:00

Complexity

Nassim Taleb Video: Says cause of crisis is because people are not rational

2009-07-15T04:26:00.000-07:00

The Age of Unthinkable

2009-06-16T22:49:00.001-07:00

Nassim On CNBC- Air date June 10, 2009

2009-06-10T23:43:00.000-07:00

The Poker Face of Wall Street- Scribd

2009-05-25T03:16:00.000-07:00

The Poker Face of Wall Street

Publish at Scribd or explore others: Non-fiction Books nassim taleb behavioral economics

The Poker Face of Wall Street

2009-05-25T02:58:00.000-07:00

I came across this great Book " The Poker Face of Wall Street" by Aaron Brown. It is turning out to be a great read. Incidentally, the foreword is written by Nassim Taleb. So, it automaticaly becomes a must read for all of Taleb's Fans. Here is a little piece from Taleb's foreword to the book:

"One would tend to think that gambling is a sterile activity that is
meant to occupy those who have not much else to do and others
when they have not much else to do. You would also think that there
is a distinction between “economic risk taking” and “gambling,” one
of them invested with respectability, the other treated as a vice and a
product of a parasitic activity."

The Black Swan Recommended by Ilya Bogard

2009-05-23T01:49:00.000-07:00

Here is an Excerpt from Ilya Bogard's "Lessons In Leadership: How to Instigate and Manage Change", published in Tech Republic.

"The most basic requirement for the success of a change you’re making is that it’s real and is interpreted correctly. This is not only because the change may fail, but because what good is an impeccably executed project if it accomplishes exactly what you should not be doing?

——————————————————————————————————————-

I trust you will agree with me that the world has changed dramatically in this short period of time. Scores of business titans have fallen or are fighting for survival, while opportunistic carpe diem challengers have moved ahead. Change is omnipresent and while some transformations are predictable, others have come from nowhere (for this reason, I recommend reading The Black Swan by Nassim Taleb, a read that is not only thought provoking but also immensely enjoyable).

If you’re in a leadership position, it’s incumbent on you to instigate and manage change within your organization. How do you go about it to ensure success?"

Read the Full Article on http://blogs.techrepublic.com.com/tech-manager/?p=1389

About Ilya Bogard:

Ilya Bogorad is the Principal of Bizvortex Consulting Group Inc, a management consulting company located in Toronto, Canada. Ilya specializes in building better IT organizations and can be reached at ibogorad@bizvortex.com or (905) 278 4753.

Myron Scholes' pathetic response to Nassim Taleb

2009-05-19T22:55:00.000-07:00

Myron Scholes finally responded, in a pathetic manner, to Nassim Taleb's criticism. With Taleb now being the leader in revolt against the Modern House of Finance and Mathematical Models adopted to measure risk, had this to say about Myron Shcoles: "we have to unmask the charlatans of risk like Myron Scholes".Taleb was quite furious on Scholes. He considers Scholes as the Great Oz because his work on options and derivatives allowed the whole of the financial system to adopt poorly understood products-like the ones that brought AIG down-that hide risk. To Taleb, Scholes' academic work, which enabled the widespread use of complex derivatives, was like 'giving children dynamite.' 'This guy should be in a retirement home doing Sudoku,' Taleb says. 'His funds have blown up twice. He shouldn't be allowed in Washington to lecture anyone on risk.'" Michael Lewis too commented on hazards and harms that the use of Black Scholes Model has brought upon the financial health- "Black-Scholes didn’t work; trillions of dollars’ worth of securities may have been priced without regard to the possibility of crashes and panics. But until very recently, no one has bitched and moaned about this problem too loudly. Lay folk might harbor private misgivings about the clergy, but as lay folk, they are reluctant to express them. Now, however, as the subprime market unravels, the beginnings of a revolt against the church seem to be taking shape".

I had expected that the fathers of Financial Horoscope Models would come up with some decent answer or better still would admit the flaws in their Models with open heart. But, it looks like they dont have the gut and unfortunately still continue to live in fool's paradise. Still sticking to their guns they are not even sophisticated to give a decent reply. All Scholes could say to Taleb's criticism was " If someone says to you, “Go to an old-folks’ home,” that’s kind of ridiculous, because a lot of old people are doing terrific things for society. I never tried sudoku. Maybe he spends his time doing sudoku".

The Legend of Nassim Taleb Part 2

2009-05-13T00:06:00.000-07:00

Somewhere on http://www.fooledbyrandomness.com Taleb is pessimistic about any change in the way the global house of finance and public policy operates. This he states as his fear despite the fact that The Black Swan has become an all time Bestselling Book in the fields of Economics or Finance. So I have started some research and trying to assess about the reach of Taleb's teachings and ideas. Further to my earlier post here are some more Books that discuss or incorporate Taleb's Ideas:

1- Derivatives: Models on Models By Espen Gaarder Haug. And here is how Haug describes Nassim: " Nassim Taleb was an original thinker a tail event himself, specializing in tail events. He was also not afraid of sharing his knowledge probably because he knew that human nature and the bonus system in most wall street firms would make most traders ignore his ideas anyway.

2- The Long Tail: Why the Future of Business is Selling Less of More
By Chris Anderson
3- Traders, guns & money: knowns and unknowns in the dazzling world of derivatives
By Satyajit Das
4- Identifying and Managing Project Risk By Tom Kendrick: The Author calls 'The Black Swans" the most serious problems.
5- Handbook for Surviving the Global Financial Crisis By Barbara Goldsmith. The Book seems to be a guide to survive the hazards of next black swan yet the author seems to have completely ignored what Taleb had to himself said in this regard.

Contiued...........

Now that I have started it all, it is hard to stop. But it is becoming evident to me that Taleb and his Books have become a great source of reference for varied fields. I desperately need volunteers to continue and broaden the work.

The Legend of Nassim Taleb Part1

2009-05-12T03:05:00.000-07:00

Taleb has proven in a very convincing manner as to why the Finance, Economics etc. are pseudo sciences. And why the game Bankers or Quants play i.e. taking large risks based on models or probabilities that do not work in the real world are bound to fail. Most of the critics of Taleb are unfair in that either they havent read the Black Swan or are biased in certain manner or it is their mental models that are hard to change. Taleb's contribution is so immense that it is bringing about a revolution in investment related professions, finance syllabi, management books etc. I am surprised to see how quickly his ideas have been adopted. Here are a few of the examples of books which have incorporated Taleb's Ideas in one way or another, and I am only referring to big ticket authors:

1- When Markets Collide by El Erian
2- Readings in Financial Institution Management by Tom Valentine, Guy Ford
- Sociology and Health: Peter Morall
3- The unthinkable: who survives wen disaster strikes and why by Amanda Ripley
4- Wealthwar and wisdom: Barton Brigg
5- Financial Armageddon: Michael J. Panzer
6- Jump the Curve: 50 essential strategies to help your company stay ahead of the curve
7- Beyond Value at Risk : Kevin Dowd

Taleb's biggest lesson in learning is " To learn the General and not Specific".

Nassim on Reuters

2009-05-06T01:04:00.000-07:00

Bigger is Not Better

2009-05-04T22:26:00.000-07:00

Taleb's Ten Principles to be Black Swan proof were not taken so seriously. Lots of Academics couldnt digest it and criticised these on one ground or another. Now here is Taleb in full technical form in association with Charles Tapiero. They establish why Large Institutions are more vulnerable. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1398102

GQ Magazine May 2009 Issue features Nassim Taleb

2009-04-20T21:16:00.000-07:00

I was never interested in Fashion Magazines and perhaps never would be. But this month I had to buy GQ as it features the most infulential Finance and Risk person of our Times; Nassim Taleb. It has a wonderful portrait of Nassim photographed in Davos World Economic Forum and captioned as " THE MAN WHO SAW TOMORROW: NASSIM TALEB, WALKING ALONE PATH AS EVER". Nassim is standing there in the snow underneath a pole light. And there is this line at the bottom of the picture" I am not interestedin money, I wanted to teach the Banks a lesson."

I have uploaded the feature here:

http://www.scribd.com/doc/14471342/GQ-May-2009-feature-on-NassimTaleb

Nassim Taleb Long Talk on Econ Talk

2009-04-07T23:35:00.000-07:00

Link to Podcast: http://www.econtalk.org/archives/2009/03/taleb_on_the_fi.html

Excerpt fromt the Interview with Russ Roberts:

complexity cannot tolerate leverage, since no room for error. Since 1980, tripling in leverage, in U.S. and in Europe, ratio of leverage to GDP. High exposure to errors. Commodity prices, similar argument: can have rise in wheat prices in response to very small imbalance in demand, followed by rapid collapse. Not long ago talking about inflation, now talking about deflation. Speculative issue in commodity prices: how much comes from similar mistakes to Greenspan. Globalization has side effects; produces fat tails. In competition, consider two banks, one robust and one not. With globalization, everybody pushed to do outsourcing; concentration of U.S. and German firms outsourcing to, say, Bangalore. Probability of failure low because only one source of randomness. But suppose there is a problem in Bangalore--political, storms--that disrupts communication there? What happens to all these firms? French bank, lost money on a rogue trader. If you had 10 small banks each with 5 billion, wouldn't have a problem because easy to liquidate. With one bank, should a rogue trader happen, his position will be 10 times the size. Assume no linearities in execution cost. Liquidating $50 billion is more costly than 10 times liquidating $5 billion. Lumping makes you more vulnerable to large events. One large error is a lot worse than 10 smaller errors.

One stop for almost all that is there on The Black Swan and Taleb

2009-04-06T23:29:00.000-07:00

I came across this great site http://www.theblackswanreport.com . The site is full of great stuff related to Nassim Taleb's work and is updated regularly with latest material. It has lots of Videos, Interviews, articles and links. A wonderful one stop free shop for Taleb's Fans

Nassim on Bloomberg, Says Geithner Plan bound to fail

2009-04-02T03:13:00.000-07:00

Nassim Taleb Blasts Myron Scholes

2009-03-30T23:53:00.000-07:00

Taleb's Fantastic Quote on Myron Schloes:

"This guy should be in a retirement home doing Sudoku. 'His funds have blown up twice. He shouldn't be allowed in Washington to lecture anyone on risk.'"

Why Could Google Die...

2009-03-27T00:06:00.001-07:00

Earlier we had discusses in "From Lean to Googly" the Google Model of Success. The following presentation highlights the why and how of a downfall to the biggest enterprise of all the times.

Why Could Google Die...

View more presentations from Ouriel Ohayon.

An Infinite Gold Mine- The Human Brain

2009-03-16T00:49:00.000-07:00

Consider the following two statements and just think about the implications:
1- "The problems we have created in the world today will not be solved by the level of thinking that created them"- Einstein

2- The world around us has changed very quickly. This change is undoubtedly the fastest in the history of mankind. The pace of change is so fast that the evolution of our brain and ,as a result, our thinking lags far behind.

Is there a way for us to make our brain and thinking take a quantum leap and make up to this tremendous gap. The human brain is probably the least explored area. The research that has been going on in this area has brought to light new revelations about this few pounds of gray matter. We can never be able to learn at the speed and quantum that we infact are capable of until we learned a bit about the functioning of our brain and how to improve it. Yes there are tons of material, theories, techniques. But 99% of it is outdated. I have recently been exploring a lot and found some excellent compilations. Now, it is again an honour for me to share with you two such books which comprehensively and yet in an entertaining way takes us to the journey to the centre of our brain :) . I have also embedded these here
to save you so,e dollars and a visit to the book shop. Please share with me your thoughts. Following are these two gems:

1- The Art and Science of Common Sense by Karl Albrecht : The Art and Science of Comon Sense

Publish at Scribd or explore others: Business Research learning Common Sense

2- The power of Impossible Thinking: The.power.of.Impossible.thinking 0131877283

Publish at Scribd or explore others: Research Business & Legal how to think mental models

Toyota and Google from Lean to Googly

2009-03-03T21:51:00.000-08:00

We have all talked a lot, read a lot,thought a lot about Toyota. We have learnt our lessons from Toyota be it production system, innovation, supplychain network or any other business process. And one way or another we always have and will continue to implement the ideas so learnt to our work place. What really inspires me isnt the mere fact that Toyota's market capitalisation is greater than all other car companies put together. Though it is a real wonder in itself, still, what blows my brains is this " Every year Toyota implements 1000,000 new ideas". Unbelievable! 3,000 ideas per day.

Recently I had the honour of discussing the differences in mental models of Japanese Auto Manufacturers and their US Counterparts with David Kilburn who works for one of the Japanese and Stuart Harker a Systems Thinking Practitioner and Consultant on Lean Implementation . Here is the Dialogue" Stuart Harker: So the American car executive failed to see what he was being shown, a typical western trait!

They still haven't learnt, looked at the state they are in now. Toyota have faced this kind of deep recession before - especially during the 70's oil crisis, they suffered, but not to the extent of other car manufacturers.

It will happen again, and they will outperform others again.
Motasim: Yeah they will definitely. It has got a lot to do with structures and mental models.
Stuart Harker:I agree, you can see easily get set in a one right way.
David Kilburn: I agree.
I work in the Japanese auto industry.
Japan have model factories, spotless(5s), efficient(Bekido) and each part made right the first time(chokko) and no waste(muda).
In japan Work is part of their culture

Motasim: Some times I really wonder what these people are made of. So dedicated to their cause. It took Taichi Ohno and his team 20years to perfect the system that is now known as lean. Just imagine- 20 years. Normally people give up in just 20 days. Unfortunately it took others more than 20 years to get to know what had done and still they said it was impossible. Recession is a good thing in that it really makes the reality of one's weaknesses to light. The tide has swamped them all who thought they were the masters of universe and know it all type. As the politics changed after 9/11. Businesses processes would too change in times to come and I hope that they bring prosperity and peace.

David Kilburn: I show visitors our production lines and explain our concepts, as we know it will take 10 years for them to adapt and in that time we will be further ahead, besides we know they wont do it lol."

Now we hav entered into a new age of innovation and economy- a knowledge economy. Along with comes th opportunities and threats of a life time. Those who have their ears, eyes and minds still open can see that the transformation is already sweeping across the globe. The credit goes to Google. In success of the Google are valuable lessons for us all tat can be applied to all sorts of organisations be it tech, publications, manufacturing or financial services. Jeff Jarvis in his remarkable book "What would Google Do?" brings to light "The Google Model". Here is the link to Jeff Jarvis's video presentaion covered by Fora TV.

http://fora.tv/2009/02/18/Jeff_Jarvis_What_Would_Google_Do#Jeff_Jarvis_Can_Acting_Like_Google_Save_Detroit

Nassim Taleb & Daniel Kahneman: Reflect on Crisis

2009-02-13T01:55:00.000-08:00

CHNAGES IN POLICIEIS AS COMPETITIVE ADVANTAGE

2009-01-28T21:57:00.000-08:00

The businesses are facing ever increasing competition. To beat your competition one has to be fast learner, innovative, responsive etc. Every one knows that stuff. Recently I came across a wonderful insight that is very obvious but gets ignored largely. It is my honour to share it with you. Though I have no doubt that most of you have already familiar with it.
The product design, price, features etc., every thing physical, is quickly either copied by the competitors. However, the changes that relate to policy matters take extraordinary long time to be adopted or bettered by the Competitor. Here is an example: Toyota's Just in time Practices took over a decade to get the attention of US Automakers. In "The Presence" Peter Senge narrates the story of a US Auto industry executive who had visited the Toyota facilities in Japan in 80s. He told Senge that the Toyota People had taken them for a "ride" and didnt show them the real plants. When Senge asked why he thought so. The executive replied that "The plants we visited had no inventories at all".

Nassim Taleb Full lengthwith Charlie Rose

2008-12-22T04:17:00.001-08:00

Randall On 'Discovery Of Black Swan'

2008-11-23T23:52:00.000-08:00

http://video.aol.com/video-detail/randall-on-and039discovery-of-blackswanand039/492626517

2008-11-06T03:14:00.000-08:00

Nassim Taleb Discussion with Benoit Mandelbrot

2008-10-28T03:09:00.000-07:00

I think this is the first time that Benoit Mandelbrot and Nassim Taleb are together on Screen. Taleb calls Mandelbrot the only flesh and bone teacher he has ever had.

What caused the current Financial Crisis

2008-10-17T01:50:00.000-07:00

In near future we are going to see book shops filled with Books on what caused the current financial crisis. But you realy dont need that. Nassim Taleb sums it up all along with the ways to deal with the crisis . The Master Genius takes only five minutes to explain it all. Watch and enjoy the video.

Mandelbrot Set Zoom: No matter how deeper you zoom into , newpatterns will emerge till infinity

2008-08-13T03:09:00.000-07:00

Peter Senge's Society for Organisational Learning

2008-07-23T04:37:00.000-07:00

Among remarkable books that help me shape my thinking and approach to Business Porcesses, Fifth Discipline, The Art and Practice of Learning Organisation, stands on top. I started studying the concepts of learning organisation prior to my affair with Chaos Theory. I was delighted to find out that certain observation about phsical phenomena are also part of The Rules and Disciplines of the Learning Organisation, in its business context. Take a look at the following, the rules which have been based on research related to Chaos Theory and finding a place in Management Science are 7 & 8:

Senge defines a learningorganization as the one that can create the results it truly desires.Through learning we are able to do something we never were able to do. Five disciplines of learning organization are:
1) Building shared vision
2) Mental models
3) Team learning
4) Personal mastery
5) Systems thinking- The Fifth Discipline that integrates the other 4.

The Laws of theFifthDiscipline:
1: Today's problems come from yesterday's "solutions."
2) The harder you push, the harder the system pushes back.
3) Behavior will grow worse before it grows better.
4) The easy way out usually leads back in.
5) The cure can be worse than the disease.
6) Faster is slower.
7) Cause and effect are not closely related in time and space.
8) Small changes can produce big results.but the areas of highest leverage are often the least obvious.
9)You can have your cake and eat it too-but not all at once.
10) Dividing an elephant in half does not produce two small elephants.
11) There is no one to blame but us.

I have created an Orkut community on Senge's Fifth Disciplne. You are invited:

http://www.orkut.com/Community.aspx?cmm=49320492

Chaos Theory every where

2008-07-19T04:13:00.000-07:00

It has become my passion to collect and read material on Chaos Theory and Fractals. Now, I think I have enough to share with all my buddies.

Books:

The best material on Chaos Theory for lay person are two books by Dr. Bill Williams. The first one is New Trading Dimension and the other one is Trading Chaos. I would recommend to read New Trading Dimension first. It is going to change the way you look at the universe, yourself and almost every view that you had about anything. You will jump from your seat, like I did, when it is proved to you that the great genius Einstein's work too isn't without flaws. Here is the link:

http://books.google.com.pk/books?id=AFySgHdkxeMC&printsec=frontcover&dq=BILL+WILLIAMS&sig=ACfU3U1pRSxG-DToeM1Z0ie73SY6-72wqw

Books take a long time to read. So, I have hunted down some movies to give you the taste of a world of pleasures that Chaos Theory brings to mind.

First one is a documentary by the Legend Arthur C. Clarke: Fractals- the colours of infinity.

The second is a Hollywood movie "The Butterfly Effect".

Every-other day I come across a couple of movies that include a reference to Chaos Theory. This shows how obsessed Hollywood Directors and Producers are with Chaos Theory. Welcome to the world of Chaos Theory. I promise you it will put a spell on you.

Nassim Taleb Video Presentation at LongNow Foundation

2008-07-10T22:06:00.000-07:00

Nassim Nicholas Taleb presentation on The Black Swan. This is over one hour video. Probably, the longest video presentation avaialable on net. I have converted the format to 3gp, to reduce the size. Anyone interested in better quality video, please email me motasim.ahmad@gmail.com .

An Introduction to Mathematical Chaos Theory and Fractal

2008-06-29T22:56:00.000-07:00

A remarkable comilation on Chaos Theory and Fractals Geometry by Manus J. Donahue. There are certain images in the document which I am unable to upload here. Please email me motasim.ahmad@gmail.com or Mr.Donahue mjd@duke.edu for full PDF File and other remarkable compilations on Chaos Theory and Fractals Geometry.

Chaos Theory
An Introduction to Mathematical Chaos Theory and Fractal
Geometry
For a printable version of this document, please click here.
The following essay was compiled by me, Manus J. Donahue III (second year Physics and
Philosophy major at Duke University..age 19). It has been unofficially published in four
different countries, has been cited in The New York Times and has been awarded
technology site of the day by TechSightings.com. Please cite this page as a reference if you
use any of the material on this page in essays, documents, or presentaitons. Also, you may
e-mail me at mjd@duke.edu if you have any questions, and I'll try to get back with you as
soon as possible.
Because I compiled this essay for myself and the enjoyment of others, and because I am
presenting it completely free, I am not responsible for any copyright violations or anything
like that. Some of the pictures that are included in this essay (although almost universally
common) were taken from other Web pages. If you are a high school/middle school student
who has to do a report on chaos theory and you print this essay off and turn it in, you will
be violating not only the work of myself, but the various other people who unknowingly
may have contributed to this site. Don't do that - these people deserve credit for their work!
Use this paper merely as a “jumping off point” for your own research, and then write a
paper that is even better – and publish it. I wrote this essay because I was always fascinated
by chaos theory and non-linear math and I could never find explanative essays aimed at the
“average person.” Hopefully this one is.
Finally, I get a lot of e-mails from people asking me to recommend books and other
resources on chaos theory. The books that I used while writing this paper are included
below; they’re the ones that I would recommend:
Chaos: Making a New Science by James Gleick
Fractals: The Patterns of Chaos by John Briggs
In the Wake of Chaos by Stephen H. Kellert
Needless to say, there is also a surfeit of resources on the Web concerning chaos theory and
fractals – so they would be worth checking out too.
"Physicists like to think that all you have to do is say, these are the conditions, now
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what happens next?" -Richard P. Feynman
The world of mathematics has been confined to the linear world for centuries. That is to
say, mathematicians and physicists have overlooked dynamical systems as random and
unpredictable. The only systems that could be understood in the past were those that were
believed to be linear, that is to say, systems that follow predictable patterns and
arrangements. Linear equations, linear functions, linear algebra, linear programming, and
linear accelerators are all areas that have been understood and mastered by the human race.
However, the problem arises that we humans do not live in an even remotely linear world;
in fact, our world should indeed be categorized as nonlinear; hence, proportion and linearity
is scarce. How may one go about pursuing and understanding a nonlinear system in a world
that is confined to the easy, logical linearity of everything? This is the question that
scientists and mathematicians became burdened with in the 19th Century; hence, a new
science and mathematics was derived: chaos theory.
The very name "chaos theory" seems to contradict reason, in fact it seems somewhat of an
oxymoron. The name "chaos theory" leads the reader to believe that mathematicians have
discovered some new and definitive knowledge about utterly random and incomprehensible
phenomena; however, this is not entirely the case. The acceptable definition of chaos theory
states, chaos theory is the qualitative study of unstable aperiodic behavior in deterministic
nonlinear dynamical systems. A dynamical system may be defined to be a simplified model
for the time-varying behavior of an actual system, and aperiodic behavior is simply the
behavior that occurs when no variable describing the state of the system undergoes a
regular repetition of values. Aperiodic behavior never repeats and it continues to manifest
the effects of any small perturbation; hence, any prediction of a future state in a given
system that is aperiodic is impossible. Assessing the idea of aperiodic behavior to a relevant
example, one may look at human history. History is indeed aperiodic since broad patterns in
the rise and fall of civilizations may be sketched; however, no events ever repeat exactly.
What is so incredible about chaos theory is that unstable aperiodic behavior can be found in
mathematically simply systems. These very simple mathematical systems display behavior
so complex and unpredictable that it is acceptable to merit their descriptions as random.
An interesting question arises from many skeptics concerning why chaos has just recently
been noticed. If chaotic systems are so mandatory to our every day life, how come
mathematicians have not studied chaos theory earlier? The answer can be given in one
word: computers. The calculations involved in studying chaos are repetitive, boring and
number in the millions. No human is stupid enough to endure the boredom; however, a
computer is always up to the challenge. Computers have always been known for their
excellence at mindless repetition; hence, the computer is our telescope when studying
chaos. For, without a doubt, one cannot really explore chaos without a computer.
Before advancing into the more precocious and advanced areas of chaos, it is necessary to
touch on the basic principle that adequately describes chaos theory, the Butterfly Effect.
The Butterfly Effect was vaguely understood centuries ago and is still satisfactorily
portrayed in folklore:
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"For want of a nail, the shoe was lost;
For want of a shoe, the horse was lost;
For want of a horse, the rider was lost;
For want of a rider, the battle was lost;
For want of a battle, the kingdom was lost!"
Small variations in initial conditions result in huge, dynamic transformations in concluding
events. That is to say that there was no nail, and, therefore, the kingdom was lost. The
graphs of what seem to be identical, dynamic systems appear to diverge as time goes on
until all resemblance disappears.
Perhaps the most identifiable symbol linked with the Butterfly Effect is the famed Lorenz
Attractor. Edward Lorenz, a curious meteorologist, was looking for a way to model the
action of the chaotic behavior of a gaseous system. Hence, he took a few equations from the
physics field of fluid dynamics, simplified them, and got the following three-dimensional
system:
dx/dt=delta*(y-x)
dy/dt=r*x-y-x*z
dz/dt=x*y-b*z
Delta represents the "Prandtl number," the ratio of the fluid viscosity of a substance to its
thermal conductivity; however, one does not have to know the exact value of this constant;
hence, Lorenz simply used 10. The variable "r" represents the difference in temperature
between the top and bottom of the gaseous system. The variable "b" is the width to height
ratio of the box which is being used to hold the gas in the gaseous system. Lorenz used 8/3
for this variable. The resultant x of the equation represents the rate of rotation of the
cylinder, "y" represents the difference in temperature at opposite sides of the cylinder, and
the variable "z" represents the deviation of the system from a linear, vertical graphed line
representing temperature. If one were to plot the three differential equations on a
three-dimensional plane, using the help of a computer of course, no geometric structure or
even complex curve would appear; instead, a weaving object known as the Lorenz Attractor
appears. Because the system never exactly repeats itself, the trajectory never intersects
itself. Instead it loops around forever. I have included a computer animated Lorenz
Attractor which is quite similar to the production of Lorenz himself. The following Lorenz
Attractor was generated by running data through a 4th-order Runge-Kutta fixed-timestep
integrator with a step of .0001, printing every 100th data point. It ran for 100 seconds, and
only took the last 4096 points. The original parameters were a =16, r =45, and b = 4 for the
following equations (similar to the original Lorenz equations):
x'=a(y-x)
y'=rx-y-xz
z'=xy-bz
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The initial position of the projectory was (8,8,14). When the points were generated and
graphed, the Lorenz Attractor was produced in 3-D:
The attractor will continue weaving back and forth between the two wings, its motion
seemingly random, its very action mirroring the chaos which drives the process. Lorenz had
obviously made an immense breakthrough in not only chaos theory, but life. Lorenz had
proved that complex, dynamical systems show order, but they never repeat. Since our world
is classified as a dynamical, complex system, our lives, our weather, and our experiences
will never repeat; however, they should form patterns.
Lorenz, not quite convinced with his results, did a follow-up experiment in order to support
his previous conclusions. Lorenz established an experiment that was quite simple; it is
known today as the Lorenzian Waterwheel. Lorenz took a waterwheel; it had about eight
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buckets spaced evenly around its rim with a small hole at the bottom of each . The buckets
were mounted on swivels, similar to Ferris-wheel seats, so that the buckets would always
point upwards. The entire system was placed under a waterspout. A slow, constant stream
of water was propelled from the waterspout; hence, the waterwheel began to spin at a fairly
constant rate. Lorenz decided to increase the flow of water, and, as predicted in his Lorenz
Attractor, an interesting phenomena arose. The increased velocity of the water resulted in a
chaotic motion for the waterwheel. The waterwheel would revolve in one direction as
before, but then it would suddenly jerk about and revolve in the opposite direction. The
filling and emptying of the buckets was no longer synchronized; the system was now
chaotic. Lorenz observed his mysterious waterwheel for hours, and, no matter how long he
recorded the positions and contents of the buckets, there was never and instance where the
waterwheel was in the same position twice. The waterwheel would continue on in chaotic
behavior without ever repeating any of its previous conditions. A graph of the waterwheel
would resemble the Lorenz Attractor.
Now it may be accepted from Lorenz and his comrades that our world is indeed linked with
an eery form of chaos. Chaos and randomness are no longer ideas of a hypothetical world;
they are quite realistic here in the status quo. A basis for chaos is established in the
Butterfly Effect, the Lorenz Attractor, and the Lorenz Waterwheel; therefore, there must be
an immense world of chaos beyond the rudimentary fundamentals. This new form
mentioned is highly complex, repetitive, and replete with intrigue.
"I coined fractal from the Latin adjective fractus. The corresponding Latin verb
frangere means "to break": to create irregular fragments. It is therefore sensible-and
how appropriate for our needs!-that, in addition to "fragmented", fractus should also
mean "irregular," both meanings being preserved in fragment." -Benoit Mandelbrot
The extending and folding of chaotic systems give strange attractors, such as the Lorenz
Attractor, the distinguishing characteristic of a nonintegral dimension. This nonintegral
dimension is most commonly referred to as a fractal dimension. Fractals appear to be more
popular in the status quo for their aesthetic nature than they are for their mathematics.
Everyone who has seen a fractal has admired the beauty of a colorful, fascinating image,
but what is the formula that makes up this glitzy image? The classical Euclidean geometry
that one learns in school is quite different than the fractal geometry mainly because fractal
geometry concerns nonlinear, nonintegral systems while Euclidean geometry is mainly
oriented around linear, integral systems. Hence, Euclidean geometry is a description of
lines, ellipses, circles, etc. However, fractal geometry is a description of algorithms. There
are two basic properties that constitute a fractal. First, is self-similarity, which is to say that
most magnified images of fractals are essentially indistinguishable from the unmagnified
version. A fractal shape will look almost, or even exactly, the same no matter what size it is
viewed at. This repetitive pattern gives fractals their aesthetic nature. Second, as mentioned
earlier, fractals have non-integer dimensions. This means that they are entirely different
from the graphs of lines and conic sections that we have learned about in fundamental
Euclidean geometry classes. By taking the midpoints of each side of an equilateral triangle
and connecting them together, one gets an interesting fractal known as the Sierpenski
Triangle. The iterations are repeated an infinite number or times and eventually a very
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simple fractal arises:
In addition to the famous Sierpenski Triangle, the Koch Snowflake is also a well noted,
simple fractal image. To construct a Koch Snowflake, begin with a triangle with sides of
length 1. At the middle of each side, add a new triangle one-third the size; and repeat this
process for an infinite amount of iterations. The length of the boundary is 3 X 4/3 X 4/3 X
4/3...-infinity. However, the area remains less than the area of a circle drawn around the
original triangle. What this means is that an infinitely long line surrounds a finite area. The
end construction of a Koch Snowflake resembles the coastline of a shore.
The two fundamental fractals that I have included provided a basis for much more complex,
elaborate fractals. Two of the leading reasearchers in the field of fractals were Gaston
Maurice Julia and Benoit Mandelbrot. Their discoveries and breakthroughs will be
discussed next.
On February 3rd, 1893, Gaston Maurice Julia was born in Sidi Bel Abbes, Algeria. Julia
was injured while fighting in World War I and was forced to wear a leather strap across his
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face for the rest of his life in order to protect and cover his injury. he spent a large majority
of his life in hospitals; therefore, a lot of his mathematical research took place in the
hospital. At the age of 25, Julia published a 199 page masterpiece entitled "Memoire sur
l'iteration des fonctions." The paper dealt with the iteration of a rational function. With the
publication of this paper came his claim to fame. Julia spent his life studying the iteration of
polynomials and rational functions. If f(x) is a function, various behaviors arise when "f" is
iterated or repeated. If one were to start with a particular value for x, say x=a, then the
following would result:
a, f(a), f(f(a)), f(f(f(a))), etc.
Repeatedly applying "f" to "a" yields arbitrarily large values. Hence, the set of numbers is
partitioned into two parts, and the Julia set associated to "f" is the boundary between the
two sets. The filled Julia set includes those numbers x=a for which the iterates of "f"
applied to "a" remain bounded. The following fractals belong to the Julia set.
Julia became famous around the 1920's; however, upon his demise, he was essentially
forgotten. It was not until 1970 that the work of Gaston Maurice Julia was revived and
popularized by Polish born Benoit Mandelbrot.
"Clouds are not spheres, mountains are not cones, coastlines are not circles, and bark
is not smooth, nor does lightning travel in a straight line." -Benoit Mandelbrot
Benoit Mandelbrot was born in Poland in 1924. When he was 12 his family emigrated to
France and his uncle, Szolem Mandelbrot, took responsibility for his education. It is said
that Mandelbrot was not very successful in his schooling; in fact, he may have never
learned his multiplication tables. When Benoit was 21, his uncle showed him Julia's
important 1918 paper concerning fractals. Benoit was not overly impressed with Julia's
work, and it was not until 1977 that Benoit became interested in Julia's discoveries.
Eventually, with the aid of computer graphics, Mandelbrot was able to show how Julia's
work was a source of some of the most beautiful fractals known today. The Mandelbrot set
is made up of connected points in the complex plane. The simple equation that is the basis
of the Mandelbrot set is included below.
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changing number + fixed number = Result
In order to calculate points for a Mandelbrot fractal, start with one of the numbers on the
complex plane and put its value in the "Fixed Number" slot of the equation. In the
"Changing number" slot, start with zero. Next, calculate the equation. Take the number
obtained as the result and plug it into the "Changing number" slot. Now, repeat (iterate) this
operation an infinite number or times. When iterative equations are applied to points in a
certain region of the complex plane, a fractal from the Mandelbrot set results. A few fractals
from the Mandelbrot set are included below.
Benoit Mandelbrot currently works at IBM's Watson Research Center. In addition, he is a
Professor of the Practice of Mathematics at Harvard University. He has been awarded the
Barnard Medal for Meritorious Service to Science, the Franklin Medal, the Alexander von
Humboldt Prize, the Nevada Medal, and the Steinmetz Medal. His work with fractals has
truly influenced our world immensely.
It is now established that fractals are quite real and incredible; however, what do these
newly discovered objects have to do with real life? Is there a purpose behind these
fascinating images? The answer is a somewhat surprising yes. Homer Smith, a computer
engineer of Art Matrix, once said, "If you like fractals, it is because you are made of them.
If you can't stand fractals, it's because you can't stand yourself." Fractals make up a large
part of the biological world. Clouds, arteries, veins, nerves, parotid gland ducts, and the
bronchial tree all show some type of fractal organization. In addition, fractals can be found
in regional distribution of pulmonary blood flow, pulmonary alveolar structure, regional
myocardial blood flow heterogeneity, surfaces of proteins, mammographic parenchymal
pattern as a risk for breast cancer, and in the distribution of arthropod body lengths.
Understanding and mastering the concepts that govern fractals will undoubtedly lead to
breakthroughs in the area of biological understanding. Fractals are one of the most
interesting branches of chaos theory, and they are beginning to become ever more key in
the world of biology and medicine.
George Cantor, a nineteenth century mathematician, became fascinated by the infinite
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number of points on a line segment. Cantor began to wonder what would happen when and
infinite number of line segments were removed from an initial line interval. Cantor devised
an example which portrayed classical fractals made by iteratively taking away something.
His operation created a "dust" of points; hence, the name Cantor Dust. In order to
understand Cantor Dust, start with a line; remove the middle third; then remove the middle
third of the remaining segments; and so on. The operation is shown below.
The Cantor set is simply the dust of points that remain. The number of these points are
infinite, but their total length is zero. Mandelbrot saw the Cantor set as a model for the
occurerence of errors in an electronic transmission line. Engineers saw periods of errorless
transmission, mixed with periods when errors would come in gusts. When these gusts of
errors were analyzed, it was determined that they contained error-free periods within them.
As the transmissions were analyzed to smaller and smaller degrees, it was determined that
such dusts, as in the Cantor Dust, were indispensable in modeling intermittency.
"It's an experience like no other experience I can describe, the best thing that can
happen to a scientist, realizing that something that's happened in his or her mind
exactly corresponds to something that happens in nature. It's startling every time it
occurs. One is surprised that a construct of one's own mind can actually be realized in
the honest-to-goodness world out there. A great shock, and a great, great joy." -Leo
Kadanoff
The fractals and iterations are fun to look at; the Cantor Dust and Koch Snowflakes are fun
to think about, but what breakthroughs can be made in terms of discovery? Is chaos theory
anything more than a new way of thinking? The future of chaos theory is unpredictable, but
if a breakthrough is made, it will be huge. However, miniature discoveries have been made
in the field of chaos within the past century or so, and, as expected, they are mind boggling.
The first consumer product to exploit chaos theory was produced in 1993 by Goldstar Co.
in the form of a revolutionary washing machine. A chaotic washing machine? The washing
machine is based on the principle that there are identifiable and predictable movements in
nonlinear systems. The new washing machine was designed to produce cleaner and less
tangled clothes. The key to the chaotic cleaning process can be found in a small pulsator
that rises and falls randomly as the main pulsator rotates. The new machine was
surprisingly successful. However, Daewoo, a competitor of Goldstar claims that they first
started commercializing chaos theory in their "bubble machine" which was released in
1990. The "bubble machine" was the first to use the revolutionary "fuzzy logic circuits."
These circuits are capable of making choices between zero and one, and between true and
Chaos Theory
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false. Hence, the "fuzzy logic circuits" are responsible for controlling the amount of
bubbles, the turbulence of the machine, and even the wobble of the machine. Indeed, chaos
theory is very much a factor in today's consumer world market.
The stock markets are said to be nonlinear, dynamic systems. Chaos theory is the
mathematics of studying such nonlinear, dynamic systems. Does this mean that chaoticians
can predict when stocks will rise and fall? Not quite; however, chaoticians have determined
that the market prices are highly random, but with a trend. The stock market is accepted as a
self-similar system in the sense that the individual parts are related to the whole. Another
self-similar system in the area of mathematics are fractals. Could the stock market be
associated with a fractal? Why not? In the market price action, if one looks at the market
monthly, weekly, daily, and intra day bar charts, the structure has a similar appearance.
However, just like a fractal, the stock market has sensitive dependence on initial conditions.
This factor is what makes dynamic market systems so difficult to predict. Because we
cannot accurately describe the current situation with the detail necessary, we cannot
accurately predict the state of the system at a future time. Stock market success can be
predicted by chaoticians. Short-term investing, such as intra day exchanges are a waste of
time. Short-term traders will fail over time due to nothing more than the cost of trading.
However, over time, long-term price action is not random. Traders can succeed trading
from daily or weekly charts if they follow the trends. A system can be random in the
short-term and deterministic in the long term.
Perhaps even more important than stock market chaos and predictability is solar system
chaos. Astronomers and cosmologists have known for quite some time that the solar system
does not "run with the precision of a Swiss watch." Inabilities occur in the motions of
Saturn's moon Hyperion, gaps in the asteroid belt between Mars and Jupiter, and in the orbit
of the planets themselves. For centuries astronomers tried to compare the solar system to a
gigantic clock around the sun; however, they found that their equations never actually
predicted the real planets' movement. It is easy to understand how two bodies will revolve
around a common center of gravity. However, what happens when a third, fourth, fifth or
infinite number of gravitational attractions are introduced? The vectors become infinite and
the system becomes chaotic. This prevents a definitive analytical solution to the equations
of motion. Even with the advanced computers that we have today, the long term
calculations are far too lengthy. Stephen Hawking once said, "If we find the answer to that
(the universe), it would be the ultimate triumph of human reason-for then we would know
the mind of God.
The applications of chaos theory are infinite; seemingly random systems produce patterns
of spooky understandable irregularity. From the Mandelbrot set to turbulence to feedback
and strange attractors; chaos appears to be everywhere. Breakthroughs have been made in
the past in the area chaos theory, and, in order to achieve any more colossal
accomplishments in the future, they must continue to be made. Understanding chaos is
understanding life as we know it.
However, if we do discover a complete theory, it should in time be understandable in
broad principle by everyone, not just a few scientists. Then we shall all, philosophers,
Chaos Theory
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scientists, and just ordinary people, be able to take part in the discussion of the
question of why it is that we and the universe exist.
-Stephen Hawking
TC
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Chaos Theory: Printable Version
An Introduction to Chaos Theory and Fractal
Geometry
Author: Manus J. Donahue III
Copyright Fall 1997, all rights reserved.
"Physicists like to think that all you have to do is say, these are the conditions, now what
happens next?" -Richard P. Feynman
The world of mathematics has been confined to the linear world for centuries. That is to say,
mathematicians and physicists have overlooked dynamical systems as random and unpredictable. The
only systems that could be understood in the past were those that were believed to be linear, that is to
say, systems that follow predictable patterns and arrangements. Linear equations, linear functions,
linear algebra, linear programming, and linear accelerators are all areas that have been understood
and mastered by the human race. However, the problem arises that we humans do not live in an even
remotely linear world; in fact, our world should indeed be categorized as nonlinear; hence, proportion
and linearity is scarce. How may one go about pursuing and understanding a nonlinear system in a
world that is confined to the easy, logical linearity of everything? This is the question that scientists
and mathematicians became burdened with in the 19th Century; hence, a new science and
mathematics was derived: chaos theory.
The very name "chaos theory" seems to contradict reason, in fact it seems somewhat of an oxymoron.
The name "chaos theory" leads the reader to believe that mathematicians have discovered some new
and definitive knowledge about utterly random and incomprehensible phenomena; however, this is
not entirely the case. The acceptable definition of chaos theory states, chaos theory is the qualitative
study of unstable aperiodic behavior in deterministic nonlinear dynamical systems. A dynamical
system may be defined to be a simplified model for the time-varying behavior of an actual system,
and aperiodic behavior is simply the behavior that occurs when no variable describing the state of the
system undergoes a regular repetition of values. Aperiodic behavior never repeats and it continues to
manifest the effects of any small perturbation; hence, any prediction of a future state in a given
system that is aperiodic is impossible. Assessing the idea of aperiodic behavior to a relevant example,
one may look at human history. History is indeed aperiodic since broad patterns in the rise and fall of
civilizations may be sketched; however, no events ever repeat exactly. What is so incredible about
chaos theory is that unstable aperiodic behavior can be found in mathematically simply systems.
These very simple mathematical systems display behavior so complex and unpredictable that it is
acceptable to merit their descriptions as random.
An interesting question arises from many skeptics concerning why chaos has just recently been
noticed. If chaotic systems are so mandatory to our every day life, how come mathematicians have
not studied chaos theory earlier? The answer can be given in one word: computers. The calculations
involved in studying chaos are repetitive, boring and number in the millions. No human is stupid
enough to endure the boredom; however, a computer is always up to the challenge. Computers have
always been known for their excellence at mindless repetition; hence, the computer is our telescope
when studying chaos. For, without a doubt, one cannot really explore chaos without a computer.
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Chaos Theory: Printable Version
Before advancing into the more precocious and advanced areas of chaos, it is necessary to touch on
the basic principle that adequately describes chaos theory, the Butterfly Effect. The Butterfly Effect
was vaguely understood centuries ago and is still satisfactorily portrayed in folklore:
"For want of a nail, the shoe was lost;
For want of a shoe, the horse was lost;
For want of a horse, the rider was lost;
For want of a rider, the battle was lost;
For want of a battle, the kingdom was lost!"
Small variations in initial conditions result in huge, dynamic transformations in concluding events.
That is to say that there was no nail, and, therefore, the kingdom was lost. The graphs of what seem
to be identical, dynamic systems appear to diverge as time goes on until all resemblance disappears.
Perhaps the most identifiable symbol linked with the Butterfly Effect is the famed Lorenz Attractor.
Edward Lorenz, a curious meteorologist, was looking for a way to model the action of the chaotic
behavior of a gaseous system. Hence, he took a few equations from the physics field of fluid
dynamics, simplified them, and got the following three-dimensional system:
dx/dt=delta*(y-x)
dy/dt=r*x-y-x*z
dz/dt=x*y-b*z
Delta represents the "Prandtl number," the ratio of the fluid viscosity of a substance to its thermal
conductivity; however, one does not have to know the exact value of this constant; hence, Lorenz
simply used 10. The variable "r" represents the difference in temperature between the top and bottom
of the gaseous system. The variable "b" is the width to height ratio of the box which is being used to
hold the gas in the gaseous system. Lorenz used 8/3 for this variable. The resultant x of the equation
represents the rate of rotation of the cylinder, "y" represents the difference in temperature at opposite
sides of the cylinder, and the variable "z" represents the deviation of the system from a linear, vertical
graphed line representing temperature. If one were to plot the three differential equations on a threedimensional
plane, using the help of a computer of course, no geometric structure or even complex
curve would appear; instead, a weaving object known as the Lorenz Attractor appears. Because the
system never exactly repeats itself, the trajectory never intersects itself. Instead it loops around
forever. I have included a computer animated Lorenz Attractor which is quite similar to the
production of Lorenz himself. The following Lorenz Attractor was generated by running data through
a 4th-order Runge-Kutta fixed-timestep integrator with a step of .0001, printing every 100th data
point. It ran for 100 seconds, and only took the last 4096 points. The original parameters were a =16,
r =45, and b = 4 for the following equations (similar to the original Lorenz equations):
x'=a(y-x)
y'=rx-y-xz
z'=xy-bz
The initial position of the projectory was (8,8,14). When the points were generated and graphed, the
Lorenz Attractor was produced in 3-D:
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Chaos Theory: Printable Version
The attractor will continue weaving back and forth between the two wings, its motion seemingly
random, its very action mirroring the chaos which drives the process. Lorenz had obviously made an
immense breakthrough in not only chaos theory, but life. Lorenz had proved that complex, dynamical
systems show order, but they never repeat. Since our world is classified as a dynamical, complex
system, our lives, our weather, and our experiences will never repeat; however, they should form
patterns.
Lorenz, not quite convinced with his results, did a follow-up experiment in order to support his
previous conclusions. Lorenz established an experiment that was quite simple; it is known today as
the Lorenzian Waterwheel. Lorenz took a waterwheel; it had about eight buckets spaced evenly
around its rim with a small hole at the bottom of each . The buckets were mounted on swivels, similar
to Ferris-wheel seats, so that the buckets would always point upwards. The entire system was placed
under a waterspout. A slow, constant stream of water was propelled from the waterspout; hence, the
waterwheel began to spin at a fairly constant rate. Lorenz decided to increase the flow of water, and,
as predicted in his Lorenz Attractor, an interesting phenomena arose. The increased velocity of the
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Chaos Theory: Printable Version
water resulted in a chaotic motion for the waterwheel. The waterwheel would revolve in one direction
as before, but then it would suddenly jerk about and revolve in the opposite direction. The filling and
emptying of the buckets was no longer synchronized; the system was now chaotic. Lorenz observed
his mysterious waterwheel for hours, and, no matter how long he recorded the positions and contents
of the buckets, there was never and instance where the waterwheel was in the same position twice.
The waterwheel would continue on in chaotic behavior without ever repeating any of its previous
conditions. A graph of the waterwheel would resemble the Lorenz Attractor.
Now it may be accepted from Lorenz and his comrades that our world is indeed linked with an eery
form of chaos. Chaos and randomness are no longer ideas of a hypothetical world; they are quite
realistic here in the status quo. A basis for chaos is established in the Butterfly Effect, the Lorenz
Attractor, and the Lorenz Waterwheel; therefore, there must be an immense world of chaos beyond
the rudimentary fundamentals. This new form mentioned is highly complex, repetitive, and replete
with intrigue.
"I coined fractal from the Latin adjective fractus. The corresponding Latin verb frangere
means "to break": to create irregular fragments. It is therefore sensible-and how appropriate
for our needs!-that, in addition to "fragmented", fractus should also mean "irregular," both
meanings being preserved in fragment." -Benoit Mandelbrot
The extending and folding of chaotic systems give strange attractors, such as the Lorenz Attractor,
the distinguishing characteristic of a nonintegral dimension. This nonintegral dimension is most
commonly referred to as a fractal dimension. Fractals appear to be more popular in the status quo for
their aesthetic nature than they are for their mathematics. Everyone who has seen a fractal has
admired the beauty of a colorful, fascinating image, but what is the formula that makes up this glitzy
image? The classical Euclidean geometry that one learns in school is quite different than the fractal
geometry mainly because fractal geometry concerns nonlinear, nonintegral systems while Euclidean
geometry is mainly oriented around linear, integral systems. Hence, Euclidean geometry is a
description of lines, ellipses, circles, etc. However, fractal geometry is a description of algorithms.
There are two basic properties that constitute a fractal. First, is self-similarity, which is to say that
most magnified images of fractals are essentially indistinguishable from the unmagnified version. A
fractal shape will look almost, or even exactly, the same no matter what size it is viewed at. This
repetitive pattern gives fractals their aesthetic nature. Second, as mentioned earlier, fractals have noninteger
dimensions. This means that they are entirely different from the graphs of lines and conic
sections that we have learned about in fundamental Euclidean geometry classes. By taking the
midpoints of each side of an equilateral triangle and connecting them together, one gets an interesting
fractal known as the Sierpenski Triangle. The iterations are repeated an infinite number or times and
eventually a very simple fractal arises:
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Chaos Theory: Printable Version
In addition to the famous Sierpenski Triangle, the Koch Snowflake is also a well noted, simple fractal
image. To construct a Koch Snowflake, begin with a triangle with sides of length 1. At the middle of
each side, add a new triangle one-third the size; and repeat this process for an infinite amount of
iterations. The length of the boundary is 3 X 4/3 X 4/3 X 4/3...-infinity. However, the area remains
less than the area of a circle drawn around the original triangle. What this means is that an infinitely
long line surrounds a finite area. The end construction of a Koch Snowflake resembles the coastline
of a shore.
The two fundamental fractals that I have included provided a basis for much more complex, elaborate
fractals. Two of the leading reasearchers in the field of fractals were Gaston Maurice Julia and Benoit
Mandelbrot. Their discoveries and breakthroughs will be discussed next.
On February 3rd, 1893, Gaston Maurice Julia was born in Sidi Bel Abbes, Algeria. Julia was injured
while fighting in World War I and was forced to wear a leather strap across his face for the rest of his
life in order to protect and cover his injury. he spent a large majority of his life in hospitals; therefore,
a lot of his mathematical research took place in the hospital. At the age of 25, Julia published a 199
page masterpiece entitled "Memoire sur l'iteration des fonctions." The paper dealt with the iteration
of a rational function. With the publication of this paper came his claim to fame. Julia spent his life
studying the iteration of polynomials and rational functions. If f(x) is a function, various behaviors
arise when "f" is iterated or repeated. If one were to start with a particular value for x, say x=a, then
the following would result:
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Chaos Theory: Printable Version
a, f(a), f(f(a)), f(f(f(a))), etc.
Repeatedly applying "f" to "a" yields arbitrarily large values. Hence, the set of numbers is partitioned
into two parts, and the Julia set associated to "f" is the boundary between the two sets. The filled Julia
set includes those numbers x=a for which the iterates of "f" applied to "a" remain bounded. The
following fractals belong to the Julia set.
Julia became famous around the 1920's; however, upon his demise, he was essentially forgotten. It
was not until 1970 that the work of Gaston Maurice Julia was revived and popularized by Polish born
Benoit Mandelbrot.
"Clouds are not spheres, mountains are not cones, coastlines are not circles, and bark is not
smooth, nor does lightning travel in a straight line." -Benoit Mandelbrot
Benoit Mandelbrot was born in Poland in 1924. When he was 12 his family emigrated to France and
his uncle, Szolem Mandelbrot, took responsibility for his education. It is said that Mandelbrot was
not very successful in his schooling; in fact, he may have never learned his multiplication tables.
When Benoit was 21, his uncle showed him Julia's important 1918 paper concerning fractals. Benoit
was not overly impressed with Julia's work, and it was not until 1977 that Benoit became interested in
Julia's discoveries. Eventually, with the aid of computer graphics, Mandelbrot was able to show how
Julia's work was a source of some of the most beautiful fractals known today. The Mandelbrot set is
made up of connected points in the complex plane. The simple equation that is the basis of the
Mandelbrot set is included below.
changing number + fixed number = Result
In order to calculate points for a Mandelbrot fractal, start with one of the numbers on the complex
plane and put its value in the "Fixed Number" slot of the equation. In the "Changing number" slot,
start with zero. Next, calculate the equation. Take the number obtained as the result and plug it into
the "Changing number" slot. Now, repeat (iterate) this operation an infinite number or times. When
iterative equations are applied to points in a certain region of the complex plane, a fractal from the
Mandelbrot set results. A few fractals from the Mandelbrot set are included below.
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Benoit Mandelbrot currently works at IBM's Watson Research Center. In addition, he is a Professor
of the Practice of Mathematics at Harvard University. He has been awarded the Barnard Medal for
Meritorious Service to Science, the Franklin Medal, the Alexander von Humboldt Prize, the Nevada
Medal, and the Steinmetz Medal. His work with fractals has truly influenced our world immensely.
It is now established that fractals are quite real and incredible; however, what do these newly
discovered objects have to do with real life? Is there a purpose behind these fascinating images? The
answer is a somewhat surprising yes. Homer Smith, a computer engineer of Art Matrix, once said, "If
you like fractals, it is because you are made of them. If you can't stand fractals, it's because you can't
stand yourself." Fractals make up a large part of the biological world. Clouds, arteries, veins, nerves,
parotid gland ducts, and the bronchial tree all show some type of fractal organization. In addition,
fractals can be found in regional distribution of pulmonary blood flow, pulmonary alveolar structure,
regional myocardial blood flow heterogeneity, surfaces of proteins, mammographic parenchymal
pattern as a risk for breast cancer, and in the distribution of arthropod body lengths. Understanding
and mastering the concepts that govern fractals will undoubtedly lead to breakthroughs in the area of
biological understanding. Fractals are one of the most interesting branches of chaos theory, and they
are beginning to become ever more key in the world of biology and medicine.
George Cantor, a nineteenth century mathematician, became fascinated by the infinite number of
points on a line segment. Cantor began to wonder what would happen when and infinite number of
line segments were removed from an initial line interval. Cantor devised an example which portrayed
classical fractals made by iteratively taking away something. His operation created a "dust" of points;
hence, the name Cantor Dust. In order to understand Cantor Dust, start with a line; remove the middle
third; then remove the middle third of the remaining segments; and so on. The operation is shown
below.
The Cantor set is simply the dust of points that remain. The number of these points are infinite, but
their total length is zero. Mandelbrot saw the Cantor set as a model for the occurerence of errors in an
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Chaos Theory: Printable Version
electronic transmission line. Engineers saw periods of errorless transmission, mixed with periods
when errors would come in gusts. When these gusts of errors were analyzed, it was determined that
they contained error-free periods within them. As the transmissions were analyzed to smaller and
smaller degrees, it was determined that such dusts, as in the Cantor Dust, were indispensable in
modeling intermittency.
"It's an experience like no other experience I can describe, the best thing that can happen to a
scientist, realizing that something that's happened in his or her mind exactly corresponds to
something that happens in nature. It's startling every time it occurs. One is surprised that a
construct of one's own mind can actually be realized in the honest-to-goodness world out there.
A great shock, and a great, great joy." -Leo Kadanoff
The fractals and iterations are fun to look at; the Cantor Dust and Koch Snowflakes are fun to think
about, but what breakthroughs can be made in terms of discovery? Is chaos theory anything more
than a new way of thinking? The future of chaos theory is unpredictable, but if a breakthrough is
made, it will be huge. However, miniature discoveries have been made in the field of chaos within
the past century or so, and, as expected, they are mind boggling.
The first consumer product to exploit chaos theory was produced in 1993 by Goldstar Co. in the form
of a revolutionary washing machine. A chaotic washing machine? The washing machine is based on
the principle that there are identifiable and predictable movements in nonlinear systems. The new
washing machine was designed to produce cleaner and less tangled clothes. The key to the chaotic
cleaning process can be found in a small pulsator that rises and falls randomly as the main pulsator
rotates. The new machine was surprisingly successful. However, Daewoo, a competitor of Goldstar
claims that they first started commercializing chaos theory in their "bubble machine" which was
released in 1990. The "bubble machine" was the first to use the revolutionary "fuzzy logic circuits."
These circuits are capable of making choices between zero and one, and between true and false.
Hence, the "fuzzy logic circuits" are responsible for controlling the amount of bubbles, the turbulence
of the machine, and even the wobble of the machine. Indeed, chaos theory is very much a factor in
today's consumer world market.
The stock markets are said to be nonlinear, dynamic systems. Chaos theory is the mathematics of
studying such nonlinear, dynamic systems. Does this mean that chaoticians can predict when stocks
will rise and fall? Not quite; however, chaoticians have determined that the market prices are highly
random, but with a trend. The stock market is accepted as a self-similar system in the sense that the
individual parts are related to the whole. Another self-similar system in the area of mathematics are
fractals. Could the stock market be associated with a fractal? Why not? In the market price action, if
one looks at the market monthly, weekly, daily, and intra day bar charts, the structure has a similar
appearance. However, just like a fractal, the stock market has sensitive dependence on initial
conditions. This factor is what makes dynamic market systems so difficult to predict. Because we
cannot accurately describe the current situation with the detail necessary, we cannot accurately
predict the state of the system at a future time. Stock market success can be predicted by chaoticians.
Short-term investing, such as intra day exchanges are a waste of time. Short-term traders will fail
over time due to nothing more than the cost of trading. However, over time, long-term price action is
not random. Traders can succeed trading from daily or weekly charts if they follow the trends. A
system can be random in the short-term and deterministic in the long term.
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Chaos Theory: Printable Version
Perhaps even more important than stock market chaos and predictability is solar system chaos.
Astronomers and cosmologists have known for quite some time that the solar system does not "run
with the precision of a Swiss watch." Inabilities occur in the motions of Saturn's moon Hyperion,
gaps in the asteroid belt between Mars and Jupiter, and in the orbit of the planets themselves. For
centuries astronomers tried to compare the solar system to a gigantic clock around the sun; however,
they found that their equations never actually predicted the real planets' movement. It is easy to
understand how two bodies will revolve around a common center of gravity. However, what happens
when a third, fourth, fifth or infinite number of gravitational attractions are introduced? The vectors
become infinite and the system becomes chaotic. This prevents a definitive analytical solution to the
equations of motion. Even with the advanced computers that we have today, the long term
calculations are far too lengthy. Stephen Hawking once said, "If we find the answer to that (the
universe), it would be the ultimate triumph of human reason-for then we would know the mind of
God.
The applications of chaos theory are infinite; seemingly random systems produce patterns of spooky
understandable irregularity. From the Mandelbrot set to turbulence to feedback and strange attractors;
chaos appears to be everywhere. Breakthroughs have been made in the past in the area chaos theory,
and, in order to achieve any more colossal accomplishments in the future, they must continue to be
made. Understanding chaos is understanding life as we know it.
However, if we do discover a complete theory, it should in time be understandable in broad
principle by everyone, not just a few scientists. Then we shall all, philosophers, scientists, and
just ordinary people, be able to take part in the discussion of the question of why it is that we
and the universe exist.
-Stephen Hawking
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Taleb Takes Alan Greenspan To Task

2008-06-21T02:55:00.000-07:00

Nassim Nicholas Taleb has turned his guns to Alan Greenspan- quite rightly so.

Sitting 17 weeks on the New York Times best-seller list, “Black Swan” outsold former U.S. Federal Reserve Governor Alan Greenspan's “The Age of Turbulence” months ago.
So, how does it feel?
“Greenspan is an empty suit,” he told the Turkish Daily News in Istanbul, one of the latest stops on his lecture tour. “He does not understand economic life and he does not know that he doesn't know. And his book is boring. I despise the man.”
Taleb says the turmoil vindicates him once again. “Greenspan is a man who plays with economic life without understanding its basic structure. In today's world, links between action and consequences are not as visible as they were in the past.”
A major mistake of Greenspan was letting the banking system cluster, he said. “Thus, you end up with a gigantic bank and lose the natural ecology. If a restaurant does not give decent food, the owner goes bust. But banks get clustered. So you end up with one single source of risk and that is JP Morgan!”
“In the U.S., you trade with any bank, you are trading with JP Morgan. I barked about this for years, but then Bear Stearns went bust and JP Morgan ended up taking it,” he said. For Taleb, a system that banks do not go bust means a system that risk is highly concentrated.
He cited an example from another realm. “Which one has more political volatility? Italy or Saudi Arabia? Of course Italy, because they had 62 governments since World War II. But Saudi Arabia has had the same family in power since you guys left them,” he said, referring to the Ottoman Empire. “But Italy has much less risk than Saudi Arabia.”
So, some entities like Bear Stearns do not have volatility but are very risky, while some that are risky do not have volatility. “Greenspan and others do not understand this,” he said. “They never let the banks fail. I want them to fail, because I love the banking system. Finance is too important to be left to U.S. central bankers.”
In his trading days, Taleb was a legend due to a few incredible “hits.” The most legendary of these was in 1987, when he was working for First Boston. At 28 years of age, he made the right bet on Eurodollar futures when nobody else did. On Oct. 19, the Dow Jones Industrial Average declined 22.6 percent, the biggest one-day drop in the United States ever. Eurodollar futures surged after the Fed pumped liquidity into the banking system in a rush, lowering interbank borrowing rates.

Investment choices:
The majority of his personal fortune today is still based on that lucky day. His choice of investing that fortune tells something about Taleb's philosophy. “I like things that are volatile. Instead of investing in medium-risk securities, I invested 90 percent in no-risk government bonds. But my 10 percent is in extremely risky choices.”
“Some businesses, such as biotech, or emerging markets, can benefit from the black swan,” he said. “The problem is, some businesses, like banks in the U.S., have a lot of downside exposure, but no upside exposure.”
The basic rule for Taleb is simple: “If you need a mathematician to understand what you have in your books, you're a blowup.”
“I trained lots of these people,” he continued. “And I tell you, my students were incompetent. I would not give them my car to drive, or even to wash. Mathematics does not work in real life.”
Does “Extremistan” mean the old saying that history repeats itself is not valid anymore? “People tend to learn first order from history. The best example would be the Maginot Line. When Germans came, the French built a wall. What did the Germans do? They went around it,” he continued. “First order thinking is like, ‘Let's make sure we are prepared for a second 22 percent stock market crash.' Because it had never been that worse. But then, the 22 percent crash did not have a predecessor, so history would not have taught you that.”
Taleb has told “the guys at Morgan Stanley” that they are “morons” precisely because of that. “They were doing historical stress testing on their subprime portfolio. But how can you do that when history does not have a predecessor?”
Then he explains his “second order thinking” so rapidly, one might think he cannot repeat these words again: “There is a past, the past's past and the past's future. Then there is today, today's past and today's future. You should work with today's future in relation to today's past the way the past's future worked with the past's past.”
“Simple peasants understand this thinking. But bring in someone with a PhD who works at a bank on risk management, he does not. It's like autism. Thus, the more mathematicians you have in a bank, the more likely it is to blow up.”

From Lebanon to war on terror:
A political “black swan” from Taleb's childhood was the Lebanese civil war. “Nobody saw it coming,” he said. “My father was telling me that it would be over in a week. It went on 17 years. But today, the black swan for Lebanon is peace.”
The black swan takes on another quality if it is spotted. “Anytime you identify a source of randomness, you overestimate its probability and commit mistakes,” Taleb explained. “Today we overestimate terrorism. Give a retard like [George W.] Bush an army and he starts inventing sources of risk.”
The biggest source of risk for humankind is not terrorism but diabetes, which kills 80 million people every year, he argued. “Our reaction to terror causes more people to die than terrorism itself. Nearly 3,000 people died on Sept. 11, 2001. But in the aftermath, many more died due to traffic accidents because they were afraid of flying.” Nearly 600 extra deaths on U.S. and European roads per month after 9/11, he said.
If diabetes is the biggest source of risk today, economists come after it. “We have too many economists,” he said. “The Federal Reserve is dangerous. So is Davos. All pseudo-experts.”

Overoptimization:
Now, this reporter was warned before the interview that Taleb was a “hard one to crack,” and a couple of previous interviews went astray due to colleagues' insistence on asking his prediction on oil prices, the U.S. dollar or the Turkish economy.
This time, Taleb answers without receiving the question in some sort of verbal preemptive strike. “Why did the price of food and oil rise so much?” he said himself. “Because the system is too optimized. A small imbalance of 1 percent in the demand for wheat causes prices to double. But if you look at the facts, demand for wheat is up 2 percent while supply is up 5 percent.”
Such vast price swings tell us that “forecastability in that domain is worse.” So, nobody can guarantee that a barrel of oil will not cost $40 the next day, instead of continuing its rise toward $140. And that is why Taleb is reluctant to predict.
Then, is there an alternative to be paranoid and expect the unexpected? Maybe one has to look at what Karl Marx had said decades ago, a suggestion surprisingly made by prominent businessman İshak Alaton in April.
Taleb strongly disagrees. “According to Marx, the idea is how to turn knowledge into action, and that is pure enlightenment arrogance,” he said. “My point is how to turn absence of knowledge and understanding into action.”
For that, the world has to wait for “Tinkering,” the next book of the trader-turned-philosopher. Until then, ranks of Taleb fans are sure to get more crowded. The world is hungry for new ideas and perspectives, a common phenomenon for times of such deep crises. And that is exactly what Taleb delivers.

Mandelbrot on Modern Portfolio Theory

2008-06-11T21:42:00.000-07:00

Individual investors and professional
stock and currency
traders know better than ever
that prices quoted in any financial market often
change with heart-stopping swiftness. Fortunes are
made and lost in sudden bursts of activity when the market
seems to speed up and the volatility soars. Last September,
for instance, the stock for Alcatel, a French telecommunications
equipment manufacturer, dropped about 40 percent
one day and fell another 6 percent over the next few days. In a
reversal, the stock shot up 10 percent on the fourth day.
The classical financial models used for most of this century
predict that such precipitous events should never happen. A
cornerstone of finance is modern portfolio theory, which tries
to maximize returns for a given level of risk. The mathematics
underlying portfolio theory handles extreme situations with
benign neglect: it regards large market shifts as too unlikely to
matter or as impossible to take into account. It is true that
portfolio theory may account for what occurs 95 percent of
the time in the market. But the picture it presents does not
reflect reality, if one agrees that major events are part of the
remaining 5 percent. An inescapable analogy is that of a sailor
at sea. If the weather is moderate 95 percent of the time, can
the mariner afford to ignore the possibility of a typhoon?
The risk-reducing formulas behind portfolio theory rely on
a number of demanding and ultimately unfounded premises.
First, they suggest that price changes are statistically independent
of one another: for example, that today’s price has no
influence on the changes between the current price and tomorrow’s.
As a result, predictions of future market movements
become impossible. The second presumption is that all
price changes are distributed in a pattern that conforms to
the standard bell curve. The width of the bell shape (as measured
by its sigma, or standard deviation)
depicts how far price changes
diverge from the mean; events at the extremes
are considered extremely rare. Typhoons
are, in effect, defined out of existence.
Do financial data neatly conform to such assumptions?
Of course, they never do. Charts of stock or currency changes
over time do reveal a constant background of small up and
down price movements—but not as uniform as one would
expect if price changes fit the bell curve. These patterns, however,
constitute only one aspect of the graph. A substantial
number of sudden large changes—spikes on the chart that
shoot up and down as with the Alcatel stock—stand out
from the background of more moderate perturbations.
Moreover, the magnitude of price movements (both large
and small) may remain roughly constant for a year, and then
suddenly the variability may increase for an extended period.
Big price jumps become more common as the turbulence of
the market grows—clusters of them appear on the chart.
According to portfolio theory, the probability of these large
fluctuations would be a few millionths of a millionth of a millionth
of a millionth. (The fluctuations are greater than 10
standard deviations.) But in fact, one observes spikes on a regular
basis—as often as every month—and their probability
amounts to a few hundredths. Granted, the bell curve is often
described as normal—or, more precisely, as the normal distribution.
But should financial markets then be described as abnormal?
Of course not—they are what they are, and it is portfolio
theory that is flawed.
Modern portfolio theory poses a danger to those who believe
in it too strongly and is a powerful challenge for the theoretician.
Though sometimes acknowledging faults in the
present body of thinking, its adherents suggest that no other
premises can be handled through mathematical
modeling. This contention leads to the
question of whether a rigorous quantitative description
of at least some features of major financial upheavals can be
developed. The bearish answer is that large market swings
are anomalies, individual “acts of God” that present no conceivable
regularity. Revisionists correct the questionable
premises of modern portfolio theory through small fixes that
lack any guiding principle and do not improve matters
sufficiently. My own work—carried out over many years—
takes a very different and decidedly bullish position.
I claim that variations in financial prices can be accounted
for by a model derived from my work in fractal geometry.
Fractals—or their later elaboration, called multifractals—do
not purport to predict the future with certainty. But they do
create a more realistic picture of market risks. Given the recent
troubles confronting the large investment pools called
hedge funds, it would be foolhardy not to investigate models
providing more accurate estimates of risk.

Benoit Mandelbrot

2008-05-29T04:45:00.000-07:00

It is a great pleasure for me to add Benoit Mandelbrot, the father of Fractal Geometry to my list of Ultra-genius who continue to shape my thinking. Recently I finished (Mis) Behavior of the Markets. Once again it proved to me that whatever I had studied in Finance was nothing but trash :( . Soon I will update the blog with the work of this Ultra Genius.

The Black Swan Ideas Gaining Momentum

2008-04-25T23:49:00.000-07:00

After writing yesterday's post" First Nail In the Coffin.......", here is another article suggesting the death of traditional models of risk management, measuring the economy. I am very much looking forward to a whole new world of ideas.

"WHAT'S WRONG WITH MARKET ECONOMICS AND GDP?" by HAZEL HENDERSON: 24/04/2008
(MaximsNews Network)

UNITED NATIONS - / MaximsNews Network / 24 April 2008 -- The credibility of the economics profession and its macroeconomic and risk models has been shattered by the Wall Street-led financial meltdown. Many analysts see this worst crisis since World War II as the beginning of the end of market fundamentalism as the driver of globalization. Coming into focus is also the fact that the USA is no longer the world’s lone super power. Military force is giving way to the new weapons of choice in today’s geopolitics: currency and cyber-attacks.

Even US Treasury Secretary Henry Paulson (former head of one of the over-leveraged Wall Street investment banks – Goldman Sachs) now calls for regulation of these reckless, risk-taking, private banks. Former options-trader/mathematician Nassim Nicholas Taleb predicted their downfall in The Black Swan (2007), as did former hedge fund "quant" Richard Bookstaber in A Demon of Our Own Design (2007). Ivory tower mathematicians lured to Wall Street’s big bucks simply didn't understand the real behavior of markets – as was demonstrated back in 1998 when their faulty models led to the collapse of hedge fund Long-Term Capital Management and its bail-out orchestrated by the US Federal Reserve.

The Nobel Prize Committee shares some blame by its recognition of the faulty options pricing model, Black-Scholes Merton, with its Bank of Sweden Prize in 1993. In recent editorials, Taleb has called on the Nobel Committee to withdraw this prize while Peter Nobel himself says that the Bank of Sweden should de-link its prize in economics from the Nobels. As I have noted in my previous editorials for IPS, many other scientists agree, since economics is not a science but a profession.

Meanwhile, the long-simmering critiques of money-based GDP/GNP national accounts are coming to a head. These popular critiques, including my own, were summarized by the late Senator Robert F. Kennedy in 1968 in a speech delivered to the University of Kansas. Even GDP's creator, Simon Kuznets, worried about using GDP as an overall indicator of national progress and well-being, saying that “the welfare of a nation can scarcely be informed from a measure of national income.”

The cracks in GDP as a scorecard of national progress began appearing at the UN Earth Summit in Rio de Janeiro in 1992, followed by the European Parliament's conference in 1995 on "Taking Nature Into Account." In November 2007, the European Parliament again took up the issue at the urging of the European Commission (www.beyond-gdp.eu). Its “Beyond GDP” debate was keynoted by EU President José Manuel Barroso of Portugal before almost 700 parliamentarians and statisticians of sustainability and quality of life. Statisticians themselves also emphasized the need for better measures of national progress, with over 13,000 attending their conference in Istanbul, convened by the OECD (Organization for Economic Co-operation and Development) in June 2007. And, EU Commissioner of Economic Policy Joaquín Almunia noted that GDP “cannot distinguish between economic activities that have a negative or positive impact on wellbeing. In fact, war and natural disasters may register as an increase in GDP.”

By March 2008, the US Senate picked up these critical debates and the plethora of new, broader indicators of health, education and environment. The Senate's Committee on Commerce held its own hearing on "Rethinking GDP as a Measure of National Strength" – a low-key academic exploration on how all of these new measures of overall quality could be used to correct all the now-recognized errors in GDP that economic textbooks perpetuate.

In its March 13, 2008 issue, even The Economist weighed in with "Grossly Distorted Picture," criticizing the widespread focus on GDP-growth. This "growth fetish" has long been the subject of countless critiques by environmentalists and even a few economists. To see this journal of economic and free-trade orthodoxy now also criticizing GDP-growth signals a tipping point in this long debate. Echoing so many earlier critiques, The Economist pointed out that a better measure than rates of GDP-growth would be to compare GDP per head – a much more tangible sign of progress that takes into account the growth of population. For example, Japan's GDP growth has been about 2.1% over the past five years, while GDP in the USA has grown 2.9%.

Yet, comparing the average growth of income per capita between the two countries, a different story emerges: the USA saw only a 1.9% increase while Japanese citizens’ income grew by 2.1%. This was among the reasons I have urged Japan to shift from GDP growth to quality-of-life indicators (Nikkei Ecology, August 2000). I pointed out that Japan had matured beyond the need for more material growth and could now concentrate on higher-level services and improving quality of life. Japan’s average income-per-head also was greater because Japan's population is shrinking while the US population is rising. India has enjoyed rapid GDP-growth, but its population has grown much faster, leaving more people to share that income.

The Economist is correct that the growth of average income per capita is the more realistic indicator. But, they omit another problem with these GDP measures: averaging per capita of growth in incomes masks how that income is distributed. Averaging incomes across the whole population could mean that a country might have a few billionaires while most of its citizens live in poverty.

Let’s agree that GDP has outlived its usefulness (started as a World War II measure of war production). There are now many new, better indicators, from the Canadian Index of Wellbeing (CIW), the UN's Human Development Index (HDI), the World Bank’s Wealth Index to Genuine Progress Index (GPI), Bhutan's Gross National Happiness (GNH) to the Calvert-Henderson Quality of Life Indicators I created with the Calvert Group of socially responsible mutual funds (the only private-sector effort so far, updated regularly at www.calvert-henderson.com).

Once again, the public is ahead of the experts and politicians on this issue. A GlobeScan survey in 10 countries in November 2007, in conjunction with the Beyond GDP Conference in the European Parliament, found large majorities in India, Russia, Germany, France, Italy, Britain as well as Australia, Brazil and Kenya favored broader scorecards of progress beyond money-based GDP, including indicators of health, education and environment. Real wealth and progress can never be quantified only in money. The economics textbooks are overdue for revision.

Hazel Henderson is author of Ethical Markets: Growing the Green Economy (2007) and other books. She co-organized the Beyond GDP Conference in Brussels, representing the Club of Rome. www.hazelhenderson.com

Sub Prime mess- A nail in the coffin of Traditional Risk Management

2008-04-24T22:31:00.000-07:00

About three years ago when I was fascinated by Economists and used to read on daily basis a lot of economic commentary, almost every one focused on China as next epicenter of economic chaos. No one, not a single soul suspected the great USA. Now the mess seems to be getting out of control. The Black Swan by Nassim Nicholas Taleb offers explanation for such blindness. It was only after the sub prime crisis that people started agreeing with his ideas to a greater extent. The traditional risk management techniques failed comprehensively. Now, I think , the whole discipline of risk management needs to be rebuild and much of it would be based on Taleb's philosophy.

Here is the first indication:

Death of VaR Evoked as Risk-Taking Vim Meets Taleb
Jan. 28 (Bloomberg) -- The risk-taking model that emboldened Wall Street to trade with impunity is broken and everyone from Merrill Lynch & Co. Chief Executive Officer John Thain to Morgan Stanley Chief Financial Officer Colm Kelleher is coming to the realization that no algorithm or triple-A rating can substitute for old-fashioned due diligence.Value at risk, the measure banks use to calculate the maximum their trades can lose each day, failed to detect the scope of the U.S. subprime mortgage market's collapse as it triggered more than $130 billion of losses since June for the biggest securities firms led by Citigroup Inc., Merrill, Morgan Stanley and UBS AG.The past six months have exposed the flaws of a financial measure based on historical prices that securities firms use idiosyncratically and that doesn't anticipate every potential disaster, such as the mistaken credit ratings on defaulted subprime debt.``Finance is an area that's dominated by rare events,'' said Nassim Taleb, a research professor at London Business School and former options trader. ``The tools we have in quantitative finance do not work in what I call the `Black Swan' domain.''Taleb's book ``The Black Swan,'' published last year by Random House, describes how people underestimate the impact of infrequent occurrences. Just as it was assumed that all swans were white until the first black species was spotted in Australia during the 17th century, historical analysis is an inadequate way to judge risk, he said. for full articlehttp://www.bloomberg.com/apps/news?pid=20601109&sid=axo1oswvqx4s&refer=home

Netsol Technologies ; Netsol Akhter (Netsol Connect) the Broad Band Way

2007-11-03T01:30:00.000-07:00

Here is first overview of Broad Band Technology, in order to enable layperson to better understand the hidden potential of Netsol Conect/ Akhter, a subsidiary of Netsol Technologies Ltd. The excellent summary has been prepared by my colleagues:

WIRELESS BROADBAND NETWORKS

Wireless broadband is a fairly new technology combining the two aspects i.e. “wireless” and “broadband”.

Communication channels (paths) are grouped into 2 basic categories- narrow band and broadband, depending on their transmission speeds:

Narrowband or baseband are used for handling low data volumes since they provide low speed transmission rates and hence are adequate for low-speed devices like telegraph lines and low speed terminals. Commonly used for telephone voice communications and for data communications by the modems of PCs and other devices.

Broadband or wideband channels are used when large volumes are to be transmitted at high speed. This data communication system handles high volume of data and can be used for high speed computer to computer communication or for simultaneous transmission of data to several different devices. There are different types of broadband access technologies, such as cable, DSL, powerline, satellite, and wireless.

Data can be transmitted through wired or wireless media. Wireless networks can cover wide geographic areas efficiently. Wireless is being adopted for many applications: to connect computers, to allow remote monitoring and data acquisition, and to provide a solution for environments where wires may not be the best solution. Wireless systems are typically slower than land-based, wire-line networks.

Broadband Wireless (BW)

Broadband means 'having instantaneous bandwidth’. This means that Wireless Broadband offers speeds roughly equivalent to wired broadband, such as that of DSL or a cable modem.

BW is an emerging wireless technology that allows simultaneous wireless delivery of voice, data, and video. It provides high-speed wireless internet and data network access over large distances. BW is considered a competing technology with Digital Subscriber Line (DSL). It is generally implemented in metropolitan areas and requires clear line of sight between the transmitter and the receiving end. What is "high" speed is always a changing number.

Through BW, networks of varying sizes can be deployed in places where it would be expensive to run wires. Because trenches do not have to be dug, there may be less overall disruption and visual impact to communities. Particularly for rural areas, wireless technologies may enable less burdensome service at lower cost.

BW falls into local and wide area categories:

Wireless Local Area Networks (WLANs), such as the Wireless Fidelity (Wi-Fi) that is a high frequency network, transmit their signals within several hundred feet. WLANs are implemented as an extension to wired LANs within a building and can provide few meters of connectivity between a wired network and the mobile user. A person with a Wi-Fi enabled device such as a PC, cell phone or PDA can connect to the internet when in proximity of an access point.

Wireless Wide Area Networks (WWANs) such as WiMAX span several miles ensuring interoperability between devices, networks, and regions. WiMAX is defined as Worldwide Interoperability for Microwave Access.

Besides BW, Bluetooth is another wireless technology for low-cost, short-range wireless links and transmission of digital voice and data between mobile PCs, mobile phones, and other portable handheld devices, and connectivity to the internet. Bluetooth is widely used for hands-free cell phone operation, including wireless headsets. It can also be used to transfer data between cell phones and computer.

NETSOL CONNECT- WHAT LIES BENEATH

2007-10-31T00:45:00.001-07:00

Just a few days my post here referred to Netsol's plan of becoming biggest Broad Band Company. At firs I didn't pay much attention and thought of it as just another publicity stunt. Thanks to Google I believe this broad band thing could get even bigger than the $150 Million Land Record Management Information System (LRMIS). Here are some bits and pieces of information:

Akhter Group, a United Kingdom Company, Acquires 49.9 Percent of NetSolConnect, a Subsidiary of NetSol Technologies, Inc.; Acquisition to Bring Potentially $20 Million in Investment for F
see addition of companies' URLs
Distribution Source : Prime Newswire
Date : Thursday, August 07, 2003
CALABASAS, Calif., Aug. 7, 2003 (PRIMEZONE) -- NetSol Technologies, Inc. (Nasdaq:NTWKC), a developer of proprietary software applications, today announced that it has entered into an agreement with United Kingdom-based Akhter Group PLC. Under the terms of the agreement, Akhter Group acquired 49.9 percent of NetSol Technologies' wholly owned subsidiary, Pakistan-based NetSolConnect (Pvt) Ltd., an Internet Services Provider in Pakistan. Akhter, one of the longest established computer companies in the UK, is well recognized as a provider of managed Internet services, integrated networks, both local area networks and wide area networks as well as metropolitan area networks within the UK.
"Akhter owns proprietary broadband technologies and solutions that will provide NetSolConnect a technologically strong platform for strengthening its telecommunications infrastructure within Pakistan with a goal of becoming a leading provider of broadband Internet access to both residential and commercial users," said NetSol CEO Naeem Ghauri. "This untapped market presents a significant opportunity to NetSol and Akhter as Pakistan's telecommunications infrastructure predominantly supports dial up access to the Internet."

The initial stage of the agreement provides NetSol with an investment of up to $1 million in cash to launch a broadband infrastructure in Karachi, the largest business hub in Pakistan. The initial infrastructure will provide a 155MB backbone and a 5MB broadband to customer premises using a proprietary broadband technology and an infrastructure consisting of 20 hubs. After the successful launch of the initial six-month beta program to Karachi's residential and commercial customers, additional rollouts of the hubs are scheduled in Lahore and Islamabad within a 12-month period.
The second investment into the program could provide up to $20 million to create the first Terabit backbone in Pakistan. This will allow NetSol to provide data, voice, video and other multi-media services to major cities within Pakistan.
"Akhter and NetSol's partnership provides both companies with significant opportunities within Pakistan," commented Ghauri. "Pakistan's major cities must be supported with a fast, efficient and cost effective communications infrastructure to maintain the significant growth currently being experienced. Our investment and technical expertise can provide a broadband communications program that will be efficiently replicated throughout each major city within Pakistan."
"After two decades in the technology industry, we have learned to invest our time and money in our customers, the continued growth of our company and our partnerships with well respected companies such as NetSol," said Akhter Computers Chairman and CEO Humayun Mughal. "Our partnership with NetSol strengthens our collective footprint within Pakistan and gives us the opportunity to substantially improve our competitive position as we have the experience and the technologies to cost effectively provide a wide range of broadband Internet and data services to the populace. We look forward to expanding our services to provide the much needed voice, data, and multimedia broadband services -- all from a single provider.
About Akhter Group PLC
Electronics expert Humayun Akhter Mughal founded Akhter in 1979. Through its 24 years as a high technology company, the $30 million company's dedication to providing the very best value for its customers has become the hallmark of Akhter's business. Akhter has a large UK customer base within defense, education, health and the public sector including major corporations. The company is a recognized provider of a wide range of computer products and related services as well as wireless broadband communications services including managed internet services and integrated networks whether local area networks, wide area networks or metropolitan area networks. For additional information, please visit www.akhter.com.
About NetSol Technologies, Inc.
NetSol Technologies is a leading end-to-end solution provider for the lease and finance industry. Headquartered in Calabasas, CA, NetSol Technologies, Inc. operates on a global basis with locations in the U.S., Europe, East Asia and Asia Pacific. NetSol helps its clients identify, evaluate and implement technology solutions to meet their most critical business challenges and maximize their bottom line. By utilizing its worldwide resources, NetSol has been delivering high quality, cost-effective IT services ranging from consulting and application-development to systems integration and outsourcing for years. Their commitment to quality is demonstrated by achieving both ISO 9001 and SEI (Software Engineering Institute) CMM (Capability Maturity Model) Level 3 assessment. For additional information, please visit www.netsoltek.com.
Securities Exchange Act of 1934
This release is comprised of inter-related information that must be interpreted in the context of all the information provided; accordingly, care should be exercised not to consider portions of this release out of context. This release is provided in compliance with Commission Regulation FD and contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, goals, assumption or future events or performance, are not statements of historical fact and may be "forward-looking statements." Forward-looking statements are based on expectations, estimates and projections at the time the statements are made that involve a number of risks and uncertainties, which could cause actual results or events to differ materially from those presently anticipated. Forward looking statements in this action may be identified through the use of words such as "expects", "will", "anticipates", "estimates", "believes", or statements indicating certain actions "may", "could", or "might" occur. Such statements reflect the current views of NetSol Technologies with respect to future events and are subject to certain assumptions, including those described in this release. Should one or more of the underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed or expected. NetSol Technologies does not intend to update these forward-looking statements prior to announcement of quarterly or annual results. CONTACT: Investor Relation Resources LLC
Marty Tullio
Investor Relations
949.566.9860
marty@investorRR.com
NetSol Technologies
Najeeb U. Ghauri
Chairman
818.222.9195
najeeb@netsoltek.com

Netsol :Twinkle, Twinkle.......Like a Diamond In the Sky

2007-10-30T23:51:00.000-07:00

Another Feather in Netsol's Cap:
Press Release Source: NetSol Technologies BMW Financial Services Hong Kong Ltd. Goes Live With NetSol Technologies' LeaseSoft SolutionThursday November 1, 8:30 am ET NetSol's LeaseSoft Offering the De Facto Standard for Vehicle Finance Accounting and Portfolio Management System in the Region CALABASAS, CA--(MARKET WIRE)--Nov 1, 2007 -- NetSol Technologies Inc. ("NetSol") (NasdaqCM:NTWK - News), a multinational provider of IT services and enterprise software to the financial services industry, announced today that its Asia-Pacific division has successfully implemented its LeaseSoft retail product suite for BMW Financial Services Hong Kong Ltd. BMW Financial Services Hong Kong Ltd. has gone live with the NetSol's LeaseSoft solution including the LeaseSoft Contract Management System (CMS) and Credit Application System (CAP) components.Mr. Najeeb Ghauri, chairman and CEO, commented, "We commend the efforts of our Asia-Pacific division in becoming the de facto standard for vehicle finance accounting and portfolio management systems in the region. LeaseSoft is the premier software suite for automotive finance in the Asia-Pacific region. We anticipate that this mission critical application has the potential to manage all of BMW Financial Services' expanding business in Hong Kong. We look forward to working with BMW and implementing applications to provide fast and convenient solutions for their most sophisticated vehicle finance and leasing software needs."About NetSol Technologies Inc.NetSol Technologies (NasdaqCM:NTWK - News) is a multinational provider of IT services and enterprise solutions to the financial services industry. By utilizing its worldwide IT design, development, quality assurance (QA), and project management resources, NetSol delivers high-quality, cost-effective portfolio management solutions for equipment and vehicle finance, as well as IT services ranging from consulting and application development to systems integration and development outsourcing. NetSol's commitment to quality is demonstrated by its achievement of both the ISO 9001 and SEI (Software Engineering Institute) CMMi (Capability Maturity Model) Level 5 assessments, a distinction shared by fewer than 100 companies worldwide. NetSol Technologies' clients include Fortune 50 manufacturers, global automakers, financial institutions, technology providers, and governmental agencies. Headquartered in Calabasas, California, NetSol Technologies has operations and/or offices in London, San Francisco, Adelaide, Beijing, Bangkok and Lahore, Pakistan.To learn more about NetSol Technologies Inc, visit http://www.netsoltek.com/http://biz.yahoo.com/iw/071101/0322632.html

Netsol Results:

Netsol Technologies, NETSOL:PK, a subsidiary of Netsol Technologies Inc., NTWK:US , announced its first quarter 2008 financial results today. Before the announcement of 2007 annual results i tried to estimate the EPS. I worked out Rs 11-12 per share. I was wrong by 30%. Now comes the first quarter of 2008, I expected an EPS of Rs. 2/ share. This time the shock was on upper side. I was wrong by 80%.

QTR 1,2008 diluted EPS is Rs. 3.59/share- an astronomical growth of 425% compared to the same period last year!

I am leaving the job of forecasting to the Analysts and Astrologists.

Indus Dyeing Mills Limited another neglected Star?

2007-10-26T01:06:00.000-07:00

Recently I have started looking into an investment opportunity in Indus Dyeing Mils Ltd (IDYM:KSE).

An EPS of 22 and Book Value per share of Rs. 120+ apparently makesit an excellent buying opportunity @77. I wanted some 30,000 shares yesterday but could get only 5000. It is again on upper circuit breaker today.

THE RISE OF NETSOL ( NTWK:US) , NETSOL:PK IS IT ANOTHER BLACK SWAN LIKE GOOGLE?

2007-10-25T22:11:00.001-07:00

Netsol continues rise beyond imagination. In early 2007 our group of friends spotted it struggling for life in 20s. A little research gave us the confidence to go and empty our pockets and bet on it. Today its cum bonus price is above 200. 8 times increase in value in just a matter of eight months. We thought there wasn't nothing much left in it in terms of capital gains unless and until it gets the Land Record Automation Contract which is worth $300,000,000. But now out of no where it has bolted another positive surprise. Just Take a look:

NetSol iReady launches the most powerful ISP in karachi. With the largest bandwidth in the country, NetSol iReady has created a new benchmark in Internet access speed. The ISP is backed by round-the-clock / 365-days-a-year technical support system run by qualified IT proffesionals. With NetSol iReady, you can be assured of instant and the most reliable Internet connectivity available. So switch to the fast lane now and experience the Internet like never before!Akhtar Group, a United Kingdom Company, Merger with NetSol Connect,a Subsidiary of NetSol Technologies, Inc.; Acquisition to Bring Potentially$20 Million in Investment for First Nationwide Broadband Infrastructure in Paksitan.We have provided the most powerful and state-of-the-art web access system all over as compares to our competitors, for NetSol iReady accounts holders for there account maintenance as well as to NetSol iReady Dealers and Franchises network for online transactions, metropolitan wide and to the areas where NetSol iReady is providing services. Our existing system can handle multiple packages and hundreds of thousands users at a time and billing, creating, disabling them on a real time basis. We have introduced more enhanced and attractive tariffs for our customers and companies as compares to other service providers.
Source: http://www.netsolir.com/

Who am I?

2007-10-25T02:25:00.000-07:00

It was 1999 when I completed my Chartered Accountancy. That day I felt I have reached the peak. It was a justifiable ecstasy as then I joined the Elite Club of just a few thousand Chartered Accountants in Pakistan. Almost a decade passed and one fine day I started to realise that the concepts, theories, principles and so on that I have learnt during my Professional Education ad Work were just nothing. All these theories etc. were nothing but a great intellectual fraud.

The Cost Accounting & Management Accounting which took most of the time to learn and master had been proven ineffective tool for Management about two decades ago by Eliyahu M. Goldratt.

And the Risk Management, Portfolio Management, Diversification, Feasibility Studies to my great surprise and horror also fell in the category of Great Intellectual Fraud (GIF) when I got my hands on Nassim Nicholas Taleb's THE BLACK SWAN.

My idea to create a blog of my own is to share the pearls of wisdom that I collect from the Smartest and Ultra Genius. The list includes:

1- Nassim Nicholas Taleb ( scholar, writer, teacher in the filed of Sciences of Uncertainty) www.fooledbyranomness.com
2- Eliyahu M. Goldratt, creator of the Theory of Constraints, and has a Doctorate in Physics www.goldratt.co.uk
3- Dr. Gerd Gigerenzer, Director of the Centre for Adaptive behaviour and Cognition at Max Planck Institute for Human Development http://ntfm.mpib-berlin.mpg.de/mpib/FMPro?-db=MPIB_Mitarbeiter.FP5&-lay=L1&-format=MPIB_Mit.htm&-op=eq&ID_Name=Gigerenzer&-find
4- Joseph Heller, the Author of Famous Catch 22.
5- Paul E. Erdman the Economist and Economic Fiction writer.
6-Malcolm Gladwell- the author of THE BLINK & THE TIPPING POINT http://www.gladwell.com/

The ideas that I keep looking for are Human Intelligence, Chaos Theory, Theory of Constraints and their application in the Fields of Management.