Friday, 20 January 2012
Market Morphisms: Pump, Chase, Game and Crush
In every "Market," we have the following ordered morphisms: pump, chase, game, crush. The pumpers are the fraudsters (think of hopium addicts of IPOs and the corporate suits posing as newspersons), the chasers are the ignorant hypnotically susceptible masses (guru devotees, Obama groupies, retail investors and now the new institutional investors), the gamesters are the High Frequency Trading robots (trading at the speed of DARKNESS and taking the mickey out of the chasers), and finally the BONE CRUSHERS (today, this role is played by our Central Bankers, but in the historical record, these were the pinnacle ontogenetic-phyllogenic exemplars of the "killer-same-species" Y-chromosome gene e.g. Ghenghis Khan, King Niall, Nurhaci or was it Giocangga?, King Solomon, President Kennedy. etc.) Our faith in the ATMs working today is in the CB bone crushers and they can't help being what they are. Take care, you all!
Thursday, 5 January 2012
DEFAULT INVARIANCE: Announcement of New Theory of Law and Finance
120105
For the 95th session of the Philosophical Foundations of Law and Finance, I will read from my unexpurgated and unpublished paper entitled, "Default Invariance." The thesis is that the intersecting discourses of law and finance, normally associated with the professional discourse of risk, can be translated into an UNIVERSAL ALGEBRA, {D, *}, where D stands for "human decisions" and * stands for any one of three isomorphisms, bilateral, translational or rotational. Beauty is thus a result of fundamental binary operations and incorporated into the firey belly of the equations. Since decisions are the objects and the three symmetries are the isomorphisms, the theory logically anticipates and therefore generously incorporates the traditional micro- to macro- economic equilibrium premises of Morgenstein, Von Neumann, Tversky, Kahneman, Debreu, Arrow. To illustrate this algebraic approach to law and finance, we critically examine the Arrow-Debreu-Sharpe model (1995) of a financial contract -- where Time 0 (T0) conditions point to an infinitely contingent states of the world and T1 points to the event of "pay". Theorists using ADS premises have an extremely biased view of financial contracts and have led to over-confidence and over-reliance in the prediction of pay events. For example, such theorists wrongly impute the value "1" for "payment" and "0" for "nonpayment." We correct this model by injecting the symmetric resultants of "pay or not-pay" to the interval between t0 and t1. What follows naturally is what is termed DEFAULT INVARIANCE. Thus, the values of "pay" and "not-pay" must be "0" and "1", respectively. This result has extraordinarily large implications for law and finance theory. For example, from this theory, a financial contract when paid exits from the infinitely contingent states of the world, i.e., (infinite-contingency) x 0 = 0, and thus, becomes a legal certainty of discharged obligations. And if unpaid, it remains as part of the infinitely contingent states of the world, i.e., (infinite contingency) x 1 = infinite contingency, and a continuing potential legal liability. One implication of this new theory is that another type of credit rating must exist in the real world (whether we like it or not). The current credit ratings in the world are based on the question of whether a legal entity can make good its financial obligations at T1. This is obviously based on an Arrow-Debreu model which sees "pay" as the only relevant event at T1. From this premise, the hierarchy of ratings AAA, AA, and so on unfolds. But this sort of credit rating obviously does not capture the continuing ("stretched out") event of non-payment except to nominate it at the bottom of ratings. From a "not-pay" event, an alternative credit rating agency would appropriate "XXX" to warn potential investors of the severity or intensity of default. (Think of warning labels on videos that are not appropriate to non-adults.) Some might argue that the XXX-rating is already incorporated in the AAA-rating system. But it is patently not since during times of credit crises, large institutional short-term traders asses the risk of AAA-instruments as "100% default probability."
For the 95th session of the Philosophical Foundations of Law and Finance, I will read from my unexpurgated and unpublished paper entitled, "Default Invariance." The thesis is that the intersecting discourses of law and finance, normally associated with the professional discourse of risk, can be translated into an UNIVERSAL ALGEBRA, {D, *}, where D stands for "human decisions" and * stands for any one of three isomorphisms, bilateral, translational or rotational. Beauty is thus a result of fundamental binary operations and incorporated into the firey belly of the equations. Since decisions are the objects and the three symmetries are the isomorphisms, the theory logically anticipates and therefore generously incorporates the traditional micro- to macro- economic equilibrium premises of Morgenstein, Von Neumann, Tversky, Kahneman, Debreu, Arrow. To illustrate this algebraic approach to law and finance, we critically examine the Arrow-Debreu-Sharpe model (1995) of a financial contract -- where Time 0 (T0) conditions point to an infinitely contingent states of the world and T1 points to the event of "pay". Theorists using ADS premises have an extremely biased view of financial contracts and have led to over-confidence and over-reliance in the prediction of pay events. For example, such theorists wrongly impute the value "1" for "payment" and "0" for "nonpayment." We correct this model by injecting the symmetric resultants of "pay or not-pay" to the interval between t0 and t1. What follows naturally is what is termed DEFAULT INVARIANCE. Thus, the values of "pay" and "not-pay" must be "0" and "1", respectively. This result has extraordinarily large implications for law and finance theory. For example, from this theory, a financial contract when paid exits from the infinitely contingent states of the world, i.e., (infinite-contingency) x 0 = 0, and thus, becomes a legal certainty of discharged obligations. And if unpaid, it remains as part of the infinitely contingent states of the world, i.e., (infinite contingency) x 1 = infinite contingency, and a continuing potential legal liability. One implication of this new theory is that another type of credit rating must exist in the real world (whether we like it or not). The current credit ratings in the world are based on the question of whether a legal entity can make good its financial obligations at T1. This is obviously based on an Arrow-Debreu model which sees "pay" as the only relevant event at T1. From this premise, the hierarchy of ratings AAA, AA, and so on unfolds. But this sort of credit rating obviously does not capture the continuing ("stretched out") event of non-payment except to nominate it at the bottom of ratings. From a "not-pay" event, an alternative credit rating agency would appropriate "XXX" to warn potential investors of the severity or intensity of default. (Think of warning labels on videos that are not appropriate to non-adults.) Some might argue that the XXX-rating is already incorporated in the AAA-rating system. But it is patently not since during times of credit crises, large institutional short-term traders asses the risk of AAA-instruments as "100% default probability."
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