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For the 95th session of the Philosophical Foundations of Law and Finance, I will read from my unexpurgated and unpublished paper entitled, "Default Invariance."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."
The effect of rules on plans of companies especially those who are technology-based boundaries the investment investment financing for these companies and effect what they can or plan to do and gradually restricting their abilities to implement new arms thereby impacting the socio-economic fiber of the community. Vertex Law
ReplyDeleteThe concept of Default Invariance is closely related to the key observation in physics that near the critical point of phase transition fluctuations appear at all scales, and it is here that physicists should look to scale invariant theory to explain cause and effect of the phenomena in question. This is all just statistical mechanics. How Default Invariance (which is based on legal and financial analytical opposites and correlatives) relates to companies depends on the completeness and resilience of its product and co-product structure at the micro- or macro-level. [Product & co-product structure are simply "databases".] At micro-level, default invariance in practice resorts to well-known "failure avoidance" informatics of Prof Kent Stephens. In the development of default invariance theory, we can see the programmable implementation at the level of informatics is simply a connection (morphism) of databases (objects of disjoints). So, comprehensive micro-to-macro programmable code can be written to model corporate ontology as set of financial contracts [SFC], and SFC can be tracked and simulated in the Great Cycle of Default in each of the four phase transitions. The 2-maps of default invariance, i.e., micro- and macro-structure, form the fundamental syntactics onto which variant unique mappings permute into existence and are absorbed. The question of whether a particular SFC continues to exist to any particular next phase transition should be turned into a question of what morphisms of legal certainty are in fact in reversal. Surviving phase transitions of default invariance is the ultimate test of any de facto community.
ReplyDelete