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Archive for December 20th, 2008

Is it really time to get out of the U.S. dollar?

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Remember the guy who was right on the housing bubble? The guy who predicted this crisis as far as two years ago. Until recently he was basically correct on just about everything except two things. He claimed gold would rise and the dollar will crash. Both had not happened until now. 

Here he is again, really excited that his last two predictions may really come true. If this guy is right, the United States economy is in deep trouble to say the very least.

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Chris Anderson wrote an interesting piece in Wired this year heralding the dawn of the Petabyte Age, or the age when extremely large databases already exist which can allow those with access to these databases to run computer correlations on just about anything to form conclusions without the traditional theoretical modelling under the scientific method.

From Anderson’s article:

At the petabyte scale, information is not a matter of simple three- and four-dimensional taxonomy and order but of dimensionally agnostic statistics. It calls for an entirely different approach, one that requires us to lose the tether of data as something that can be visualized in its totality.

This is a world where massive amounts of data and applied mathematics replace every other tool that might be brought to bear. Out with every theory of human behavior, from linguistics to sociology. Forget taxonomy, ontology, and psychology. Who knows why people do what they do? The point is they do it, and we can track and measure it with unprecedented fidelity. With enough data, the numbers speak for themselves.

The big target here isn’t advertising, though. It’s science. The scientific method is built around testable hypotheses. These models, for the most part, are systems visualized in the minds of scientists. The models are then tested, and experiments confirm or falsify theoretical models of how the world works. This is the way science has worked for hundreds of years.

Scientists are trained to recognize that correlation is not causation, that no conclusions should be drawn simply on the basis of correlation between X and Y (it could just be a coincidence). Instead, you must understand the underlying mechanisms that connect the two. Once you have a model, you can connect the data sets with confidence. Data without a model is just noise.

There is now a better way. Petabytes allow us to say: “Correlation is enough.” We can stop looking for models. We can analyze the data without hypotheses about what it might show. We can throw the numbers into the biggest computing clusters the world has ever seen and let statistical algorithms find patterns where science cannot.

Although the potential applications and implications of the Petabyte Age described by Chris are staggering in context, this reminds me of a logical fallacy otherwise known as the Texas Sharpshooter’s Fallacy:

The Texas sharpshooter fallacy is a logical fallacy in which information that has no relationship is interpreted or manipulated until it appears to have meaning. The name comes from a story about a Texan who fires several shots at the side of a barn, then paints a target centered on the hits and claims to be a sharpshooter.

The fallacy does not apply if one had an ex ante, or prior, expectation of the particular relationship in question before examining the data. For example one might, previous to examining the information, have in mind a specific physical mechanism implying the particular relationship. One could then use the information to give support or cast doubt on the presence of that mechanism. Alternatively, if additional information can be generated using the same process as the original information, one can use the original information to construct a hypothesis, and then test the hypothesis on the new data. See hypothesis testing. What one cannot do is use the same information to construct and test the same hypothesis — to do so would be to commit the Texas sharpshooter fallacy.

The fallacy is related to the clustering illusion, which refers to the tendency in human cognition to interpret patterns in randomness where none actually exist.

Sharpshooter’s fallacy is what allows pseudo-science (albeit backed by statistically significant data) such as The Bible Code to persist.

Now consider the Petabyte version of The Bible Code.

Chilling.

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A placebo is something that produces a positive or improving effect on a person’s health but having no relation or root on actual physical or medical treatement. The effect is also referred to as placebo effect and has been well documented in the past years. One notable study (Response expectancies in placebo analgesia and their clinical relevance) conducted in the University of Torino Medical School in Italy describes how verbal instructions can act as a placebo in relieving pain.

 Thoracotomized patients were treated with buprenorphine [a powerful pain reliever] on request for 3 consecutive days, together with a basal intravenous infusion of saline solution. However, the symbolic meaning of this basal infusion was changed in three different groups of patients. The first group was told nothing about any analgesic effect (natural history). The second group was told that the basal infusion was either a powerful painkiller or a placebo (classic double-blind administration). The third group was told that the basal infusion was a potent painkiller (deceptive administration). Therefore, whereas the analgesic treatment was exactly the same in the three groups, the verbal instructions about the basal infusion differed. The placebo effect of the saline basal infusion was measured by recording the doses of buprenorphine requested over the three-days treatment.

We found that the double-blind group showed a reduction of buprenorphine requests compared to the natural history group. However, this reduction was even larger in the deceptive administration group. Overall, after 3 days of placebo infusion, the first group received 11.55 mg of buprenorphine, the second group 9.15 mg, and the third group 7.65 mg. Despite these dose differences, analgesia was the same in the three groups.

These results indicate that different verbal instructions about certain and uncertain expectations of analgesia produce different placebo analgesic effects, which in turn trigger a dramatic change of behaviour leading to a significant reduction of opioid intake.

There is an opposite phenomena to the placebo effect in which adverse or harmful symptoms are caused by something that should have no established effects. This is called the nocebo effect but is not as widely documented as placebos due primarily to ethical considerations (i.e. what scientist or doctor would intentionally administer something that can cause harmful symptoms or effects to a patient?). However some studies exist which may illustrate the effect:

“Japanese researchers tested 57 high school boys for their sensitivity to allergens. The boys filled out questionnaires about past experiences with plants, including lacquer trees, which can cause itchy rashes much as poison oak and poison ivy do. Boys who reported having severe reactions to the poisonous trees were blindfolded. Researchers brushed one arm with leaves from a lacquer tree but told the boys they were chestnut tree leaves. The scientists stroked the other arm with chestnut tree leaves but said the foliage came from a lacquer tree. Within minutes the arm the boys believed to have been exposed to the poisonous tree began to react, turning red and developing a bumpy, itchy rash. In most cases the arm that had contact with the actual poison did not react.” (Gardiner Morse, “The nocebo effect,” Hippocrates, November 1999, Hippocrates.com)

I briefly brought up the above discussions as a springboard to appreciate the interesting findings of a 2006 study funded by the John Templeton Foundation and published in the American Heart Journal. The study was to find any noticeable effects that prayer had on the recovery of some 1,800 heart bypass patients. (more…)

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In just a week, Bernard Madoff has reinserted the term ponzi scheme back in the public vocabulary. As we discussed earlier, these schemes are a lopsided business model and have been victimizing investors and the public for decades. Various financial commentators such as Peter Schiff and Max Keiser are beginning to echo sentiments that the U.S. economy is, in hindsight, resembling a larger scale ponzi scheme itself.

Shifting our focus back on the man who brought back our attention to this economic phenomenon, one has to wonder at the motivations and circumstances that created the Madoff scandal. Ponzi schemes are nothing new but every new incarnation doesn’t cease to disturb me. This Madoff caper in particular has three things I find bothering.

The first thing that disturbed me about the Madoff case is the high-profile nature of the parties that were affected by it. Madoff’s client list reads like a who’s-who-of-the-elite in the U.S.

Fox News reported that wealthy socialites comprised Madoff’s list of ruined clients:

Many of his investors came from the enormously wealthy enclaves of Palm Beach, Florida and Long Island, New York, where people had invested billions in Madoff’s firm for decades. He was a fixture on the Palm Beach social scene, and was a member of some of its most exclusive clubs, including the Palm Beach Country Club and Boca Rio Golf Club, where he drummed up much of his business.

The Wall Street Journal describes Madoff as a household name among elite circles:

During golf-course and cocktail-party banter, Mr. Madoff’s name frequently surfaced as a money manager who could consistently deliver high returns. Older, Jewish investors called Mr. Madoff ” ‘the Jewish bond,’ ” says Ken Phillips, head of a Boulder, Colo., investment firm. “It paid 8% to 12%, every year, no matter what.”

Evidently, the ability to make money grow consistently is a somewhat of a nectar to the rich folk, and arguably was the key in creating the brownie points for Madoff’s pedigreed credibility. In an analysis that Andy Kessler of Forbes on the Madoff tale, he drew some similar points in qualifying Madoff’s motivations in this context: (more…)

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