October 15th, 2008

The Infinite Improbability Drive, and your stock portfolio.

Via the Digest for Semiological Transcoding, which seems to have gone on an extended break.

January 12, 2008
Fun Definitions from New York Magazine and H2G2

Stat-Arb: Statistical arbitrage, a.k.a. quantitative trading, a.k.a. “black-box trading.” The computerized trading of thousands of stocks based on a set of models manned by “guys with a lot of physics and hardcore statistics backgrounds who come up with ideas about models that might lead to excess return and then they test them and then basically all these models get incorporated into a bigger system that trades stocks in an automated way.”

Black Box: The computers that do the trading.

These definitions sounded vaguely familiar to me, and confirmed my long-held suspicion that, not only does life imitate art, but so too does day trading imitate science fiction –

Infinite Improbability Drive (From The Hitchhiker’s Guide to the Galaxy): Finite levels of improbability could easily be generated using an electronic brain and a strong Brownian motion producer (say, a cup of hot tea); yet scientists lacked the means to create a drive that could produce the infinite improbability field required to allow a ship to travel anywhere instantaneously. It was generally concluded that such a drive was virtually impossible.

Eventually, a student (left to sweep up the lab after a particularly unsuccessful party) reasoned that if such a machine were, in fact, a virtual impossibility, then it must also logically be a finite improbability. After working out exactly how improbable, he fed that value into the finite improbability generator, gave it a really hot cup of tea, and managed to generate the infinite improbability generator out of thin air, thus violating the laws of cause and effect. After winning the Galactic Institute’s prize for extreme cleverness, he was later lynched by other scientists who had been trying to make the generator for years, and who finally worked out that what they really could not stand was a smartass.

Ever since I took an Intro to Econ class many years ago (and never took an econ class again), I’ve come to the conclusion that any science that attempts to derive solid outcomes from equations that cannot possibly have a 100% outcome is essentially science fiction. The only statistical certainty is that failure is going to happen sooner or later, and then we’ll have to start all over again.

Yes, the black boxes described are essentially finite probability drives, or something like that.

EDIT: I should add that my main focus in college was Sociology, which admittedly, is not always very accurate. I have nothing against using statistics and generating opinions and theories based off of strong correlations and such, but we have to be honest with ourselves when in comes to statistics.