Thursday, December 1, 2011

Book Review: "Models.Behaving.Badly: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life "

A topic of some importance and of some interest to moi.
From Reading the Markets:
Models.Behaving.Badly: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life (Free Press, 2011) is a wise book by a man who has thought deeply about his life, and not just as a quant on Wall Street. Emanuel Derman reminisces about his youth as a member of Habonim (a coeducational Zionist movement) in apartheid South Africa, his ordeal with myopic ophthalmological specialists, and his immersion in theoretical physics. He ventures into an unlikely corner of philosophy—not epistemology but Spinoza’s theory of emotions. He describes “the crooked paths that culminate in theories,” in particular classical and quantum electromagnetic theory.

Although these discussions have a life of their own, they serve to illustrate three fundamental ways of understanding the world: models, theories, and intuition. Intuition is “a merging of the understander with the understood”; “it emerges only from intimate knowledge acquired after careful observation and painstaking effort.” (pp. 96-97) Theory bears a close relationship to intuition. “[W]hen it is successful … it describes the object of its focus so accurately that the theory becomes virtually indistinguishable from the object itself. Maxwell’s equations are electricity and magnetism; the Dirac equation is the electron….” (p. 61)

Of the three, models are the most common and potentially the most troubling ways of understanding. “A model is a metaphor of limited applicability, not the thing itself.” (p. 54) It is an analogy which, although not unfounded, is partial and flawed. “Models project multidimensional reality onto smaller, more manageable spaces where regularities appear and then, in that smaller space, allow us to extrapolate and interpolate from the observed to the unknown.” (p. 58)...MORE
We have so many posts on models and modeling that it is easiest to just give you the Google search results:  models
Here is a taste of some of the topics we've looked at:
How Models Caused the Credit Crisis
Quants Lose that Old Black (Box) Magic
Finance: "Blame the models"
Climate Models Overheat Antarctica, New Study Finds
Climate modeling to require new breed of supercomputer
Computer Models: Climate scientists call for their own 'Manhattan Project'
Computer Models: " Misuse of Models" and "No model for policymaking"
Climate prediction: No model for success
Climate Models and Modeling
Based on Our Proprietary "What's on T.V." Timing Model...
How many Nobel Laureates Does it Take to Make Change...And: End of the Universe Puts
The New Math (Quant Funds)
Modeling*: The Map is Not the Territory
Inside Wall Street's Black Hole
The computer model that once explained the British economy (and the new one that explains the world)
"Airspace Closure Was Exacerbated by Too Much Modeling, Too Little Research 
Insurance: Is the industry too reliant on models? (BRK.B)
Insurance: "CEO FORUM: Gen Re's Tad Montross on model dependency" (BRK.A)
and many, many more. One that is definitely worth a deeper dive:
Computer Models: " Misuse of Models" and "No model for policymaking"
I'm going to bring out the big guns.

I read a book last year, Useless Arithmetic: Why Environmental Scientists Can't Predict the Future, that, while a bit light on the 'whys', packs more understanding of computer modeling into230 pages than you are likely to find anywhere else.

The author, Orrin H. Pilkey is Emeritus Professor of Geology at Duke.
The first review I'm going to link to appeared in American Scientist. The reviewer is Carl Wunsch, Carl and Ida Green Professor of Physical Oceanography in the Department of Earth, Atmospheric and Planetary Sciences at the Massachusetts Institute of Technology....
 Obama: Swedish Model Would Be Impossible Here
From ClusterStock:
Eventually the government might be forced to nationalize a large swath of the banking sector, but they'll be dragged kicking and screaming. Yesterday's non-bailout announcement aimed to preserve the status quo, and Obama himself dismissed the idea that the US could adopt the Swedish model in an interview with ABC...

The Swedish Model 


As the [college] site that I lifted the picture from said:

(okay, sorry we know its tacky) [hey, come on we're an all boy's team, what'd you expect!]