NYtimes had an article on Wall Street’s math wizards forgetting a few variables – human behavior. This article got me thinking the top issues for data center operations have a human factor.
Wall Street’s Math Wizards Forgot a Few Variables
- By STEVE LOHR
Published: September 12, 2009
IN the aftermath of the great meltdown of 2008, Wall Street’s quants have been cast as the financial engineers of profit-driven innovation run amok. They, after all, invented the exotic securities that proved so troublesome.
James Yang
But the real failure, according to finance experts and economists, was in the quants’ mathematical models of risk that suggested the arcane stuff was safe.
The risk models proved myopic, they say, because they were too simple-minded. They focused mainly on figures like the expected returns and the default risk of financial instruments. What they didn’t sufficiently take into account was human behavior, specifically the potential for widespread panic. When lots of investors got too scared to buy or sell, markets seized up and the models failed.
That failure suggests new frontiers for financial engineering and risk management, including trying to model the mechanics of panic and the patterns of human behavior.
The interesting thing is the same companies that run huge data centers are leaders in this topic.
Much of the early work has been done tracking online behavior. The Web provides researchers with vast data sets for tracking the spread of all manner of things — news stories, ideas, videos, music, slang and popular fads — through social networks. That research has potential applications in politics, public health, online advertising and Internet commerce. And it is being done by academics and researchers at Google, Microsoft, Yahoo and Facebook.
And, there is a chance some of this is being applied to complex modeling in data centers.
One of the interesting areas I found was the topic of econophysics.
J. Doyne Farmer, a former physicist atLos Alamos National Laboratory and a founder of a quantitative trading firm, finds the behavioral research intriguing but awfully ambitious, especially to build into usable models. Instead, Mr. Farmer, a professor at the interdisciplinary Sante Fe Institute, is doing research on models of markets, institutions and their complex interactions, applying a hybrid discipline called econophysics.
To explain, Mr. Farmer points to the huge buildup of the credit-default-swap market, to a peak of $60 trillion. And in 2006, the average leverage on mortgage securities increased to 16 to 1 (it is now 1.5 to 1). Put the two together, he said, and you have a serious problem.
“You don’t need a model of human psychology to see that there was a danger of impending disaster,” Mr. Farmer observed. “But economists have failed to make models that accurately model such phenomena and adequately address their couplings.”
I’ve been sitting on this blog entry for the last week, and thanks to a social networking connection I am attending Santa Fe Institute’s Business Networking event.
2009 Annual Business Network and Board of Trustees’ Symposium
Multi-Dimensions of Evolution
2009 is the bicentenary of the birth of Charles Darwin. This year SFI has been celebrating this event through a variety of wide-ranging lectures, symposia, and public events on the topic of evolution. The idea has been to explore the many ways in which a Darwinian and Post-Darwinian perspective on life and time have changed our science, society and metaphysics.
This November we shall continue our celebrations with a series of talks on the multi-dimensions of evolution followed by a concert performance and readings -- extending our inquiries into the world of nineteenth century, romantic exploration, and historical synthesis, spanning science and music.
Each speaker will address some unique application of evolutionary thought, describing how an evolutionary perspective has transformed our knowledge of the world. Speakers will consider how evolutionary thinking transformed their fields, and how new, post-Darwinian ideas have been evolving and generating further insights.
Organized by David Krakauer, SFI Chair of Faculty and Professor.
I am sure I’ll learn some interesting areas where the complexity of data centers can be understood with approaches used similar to the math wizards of finance.