Thursday, October 02, 2008

Wall Street, Fall 2008: crisis, capital, risk, computation, and information

Crisis is an unstable situation of extreme danger or difficulty. This term precisely describes what is happening at Wall Street now.

The Wall Street banks, especially those investment banks, claimed to have produced capital more than (a lot more than) the capital they indeed have produced. This unbalance between the real output and the claimed output leads to an unstable situation. When the unstable situation has lasted for years without proper fixing, it accumulated and finally grew to be extreme danger or difficulty. Hence we have the financial crisis now.

Capital is cash or goods accumulated and available for use in producing more cash or goods. Capital is the trouble maker in this crisis.

Capital represents wealth; and everybody likes wealth, hence everybody likes capital. So far there is no trouble.

In order to produce more wealth, a straightforward way is to produce more capital. Now the trouble starts. The trouble, however, is closely related to another essential character of capital---capital is a type of matter. Both cash and goods are matter. Although by the nature law the total amount of matter never increases, the value of the total amount of mass could increase. In order to produce matter in higher value, however, we have to at the same time consume some matter or energy (by Albert Einstein, there is equivalence between mass and energy). Ideally, to produce the same amount and quality of output matter, the less value of input matter/energy we consume the more wealthy we produce. This normal formula of wealth generation becomes the origin of all the troubles.

The Wall Street bankers have had a brilliant idea. How about we embody risk/security to be a type of mass and consume it to produce wealth? This idea is indeed brilliant because we can barely objectively measure the actual value of the embodied risk. As the result, the bankers may arbitrarily undervalue the input cost to claim a huge amount of newly produced value by subtracting the input from the output. Then the real-world trouble begins---the unbalance-based unstable (seed of crisis) is generated.

Risk is a possibility of incurring loss or misfortune. Risk is the central problem in this crisis.

The opposite side of the possibility of incurring loss or misfortune is the possibility of incurring gain or fortune, i.e., chance and opportunity. Gamblers love chances and opportunities, and so do the wealth tracers, and thus reasonably we have the bankers/capital-producers in the list.

In order to perform the arbitrary undervaluation of risks, the gamblers (i.e., the Wall Street bankers) hired top mathematicians (or they were themselves) to have created very complicated mathematic models of risk computation (such as the one in the right figure) that few people in this world (I doubt whether including themselves) truly understood. There is only one goal in all of these math models---to minimize the value of input (i.e. undervalue the cost of risks) so that the increased value of output is maximized.

However, computational sound does not necessarily represent in-reality sound. This is thus the problem.

Computation is a general term for any type of information processing that can be represented mathematically. Computation is the most tricky part in this crisis.

Computation is information processing. This recognition is critical because we have mentioned a little bit earlier that capital production is matter processing. Then we are facing one of the most tricky questions in this world---is information a type of matter?

The importance of this question in our situation is in three folds. First, if information is matter, the bankers are not cheating us but they do have miscalculated (if intentionally then they must have legal issues) the real value of information as matter. Second, if information is not matter and it could not be measured as matter at all, we are completely deceived by the bankers and all of the bankers should be put into jail since they literally robbed all of us. At last, if information is not matter while there is some unknown equivalence between information and matter, the bankers could be excused (but still need to be blamed).

Personally, I lean to the third facet. It is the unknown transformation between information and matter that causes this crisis. Certainly, however, without human's greed we would have never trapped into it either.

Information is a numerical measure of the uncertainty of an outcome. Information is the hope that may save us from falling into the crisis again.

Because of the crisis, US government has requested the remaining two major investment banks to transform themselves to be commercial banks. Will this political order eventually solve the problem forever? I don't think so.

This crisis happens due to the greedy nature of human beings beyond the danger of risk computation. In contrast to challenge the nature of greed, I would suggest a more pragmatic solution to the problem---start to study the real value equivalence between information and matter. That is, start to research the asset of mind.

Based on Seth Lloyd's discovery, information is actually another fundamental element of the universe that is the same as mass and energy. Hence it is reasonable to assume the existence of equivalence transformation between information and mass as we have proved the existence of similar equivalence between mass and energy. In fact, we even do not really need such a great scientific discovery in order to solve the immediately faced problems. What we are looking for now is only a measurement of the value equivalence (in contrast to the fundamental equivalence) between information consumption and mass consumption. Encapsulating human mind in a way that it becomes exchangeable in the market might be the straightforward answer.

If numerical measure of the uncertainty is the essence of information, we may solve the valuation of risk in the free market rather than handing the issue to the few smart people in dark room. This picture might represent the future of financial production.


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Dear Yihong Ding,

I was reading your article, it is quite interesting, basic intention and the ideas between you and me are more or less same. The difference between you and me, I could feel is you are technically predominant and, and about me may be more philosophical.

I am trying to learn more technical information and ideas from your posting. Let me add the famous coating from Karl Marx, “Philosophies always tried to interpret the world, but how to change the world is more important”

Let us think over and jointly put the mass energy of effort to make a better, friendly and sustainable world…at least for the coming generation…

Best Wishes,

Please visit my latest post on

Yihong Ding said...

sure, thank you, Pappan. That's also my expectation. ;-)

take care,