Time, on the other hand, has no direct sensory backing. And for this reason, it becomes quite difficult to get a grip over it. What is time? We sense it indirectly through change and motion. But it would be silly to define time using the concepts of change and motion, because they already include the notion of time. The definition would be cyclic.

Assuming, for now, that no definition is necessary, let’s try another perhaps more tractable issue. Where does this strong sense of time come from? I once postulated that it comes from our knowledge of our demise — that questionable gift that we all possess. All the time durations that we are aware of are measured against the yardstick of our lifespan, perhaps not always consciously. I now wonder if this postulate is firm enough, and further ruminations on this issue have convinced me that I am quite ignorant of these things and need more knowledge. Ah.. only if I had more time.

In any case, even this more restricted question of the origin of time doesn’t seem to be that tractable, after all. Physics has another deep problem with time. It has to do with the directionality. It cannot easily explain why time has a direction — an arrow, as it were. This arrow does not present itself in the fundamental laws governing physical interactions. All the laws in physics are time reversible. The laws of gravity, electromagnetism or quantum mechanics are all invariant with respect to a time reversal. That is to say, they look the same with time going forward or backward. So they give no clue as to why we experience the arrow of time.

Yet, we know that time, as we experience it, is directional. We can remember the past, but not the future. What we do now can affect the future, but not the past. If we play a video tape backwards, the sequence of events (like broken pieces of glass coming together to for a vase) will look funny to us. However, if we taped the motion of the planets in a solar system, or the electron cloud in an atom, and played it backward to a physicist, he would not find anything funny in the sequences because the physical laws are reversible.

Physics considers the arrow of time an emergent property of statistical collections. To illustrate this thermodynamic explanation of time, let’s consider an empty container where we place some dry ice. After some time, we expect to see a uniform distribution of carbon dioxide gas in the container. Once spread out, we do not expect the gas in the container to coagulate into solid dry ice, no matter how long we wait. The video of CO2 spreading uniformly in the container is a natural one. Played backward, the sequence of the CO2 gas in the container congealing to solid dry ice in a corner would not look natural to us because it violates our sense of the arrow of time.

The apparent uniformity of CO2 in the container is due to the statistically significant quantity of dry ice we placed there. If we manage to put a small quantity, say five molecules of CO2, we can fully expect to see the congregation of the molecules in one location once in a while. Thus, the arrow of time manifests itself as a statistical or thermodynamic property. Although the directionality of time seems to emerge from reversible physical laws, its absence in the fundamental laws does look less than satisfactory philosophically.

We used to call him PJ — an acronym for a mildly insulting expression, which probably had its origin in our academic envy. PJ was academically brilliant, and graduated at the top of a class filled with almost pathologically competitive and bright IITians. This intensity that he brought to bear on the less superhuman is part of my first memory.

Troubled by this intensity, we once formed a delegation to appeal to PJ’s better nature. I don’t remember who initiated it, or even who was there in the delegation. But it certainly feels like something that Lux or Rat would do; or Kutty, perhaps, if we could get him to do anything at all. Anyway, we approached PJ and requested that he take it easy. “What is the big deal, man? Slow and steady wins the race, you know.” PJ’s response was an eye-opener. “Sure,” he said, “but fast and steady is better!”

I’m sure this fast and furious pace of PJ’s brilliance brought him many well-deserved accolades later in a lifetime perhaps best measured in terms of its quality rather than quantity, impact rather than longevity. But PJ was never an all-work-and-no-play fellow. I remember once when the MardiGras girls came to the Mandak dining hall (”mess”) to eat. Studying them with that hapless fervor that only a fellow IITian can fully appreciate, we discussed this development with PJ. He said, “Yes, we want to mess with them!”

IIT happened to us at an age when friendships came easy and the bonds forged stayed strong. With PJ gone and the connections a bit weaker, I feel a bit of unraveling. And the melancholy words that ring in my mind remind me — ask not for whom the bell tolls, it tolls for thee.

PJ was a brilliant man. I hope his brilliance would be source of strength and courage to those close to him. You know what they say, a candle that burns twice as bright burns half as long. With one of our brightest candles flaming out, what I feel is a sense of some darkness descending somewhere far.

You may consider the distinction between the two just another one of those philosophical hairsplittings, but it really is not. What space is, and even what kind of entity space is, has enormous implications in physics. For instance, if it is relational in nature, then in the absence of matter, there is no space. Much like in the absence of any family members, you have no family. On the other hand, if it is a container-like entity, the space exists even if you take away all matter, waiting for some matter to appear.

So what, you ask? Well, let’s take half a bucket of water and spin it around. Once the water within catches on, its surface will form a parabolic shape — you know, centrifugal force, gravity, surface tension and all that. Now, stop the bucket, and spin the whole universe around it instead. I know, it is more difficult. But imagine you are doing it. Will the water surface be parabolic? I think it will be, because there is not much difference between the bucket turning or the whole universe spinning around it.

Now, let’s imagine that we empty the universe. There is nothing but this half-full bucket. Now it spins around. What happens to the water surface? If space is relational, in the absence of the universe, there is no space outside the bucket and there is no way to know that it is spinning. Water surface should be flat. (In fact, it should be spherical, but ignore that for a second.) And if space is container-like, the spinning bucket should result in a parabolic surface.

Of course, we have no way of knowing which way it is going to be because we have no way of emptying the universe and spinning a bucket. But that doesn’t prevent us from guessing the nature of space and building theories based on it. Newton’s space is container-like, while at their heart, Einstein’s theories have a relational notion of space.

So, you see, philosophy does matter.

I remember feeling, in my dream, “Yeah, right! The right song just happened to be playing!” Way too skeptical even in my dreams. Not to mention that there is not such song (as far as I know). If you think this dream is weird, I once dreamed up an unknown (and non-existent) word while reading a book. I even tried looking up the word when I woke up, but in vain, of course.

One of my top dreams was when I was invited to the White House by President Bush (junior) right after his inauguration. As I stepped into what appeared to be a decent sized living room, the President was walking down a flight of stairs. And he asked me, “So. Do you still think I’m dumb?” Now, how did he know how I felt?

Coming back to my time-dying dream, there is something else that is a bit weird. I mean, one would normally say, “If I died now, I would die a happy man” or something to that effect. Why would “time” die? Is it my secret conviction that when one dies, one’s “time” also dies? That there is no common, universal time, but only our own, individual, personal times? Perhaps. I’m not talking about Newton’s universal times vs. Einstein’s relative time. There is something philosophical here that is just beyond my grasp. Like a name at the tip of your tongue. These are deep waters, and I really need to learn more. Back to school, some day…

The fanciest of my dreams? I was James Bond once. Complete with a bicycle that turned into a wooden canoe when I hit the local beach.

Stepping back a bit, rationality is quintessentially a worldview. By rational, we mean things that seem normal to our commonsense. So the notion of a nuclear bomb moving or obliterating a mountain is rational, although we have never seen it. You believe it because it is consistent with your worldview. I believe it too, trust me. I was a nuclear physicist not too long ago.

And a god (or faith) moving mountains is clearly ludicrous to our rationality. I’m not asking people to give equal rational weight to faith and bomb moving mountains. I’m merely encouraging them to examine why they believe in one and not the other. Calling one more rational is just another way of saying that you choose to believe one more than the other. Why?

Thinking along those lines, I come to the conclusion that it is only a question of worldviews or belief systems. I personally subscribe to your worldview based on rationality as well, which is why I consider myself also an atheist (although one of my readers thought I was merely confused )

A god as an old man hiding behind the clouds is not consistent with our worldview. But it may have been a metaphor for something else. Let me explain. We have these abstract concepts of happiness, perfection, grief etc. Are these things real? Should we believe they exist? Such questions don’t make too much sense because these concepts are all in our minds. But then, what isn’t?

Let’s take perfection, for instance. Let’s say we assign some human form to it, so that we could explain it to a child or something. We then call it, say, the goddess of perfection or whatever. Over generations, for whatever reason, the notion of perfection disappears from our awareness, but the metaphor of the goddess remains. Now, to somebody who believes in the reality perfection, and therefore the existence of the goddess, it is not a delusion. In that belief system, in that context and worldview, it makes perfect sense. But in the absence of the abstract concept of perfection, the goddess becomes a delusion.

I believe that a large part of our collective wisdom is handed down in the form of such metaphors. Instead of dismissing them as delusions because their context is gone, we should perhaps try harder to rediscover the lost concepts. I also believe such metaphors exist in other fields that seem to work well. Take, for instance, the Qi concept in traditional Chinese medicine, the five elements (or three body types) in Ayurveda and so on. To the extent that traditional Chinese medicine and Ayurveda work, there has to be some knowledge buried in those practices. If we write off their basis merely because their metaphors are not consistent with our rationality, we may be writing off some potential sources of new or forgotten knowledge.

In addition, I believe that some of our smarter geniuses indeed see delusional metaphors in what we take to be supremely real.

In “Principles of Quantitative Development”, Thulasidas has offered a contribution that is somewhat unique in the literature associated with the field of Quantitative Development. In that specialised, narrow domain, technical books abound. Most such titles are concerned with the intricacies of the application of specific programming language to the problems of financial engineering or, expositions of advanced mathematics as used in the pricing models of exotic financial derivative products. Thulasidas however has taken a very different tact. Focusing instead on what he terms “the big picture”, Thulasidas offers us his insights into the role of Quantitative Development in the broader context of a bank’s “trading platform”. Armed with such insights, he shows us how an understanding of the varied usages of the trading platform can and should be used to influence and shape its design.

In the opening chapters, the book is concerned with defining what is meant by the term “trading platform”. In doing so, Thulasidas necessarily reviews the “architecture” of a bank from the point of view of a Quantitative Developer. That is, he discusses the nature and interactions of the front, middle and back offices of a bank, the different roles that professionals in each of those areas satisfy and how each of their respective needs induce a different set of requirements on the trading platform. Moving on, he reviews the nature of trades, the so-called trade “life cycle” and how different views of a trade are required as a function of the life cycle and the business role of the user.

Having established a broad understanding of the requirements for a trading platform, Thulasidas turns his attention to translating those requirements into design decisions for trading platforms. Along the way he considers such aspects of design as choice of programming languages, issues relating to scalability and extensibility, security and auditing, representations for market and trade data and a trading platform’s macro architecture whilst all the way remaining focussed on ensuring that all business needs identified in the earlier chapters are given consideration and catered for.

Going from the general to the specific, Thulasidas in later chapters introduces a flexible derivatives pricing tool (the source code for which accompanies the book). This program in itself will no doubt serve as an excellent starting point for Quantitative Development teams charged with the production of an in-house trading platform. Perhaps of even greater benefit though is Thulasidas’s critique of the pricing tool, that is, in his explanation of how the supplied program fails to meet the requirements of a complete trading platform and how the program needs to be extended in order to be considered one. In this way, the line of thought of earlier chapters is reinforced and brought sharply into focus.

Throughout the book, Thulasidas manages to convey his ideas with remarkable eloquence and lucidity. Understanding is enhanced by numerous rich graphics outlining processes and their design (both in the software and work-flow sense). The reader’s attention and interest is never lost and a great deal of entertainment is to be found in the numerous side-bars, the “Big Pictures” (in effect an enjoyable mini-series of magazine style articles in their own right).

As Thulasidas himself notes, the subject matter of his book is broad. Accordingly, the potential readership of this title is equally broad. Notably, Quantitative Developers at the beginning of their careers stand most to gain from this book. The fact is though that even the most seasoned of banking professionals would profit from its reading. Quantitative Developers, Quantitative Analysts, Traders, Risk Managers, IT professionals and their Project Managers, individuals considering switching from academia or other industries to a career in banking… Readers from each and all of these groups will find Thulasidas’s work informative and thought provoking.

To be fair, this post won’t give you any get-rich-quick, sure-fire schemes or strategies. What it will tell you is why and how some people make money, and hopefully uncover some new insights. You may be able to put some of these insights to work and make yourself rich — if that’s where you think your happiness lies.

By now, it is clear to most people that they cannot become filthy rich by working for somebody else. In fact, that statement is not quite true. CEOs and top executives all work for the shareholders of the companies that employ them, but are filthy rich. At least, some of them are. But, in general, it is true that you cannot make serious money working in a company, statistically speaking.

Working for yourself — if you are very lucky and extremely talented — you may make a bundle. When we hear the word “rich,” the people that come to mind tend to be (a) entrepreneurs/industrialists/software moguls — like Bill Gates, Richard Branson etc., (b) celebrities — actors, writers etc., (c) investment professionals — Warren Buffet, for instance, and (d) fraudsters of the Madoff school.

There is a common thread that runs across all these categories of rich people, and the endeavors that make them their money. It is the notion of scalability. To understand it well, let’s look at why there is a limit to how much money you can make as a professional. Let’s say you are a very successful, highly-skilled professional — say a brain surgeon. You charge $10k a surgery, and perform one a day. So you make about $2.5 million a year. Serious money, no doubt. How do you scale it up though? By working twice as long and charging more, may be you can make $5 million or $10 million. But there is a limit you won’t be able to go beyond.

The limit comes about because the fundamental economic transaction involves selling your time. Although your time may be highly-skilled and expensive, you have only 24 hours in a day to sell. That is your limit.

Now take the example of, say, John Grisham. He spends his time researching and writing his best-selling books. In that sense, he sells his time as well. But the big difference is that he sells it to many people.

We can see a similar pattern in software products like Windows XP, performances by artists, sports events, movies and so on. One performance or accomplishment is sold countless times. With a slight stretch of imagination, we can say that entrepreneurs are also selling their time (that they spend setting up their businesses) multiple times (to customers, clients, passengers etc.) This is the only way to address the scalability issue that comes about due to the paucity of time.

Investment professionals (bankers) do it too. They develop new products and ideas that they can sell to the masses. In addition, they make use of a different angle that we discussed in the Philosophy of Money. They focus on the investment value of money to make oodles of it. It not so much that they take your money as deposits, lend it out as loans, and earn the spread. Those simple times are gone for good. The banks make use of the fact that investors demand the highest possible return for the lowest possible risk. Any opportunity to push this risk-reward envelope is a profit potential. When they make money for you , they demand their compensation and you are happy to pay it.

Put it that way, investment sounds like a positive concept, which it is, in our current mode of thinking. We can easily make it a negative thing by portraying the demand for the investment value of money as greed. It then follows that all of us are greedy, and that it is our greed that fuels the insane compensation packages of top-level executives. Greed also fuels fraud – ponzi and pyramid schemes.

There is a thin blurry line between the schemes that thrive on other people’s greed and confidence jobs. If you can come up with a scheme that makes money for others, and stay legal (if not moral), then you will make money. You can see that even education, traditionally considered a higher pursuit, is indeed an investment against future earnings. Viewed in that light, you will understand the correlation between the tuition fees at various schools and the salaries their graduates command.

Blindness can be physiological, when the physical eye is not functioning properly. Or it can be neurological, when the eye is fne but the visual signal processing is impaired. For example, if our right visual cortex is damaged, we are blind on the left side. When examining a patient with such a neurological blindness on one side, Weiscrantz shined a little spot of light on the patient’s blind side. Weiscrantz then asked the patient to point to it. The patient protested that he could not see it and could not possibly point to it. Weiscrantz asked him to try anyway. The patient then proceeded to point accurately to the spot of light that he could not consciously perceive.

After hundreds of trials, it became obvious that the patient could point correctly in ninety-nine percent of trials, even though he claimed on each trial that he was only guessing. How did the patient determine the location of an invisible object and point to it accurately? The neurological reason is that we all have two visual pathways. The new visual pathway goes through the visual cortex. The old, backup pathway runs through our brain stem to the superior colliculus.

The cause of our patient’s blindness was that his visual cortex was damaged, and it did not get the signals from one eye and its optic nerves. But the signals took the parallel route to the superior colliculus, using the old pathway. This rerouting allowed him to locate the object in space and guide his hand accurately to point to the invisible object. What this syndrome of blind-sight shows us is that only the new visual pathway leads to a conscious experience. While the old pathway is perfectly usable (for survival, for instance), it does not lead to a conscious experience of vision.

An interesting neurological condition, no doubt. But blind-sight is more than that. It is a rather confounding philosophical conundrum. The spot of light that the patient could see — was it real? Sure, we know it was real. But what if all of us were blind-sighted? If some of us started developing a semblance of awareness as a result of our blind-sight, would we believe them, or call them delusional? If there are senses that we can be unaware of, how sure can we be of the “sensed”? Or of our “delusions”?

This post is an edited version of section in The Unreal Universe. The information comes from The Emerging Mind: Reith Lectures on Neuroscience (BBC Radio, 2003) given by V. S. Ramachandran, the director of the Center for Brain and Cognition, San Diego, CA, USA. My book refers to several examples of physiological brain anomalies and their perceptual manifestation from this lecture series.

Of all the sciences, physics seems to be the one most at odds with the God concept. Clearly, evolutionary biology is none too happy with it either, if Dawkins is anything to go by. But that analysis is for another post.

Let’s start by analyzing a physicist’s way of “proving” that there is no God. The argument usually goes something like this:

If there is a God who is capable of affecting me in any way, then there should be some force exerted by that God on me. There should be some interaction. Since the interaction is big enough to affect me, I should be able to use this particular interaction to “measure” the God-intensity. So far, I haven’t been able to measure any such God-related force. So either there is no God that affects me in any way, or there is a God that affects me through deviously disguised interactions so that whenever I try to measure the interaction, I’m always fooled. Now, you tell me what is more likely. By Occam’s Razor, the simplest explanation (that there is no God that can affect me) has the highest chance of being right.

While this is a good argument (and one I used to make), it is built on a couple of implicit assumptions that are rather tricky to spot. The first assumption is that we cannot be affected by an interaction that we cannot sense. This assumption is not necessarily true.

Modern cosmology needs at least one other kind of interaction to account for dark matter and dark energy. Let’s call this unknown interaction the dark interaction. Even though we cannot sense the dark interaction, we are subject to it exactly as all other (known) matter is. The existence of this interaction beyond our senses is sufficient to break the physicist’s proof. A plausible God can affect us, without our being able to sense it, through dark interactions.

But that is not the end of the story. The physicist can still argue, “Fine, if we cannot sense this God, how would we know he exists? And why do so many people claim they can feel him?” This argument is based on the assumptions on conscious experience and sensing. The hidden assumptions in the physicist’s questions (again, not necessarily true) are:

1. Sensing should lead to a conscious perception.
2. All humans should have the same sense modality.

An example of sensing that does not lead to conscious perception is the syndrome of blind sight. (I will post more on it later). A patient suffering from blind sight can point to the light spot he cannot consciously see. Thus, sensing without conscious perception is possible. The second assumption that all men are created equal (in terms of sensory modality) does not have any a priori reason to be true. It is possible that some people may be able to sense the dark interaction (or some other kind of interaction that God chooses) without being conscious of it.

So it is possible to argue that there is a God that affects us through a hitherto unknown interaction. And that some 95% of us can sense this interaction, and the others are atheists. What this argument illustrates is the plausibility of God. More precisely, it demonstrates the consistency of a concept of God with physics. It is not meant to be a proof of the existence of God. And that is why, despite the plausibility of God, I am still an atheist.

In retrospect, this argument did not have to be so complicated. It boils down to saying that there are limits on our knowledge, and to what is knowable. There is plenty of room for God outside these limits. It is also a classic argument by those who believe in God — you don’t know everything, so how do you know there isn’t a God?

Now, it is one thing to say that the concept of God is inconsistent with the worldview you have developed, perhaps with the help of science. The concept is indeed very inconsistent with my personal worldview, which is why I am an atheist. But it is quite a different matter to discount the concept as a delusion. I believe that our knowledge is incomplete. And that there is plenty of room for a possible God to hide beyond the realms of our current knowledge. Does it mean that we should call our ignorance God and kneel before it? I don’t think so, but if you do, that is your prerogative.

You see, it is all a question of what your worldview is. And how much rigor and consistency you demand of it. So, what is a worldview? In my opinion, a worldview is the extension of your knowledge. We all have a certain amount of knowledge. We also have a lot of sensory data that comes in every moment that we have to make sense of. We do most of this processing automatically, without conscious effort. But some of the higher level data and information that we encounter merit a closer analysis. How do we do it, given that we may not know much about it? We use our commonsense, our pre-conceived notions, the value systems our parents and teachers left in us and so on. One of these things that we use, or perhaps the totality of these things, is our worldview.

Let’s take an example. Douglas Adams tells us that dolphins are actually smarter than us and have regular inter-galactic communication. Well, we have no way of refuting this claim (which, of course, is only a joke). But our worldview tells us that it is unlikely to be true. And we don’t believe it — as though we know it is not true.

Another example, one that Bertram Russell once cited. Scripture tells us that faith can move mountains. Some people believe it. Science tells us that a nuclear blast can, well, move mountains. Some people believe that too. Note that most people haven’t directly witnessed either. But even for those who believe in the faith-mountain connection, nuclear energy moving mountains is a far more plausible belief. It is just a lot more consistent with our current worldview.

Now, just because God is a delusion according to Dawkins’s worldview (or mine, for that matter), should you buy it? Not unless it is inconsistent with yours as well. Worldviews are hard to change. So are our stances vis-a-vis God and science, when seen as belief-systems — as the movie Contact vividly illustrates. If you missed it, you should watch it. Repeatedly, if needed. It is a good movie anyway.

It is true what they say about a scientific worldview being inconsistent with any sensible notion of a god. But worldviews are a funny thing. Nothing prevents you from tolerating inconsistencies in your worldview. Although Dawkins goes to some length to absolve Einstein of this lack of consistency, the conventional wisdom is that he did believe in God. The truth of the matter is that our collective knowledge (even after adding Einstein’s massive contribution) is limited. There really is plenty of room beyond its limits for God (or eight million gods, if I were to believe my parents), as I will try to show in my next post.

That, however, is only the tip of the iceberg. Once we admit that there are limits to our knowledge, and to what is knowable, we will soon find ourselves staring at other delusions. What is the point it discounting a God delusion, while embracing a space-delusion? In a universe that is unreal, everything is a delusion, not just God. I know, you think it is just my sanity that is unreal, but I may convince you otherwise. In another post.

Disconnected from the physical world, Helen was trapped in her dark, silent reality (or the lack thereof). She did not even have thoughts or words in her mind, because the tragedy happened before she started talking. She could not learn from her parents like normal children, because she was blind and deaf. There were no special schools at that time for disadvantaged children like her. When she was seven, Helen’s parents contacted Alexander Graham Bell, the inventor of the telephone, who was also an educator of the deaf. Through his help, they found Anne Sullivan to tutor Helen. Anne Sullivan had special methods of making hand signs to spell out objects. Sadly, none of these tricks worked with Helen for a few frustrating months. She could not make the connection between the hand movements and the objects. It looked as though Helen would be doomed to her dark reality for ever. Here is how she made the connection and broke free from darkness. (This block quote is from Helen Keller’s autobiography “The Story of my Life,” which was ffirst published in 1903 and is in the public domain according to the US copyright laws.)

One day, while I was playing with my new doll, Miss Sullivan put my big rag doll into my lap also, spelled “d-o-l-l” and tried to make me understand that “d-o-l-l” applied to both. Earlier in the day we had had a tussle over the words “m-u-g” and “w-a-t-e-r.” Miss Sullivan had tried to impress it upon me that “m-u-g” is mug and that “w-a-t-e-r” is water, but I persisted in confounding the two. In despair she had dropped the subject for the time, only to renew it at the first opportunity. I became impatient at her repeated attempts and, seizing the new doll, I dashed it upon the floor. I was keenly delighted when I felt the fragments of the broken doll at my feet. Neither sorrow nor regret followed my passionate outburst. I had not loved the doll. In the still, dark world in which I lived there was no strong sentiment or tenderness. I felt my teacher sweep the fragments to one side of the hearth, and I had a sense of satisfaction that the cause of my discomfort was removed. She brought me my hat, and I knew I was going out into the warm sunshine. This thought, if a wordless sensation may be called a thought, made me hop and skip with pleasure.

We walked down the path to the well-house, attracted by the fragrance of the honeysuckle with which it was covered. Some one was drawing water and my teacher placed my hand under the spout. As the cool stream gushed over one hand she spelled into the other the word water, first slowly, then rapidly. I stood still, my whole attention fixed upon the motions of her fingers. Suddenly I felt a misty consciousness as of something forgotten — a thrill of returning thought; and somehow the mystery of language was revealed to me. I knew then that “w-a-t-e-r” meant the wonderful cool something that was flowing over my hand. That living word awakened my soul, gave it light, hope, joy, set it free! There were barriers still, it is true, but barriers that could in time be swept away.

The mystery of language is at the genesis of reality; it is what sweeps away the dark barriers standing between us and our conscious awareness of reality. It took Helen Keller out of nothingness into a world of reality, and if it is not the Word in “The Word was God,” I will never know what is.

The verse, John 1:1 “In the beginning was the Word, and the Word was with God, and the Word was God”, is again something people have spent much time researching and pondering over. My cursory search unearthed a couple of lines of thought. These lines were mostly concerned with the accuracy of the translation of the verse from Greek, which was complicated by the lack of “the” or “a” articles in the original language. So the verse could be translated as, for instance, “The Word was the God,” consistent with the monotheist notion of Christianity. Or it could be “The Word was a god,” giving quite a different, perhaps pagan, coloration to the issue.

For obvious (atheistic) reasons, I am not interested in this aspect of the verse, nor in these lines of thought. I found another translation, allegedly more literal, that went like, “When the beginning began, the Word was already there.” This suited my purpose better. Still, what exactly was this Word?

My understanding of this statement is as follows. In the philosophy of language, it can be argued that life, universe and everything exists in language, in thoughts, in your brain. The term “language” as defined here doesn’t just mean the communication tool, it also encompasses your thoughts and ideas. It is the vehicle of your thought process. In the absence of language, you have no thoughts, only animal instincts. You have no conscious awareness, only unthinking reactions to your surroundings. You don’t know that you exist, you don’t know that the world exists. The nothingness that engulfs you in the absence of a language is most poignantly depicted in the inspiring story of Helen Keller, coming up in a few days.

In my view, the “Word” that was there in the beginning is language, the ensemble of your thoughts and ideas, and the thought-processing mechanism. It creates our reality. Before we had language, we had no reality; we had nothing. And John 1:1 is a statement of intention to attribute this world of reality, or the opposite of nothingness, created by language to God. And, to me, this statement is the clearest proof that the saint knew how god was born. Obviously, I am rushing in where angels fear to tread. This view of mine will not be embraced (or even tolerated) by anybody who believes in the theological meaning attached to this text of scripture. And to them, I humbly point out that it is just a view, a mere mortal’s view at that! It probably only goes to show that “The devil can cite Scripture for his purpose!”

We know that this assumption is not quite right. If it was, there wouldn’t be any transient arbitrage opportunities. But even at a more fundamental level, the assumption has shaky justification. The reason that the market is efficient is that the practitioners take advantage of every little arbitrage opportunity. In other words, the markets are efficient because they are not so efficient at some transient level.

Mark Joshi, in his well-respected book, “The Concepts and Practice of Mathematical Finance,” points out that Warren Buffet made a bundle of money by refusing to accept the assumption of market efficiency. In fact, the weak form of market efficiency comes about because there are thousands of Buffet wannabes who keep their eyes glued to the ticker tapes, waiting for that elusive mispricing to show up.

Given that the quant careers, and literally trillions of dollars, are built on the strength of this assumption, we have to ask this fundamental question. Is it wise to trust this assumption? Are there limits to it?

Let’s take an analogy from physics. I have this glass of water on my desk now. Still water, in the absence of any turbulence, has a flat surface. We all know why – gravity and surface tension and all that. But we also know that the molecules in water are in random motion, in accordance with the same Brownian process that we readily adopted in our quant world. One possible random configuration is that half the molecules move, say, to the left, and the other half to the right (so that the net momentum is zero).

If that happens, the glass on my desk will break and it will make a terrible mess. But we haven’t heard of such spontaneous messes (from someone other than our kids, that is.)

The question then is, can we accept the assumption on the predictability of the surface of water although we know that the underlying motion is irregular and random? (I am trying to make a rather contrived analogy to the assumption on market efficiency despite the transient irregularities.) The answer is a definite yes. Of course, we take the flatness of liquid surfaces for granted in everything from the useless lift-pumps and siphons of our grade school physics books all the way to dams and hydro-electric projects.

So what am I quibbling about? Why do I harp on the possibility of uncertain foundations? I have two reasons. One is the question of scale. In our example of surface flatness vs. random motion, we looked at a very large collection, where, through the central limit theorem and statistical mechanics, we expect nothing but regular behavior. If I was studying, for instance, how an individual virus propagates through the blood stream, I shouldn’t make any assumptions on the regularity in the behavior of water molecules. This matter of scale applies to quantitative finance as well. Are we operating at the right scale to ignore the shakiness of the market efficiency assumption?

The second reason for mistrusting the pricing models is a far more insidious one. Let me see if I can present it rather dramatically using my example of the tumbler of water. Suppose we make a model for the flatness of the water surface, and the tiny ripples on it as perturbations or something. Then we proceed to use this model to extract tiny amounts of energy from the ripples.

The fact that we are using the model impacts the flatness or the nature of the ripples, affecting the underlying assumptions of the model. Now, imagine that a large number of people are using the same model to extract as much energy as they can from this glass of water. My hunch is that it will create large scale oscillations, perhaps generating configurations that do indeed break the glass and make a mess. Discounting the fact that this hunch has its root more in the financial mess that spontaneously materialized rather than any solid physics argument, we can still see that large fluctuations do indeed seem to increase the energy that can be extracted. Similarly, large fluctuations (and the black swans) may indeed be a side effect of modeling.

Coupled with this perfectionism, there is a curious tendency among academic researchers toward creating a “wow” factor with their results, as opposed to finance professionals who are quite content with the “wow” factor in their bonuses. This subtle mismatch generates interesting manifestations. Academics who make the mid-career switch to finance tend to work either alone or in small groups, trying to perfect an impressive prototype. Banking professionals, on the other hand, try to leverage on each other (at times taking credit for other people’s work) and roll out potentially incomplete solutions as early as possible. The intellectual need for a “wow” may be a factor holding back at least some quant deliverables.-

Given that the investment value is also measured and returned in terms of money, we get the notion of compound interest and “putting money to work.” Those who have money demand returns based on the investment risk they are willing to assume. And the role of modern financial system becomes one of balancing this risk-reward equation.

We should keep in mind that this signification of money as investment entity is indeed a philosophical choice that we have made over the past few centuries. Other choices do exist — Islamic banking springs to mind, although its practice has be diluted by the more widely held view of money as possessing an investment value. It is fascinating to study the history and philosophy of money, but it is a topic that calls for a full-length book on its own right. Understanding money at its most fundamental level may in fact enhance our productivity — which is again measured in terms of the bottom line, consistent with the philosophy of money that enjoys currency.

The habitualization of insomnia is probably not in vain. John Wiley and Co will get back to me with their comments and suggestions, which will keep me busy for a couple of months again working on the book. The book, Principles of Quantitative Development, is an attempt to find the niche at the intersection of computer science, mathematical finance, and the business of trading and making money. I felt that this niche was being neglected, and the void thus created may have been the proverbial straw on the camel’s back that precipitated the current financial meltdown. In setting its sight at such a large problem from its lofty soapbox, the book indeed starts with an ambitious goal, but perhaps a timely one.

On the plugin development front, my latest contribution is a translator for other plugins. It will be of interest to fellow plugin authors and their international users. It is a fairly nifty piece of software, if I may say so myself. If you want to take a quick look, here it is. Easy Translator and my other gem, Theme Tweaker, may not become as popular as my other plugins (which help bloggers make money through AdSense), but they showcase ideas and programming wizardry that few other plugins do. As you can tell, I’m rather proud of them.

Back to blogging now, coming up in the next few days will be an analysis of the philosophy of money (an idea for my next book), the reasons behind quantitative professionals’ failings, and a comparison of the work-culture in a corporate machine and the idyllic (but poorly compensated) academic life. Ah, how I miss those days. There is an old Chinese saying: Be careful what you wish for; you may get it!

But, this dictum of denying bonus to the whole firm during bad times doesn’t work quite right either, for a variety of interesting reasons. First, let’s look at the case of the AIG EVP. AIG is a big firm, with business units that operate independently of each other, almost like distinct financial institutions. If I argued that AIG guys should get no bonus because the firm performed abysmally, one could point out that the financial markets as a whole did badly as well. Does it mean that no staff in any of the banks should make any bonus even if their particular bank did okay? And why stop there? The whole economy is doing badly. So, should we even out all performance incentives? Once we start going down that road, we end up on a slippery slope toward socialism. And we all know that that idea didn’t pan out so well.

Another point about the current bonus scheme is that it already conceals in it the same time segmentation that I ridiculed in my earlier post. True, the time segmentation is by the year, rather than by the month. If a trader or an executive does well in one year, he reaps the rewards as huge bonus. If he messes up the next year, sure, he doesn’t get any bonus, but he still has his basic salary till the time he is let go. It is like a free call option implied in all high-flying banking jobs.

Such free call options exist in all our time-segmented views of life. If you are a fraudulent, Ponzi-scheme billionaire, all you have to do is to escape detection till you die. The bane of capitalism is that fraud is a sin only when discovered, and until then, you enjoy a rich life. This time element paves the way for another slippery slope towards fraud and corruption. Again, it is something like a call option with unlimited upside and a downside that is somehow floored, both in duration and intensity.

There must be a happy equilibrium between these two slippery slopes — one toward dysfunctional socialism, and the other toward cannibalistic corruption. It looks to me like the whole financial system was precariously perched on a meta-stable equilibrium between these two. It just slipped on to one of the slopes last year, and we are all trying to rope it back on to the perching point. In my romantic fancy, I imagine a happier and more stable equilibrium existed thirty or forty years ago. Was it in the opposing economic ideals of the cold war? Or was it in the welfare state concepts of Europe, where governments firmly controlled the commanding heights of their economies? If so, can we expect China (or India, or Latin America) to bring about a much needed counterweight?

Sections

• Bonus Plans of Mice and Men
• Hard Work
• Talent and Intelligence
• Talent Retention
• Profit Sharing
• Slippery Slopes

Among all the arguments for hefty bonuses, the most convincing is the one on profit generation and sharing. Profit for the customers and stakeholders, if generated by a particular executive, should be shared with him. What is wrong with that?

The last argument for bonus incentives we will look at is this one in terms of profit (and therefore shareholder value) generation. Well, shareholder value in the current financial turmoil has taken such a beating that no sane bank executive would present it as an argument. What is left then is a rather narrow definition of profit. Here it gets tricky. The profits for most financial institutes were abysmal. The argument from the AIG executive is that he and his team had nothing to do with the loss making activities, and they should receive the promised bonus. They distance themselves from the debacle and carve out their tiny niche that didn’t contribute to it. Such segmentation, although it sounds like a logical stance, is not quite right. To see its fallacy, let’s try a time segmentation. Let’s say a trader did extremely well for a few months making huge profits, and messed up during the rest of the year ending up with an overall loss. Now, suppose he argues, “Well, I did well for January, March and August. Give me my 300% for those months.” Nobody is going to buy that argument. I think what applies to time should also apply to space (sorry, business units or asset classes, I mean). If the firm performs poorly, perhaps all bonuses should disappear.

As we will see in the last post of the series, this argument for and against hefty incentives is a tricky one with some surprising implications.

Sections

• Bonus Plans of Mice and Men
• Hard Work
• Talent and Intelligence
• Talent Retention
• Profit Sharing
• Slippery Slopes

Even after we discount hard work and inherent intelligence as the basis of generous compensation packages, we are not quite done yet.

The next argument in favour of hefty bonuses presents incentives as a means of retaining the afore-mentioned talent. Looking at the state of affairs of the financial markets, the general public may understandably quip, “What talent?” and wonder why anybody would want to retain it. That implied criticism notwithstanding, talent retention is a good argument.

As a friend of mine illustrated it with an example, suppose you have a great restaurant thanks mainly to a superlative chef. Everything is going honky dory. Then, out of the blue, an idiot cook of yours burns down the whole establishment. You, of course, sack the cook’s rear end, but would perhaps like to retain the chef on your payroll so that you have a chance of making it big again once the dust settles. True, you don’t have a restaurant to run, but you don’t want your competitor to get his hands on your ace chef. Good argument. My friend further conceded that once you took public funding, the equation changed. You probably no longer had any say over payables, because the money was not yours.

I think the equation changes for another reason as well. When all the restaurants in town are pretty much burned down, where is your precious chef going to go? Perhaps it doesn’t take huge bonuses to retain him now.

Sections

• Bonus Plans of Mice and Men
• Hard Work
• Talent and Intelligence
• Talent Retention
• Profit Sharing
• Slippery Slopes

In the last post, I argued that how hard we work has nothing much to do with how much reward we should reap. After all, there are taxi drivers who work longer and harder, and even more unfortunate souls in the slums of India and other poor countries.

But, I am threading on real thin ice when I compare, however obliquely, senior executives to cabbies and slum dogs. They are (the executives, that is) clearly a lot more talented, which brings me to the famous talent argument for bonuses. What is this talent thing? Is it intelligence and articulation? I once met a taxi driver in Bangalore who was fluent in more than a dozen languages as disparate as English and Arabic. I discovered his hidden talent by accident when he cracked up at something my father said to me — a private joke in our vernacular, which I have seldom found a non-native speaker attempt. I couldn’t help thinking then — given another place and another time, this cabbie would have been a professor in linguistics or something. Talent may be a necessary condition for success (and bonus), but it certainly is not a sufficient one. Even among slum dogs, we might find ample talent, if the Oscar-winning movie is anything to go by. Although, the protagonist in the movie does make his million dollar bonus, but it was only fiction.

In real life, however, lucky accidents of circumstances play a more critical role than talent in putting us on the right side of the income divide. To me, it seems silly to claim a right to the rewards based on any perception of talent or intelligence. Heck, intelligence itself, however we define it, is nothing but a happy genetic accident.

Sections

• Bonus Plans of Mice and Men
• Hard Work
• Talent and Intelligence
• Talent Retention
• Profit Sharing
• Slippery Slopes