Byung Kyu Park's Personal Website

Amazon’s Prime library has been a great boon for expanding my normal reading materials (usually restricted to academic journals and, well, religious materials). One of the first on the list was The Big Short: Inside the Doomsday Machine which I just finished reading through.

At first I thought it was supposed to be a fiction (hey, I was just browsing through the list of books on the Prime library and didn’t do due diligence before checking out the book, free of charge), but, well, I guess it’s non-fiction—which I always interpret as the authors not admitting having made up the story (different and distinct from the story being a true one).

Well. It was an interesting story, written from a clearly anti-Wall Street perspective, which is clear in both the author’s choice of narrators (all of whom are either outside-Wall Street characters or those working against the Machine inside the Machine) and the telling itself—I recommend that you first read the Afterword to set your expectations properly before reading through the narrative; it’s not like there’s a big spoiler; everyone knows largely how the financial crisis of 2008 unfolded.

Some of that choice was inevitable: he was writing a story about short-sellers; because of the structure of the market, short-sellers form a minority, and, well, you know about members of minority and their inevitable persecution complex. But I found interesting how Mr. Lewis chose sore winners for his narrators—the “winners” whose stories he chose to tell were not happy that they won (again, some of that is inevitable part of being short a market; short-sellers may be willing to exploit a weakness but they cannot enjoy the general shared ecstasy of a bull market). Nearly all his “winners” become embittered and defeated in spirit through their experience as narrated in The Big Short, and their bitterness (at least as seen through Mr. Lewis’s eyes) is clear by Chapter 10. Assuming Mr. Lewis told at least their side of the story correctly (again, I’d recommend reading Afterword before other parts of the book), to pick only sore winners as champions of his narrative, it had to be a deliberate choice—part of the narrative Mr. Lewis wanted to tell.

And in fact, it’s that driving purpose that leads to certain … inaccuracies in the book. In particular, one theme Mr. Lewis wanted to drive was how big financial institutions misjudged the risk in the proprietary trades involving the sub-prime mortgage market and selling of CDSs. He drives that point in particular in relating the narrative of Michael Burry, who felt the CDSs he owned were not being priced accurately,

All through 2006, and the first few months of 2007, Burry sent his list of credit default swaps to Goldman and Bank of America and Morgan Stanley with the idea they would show it to possible buyers, so he might get some idea of the market price.
…
The data from the mortgage servicers was worse every month—the loans underlying the bonds were going bad at faster rates—and yet the price of insuring those loans, they said, was falling. “Logic had failed me,” he said.
…
In May [2006] he adopted a new tactic: asking Wall Street traders if they would be willing to sell him even more credit default swaps at the price they claimed they were worth, knowing that they were not.

Critical to this narrative is the idea that price of a security can change dramatically and discontinuously—what Mr. Lewis does not make crystal clear are the conditions necessary for such changes. The conditions which would prevent such change are actually spelled out in a verbatim quote in a teleconference by one of the characters that Mr. Lewis would consider a villain in his narrative,

MACK: Bill, I think VaR is a very good representation of liquid trading risk. But in terms of the (inaudible) of that, I am very happy to get back to you on that when we have been out of this, because I can’t answer that at the moment.

A liquid market would ensure any price change would be nearly continuous (especially in today’s markets, where futures market is closed for no longer than 30 minutes except over weekends). But ignoring that critical element, Mr. Lewis makes the following statement while trying to fit Cornwall Capital’s other investment activities into the overarching theme:

If in the next year, a stock was going to be worth nothing or $100 a share, it was silly for anyone to sell a year-long option to buy the stock at $50 a share for $3. Yet the market often did something just like that. The model used by Wall Street to price trillions of dollars’ worth of derivatives thought of the financial world as an orderly, continuous process. But the world was not continuous; it changed discontinuously, and often by accident.

I imagine Mr. Lewis’s chief mistake is in taking the black swan event and use that experience to draw conclusions about white swans. Stock options generally trade in a liquid market, it means stock prices—and hence option prices—generally change continuously, especially when futures market is included. It is silly for a far out-of-the-money long-term options to be sold at low option premiums, only if you assume that a short position on the option cannot be covered before the expiration date. But all traders know it is silly not to set a stop order on any short position on which loss is theoretically unlimited. Perhaps it’s Mr. Lewis’s experience as bond trader that limits his thinking, but stock options are not bought and sold to be exercised (unlike bonds which are often held ’til maturity)—as Dodd points out in Security Analysis, it is always more sensible to directly trade options and warrants than
to exercise them and then trade the underlying security—your capital outlays will be much less (and returns on equity higher) that way.

And if you take it as given that vast majority of options will not be exercised—that is, many contracts will be closed before the expiration date by the option writers buying back the options to cover their short positions if options somehow remain in-the-money (or near-the-money), there’s nothing silly about far out-of-the-money options being low-priced, regardless of the expiration date—as underlying stock prices move (nearly continuously, changing by less than 10% daily on all but perhaps 5 trading days out of the year) and it becomes more or more likely that out-of-the-money will become in-the-money, the contracts will be bought back.

But this little detail about liquid market fixing many of the problems with the preciseness of pricing model (because, let’s face it; financial markets are not normally distributed; like in many other cases, normal distribution is being used as a convenient approximation) would ruin Mr. Lewis’s narrative about how financial markets do not work, so it has to be ignored—or so I think, anyway.

But anyways. So long as one is not interested in getting a fair hearing of both sides (again, read the Afterword for a hint of that), the book is interesting enough—just remember that there are two sides to every story (like there are two sides to every trade), and you don’t get both sides from the same source (unless you are talking to an economist).

I’ve been looking at Chapters 6 and 11 of Prof. Happer’s Optically Pumped Atoms (for sections about excited state depolarization by collisions with buffer gas), but I fear I don’t really understand them—exactly how the mathematics correspond to physics, and exactly how the spin-exchange with fictitious atom produces the pressure broadening (without also causing depolarization of ground state).

Well, so it looks like I’ll be sticking with the devil I know: writing terms into my optical Bloch equations to model pressure broadening and excited state depolarization piece by piece … in physically (and least to me) intuitive terms.

Maybe one day I’ll understand Prof. Happer’s approach.

As I’ve said before, I began reading “Reason for God”, as a part of NCB winter break book club thing.

Well, I’m finally done with the book (as of last week), and I can make … general comments about the book—which is great because that’s all I have the time for at the moment.

So the book is broken into two parts. In the first part, Rev. Keller breaks down secularist arguments by arguing, (1) moral relativism (which is essentially the basis of secularism) is internally inconsistent: relativism doesn’t provide enough ground for the tenets of relativism itself, (2) doubt applies to everything; both to the Christian faith and non-believing atheism.

In the second part, Keller tries to provide the argument for Christianity—why it might be true (given the arguments given in first part, we concede that it’s not possible to prove a belief beyond all doubt—or perhaps even reasonable doubt), and why one might want it to be true.

To be blunt, I find the first part far more convincing than the second part. As I read Rev. Keller’s argument for Christianity, as a natural skeptic (but you all know that I put my skepticism to rest on certain aspects), I keep finding myself in the Devil’s advocate’s position, arguing counter-points and alternate plausible explanations that does not involve God or Jesus Christ (like a good lawyer or mathematician, I don’t have to believe in arguments that I advance; if I couldn’t do that, I would have to give up pretending to be a sophist). In contrast, I found myself mostly agreeing with Rev. Keller in the first half; it’s far much easier to agree that skeptical points of views he offered in the first half are reasonable than to agree that the options Rev. Keller is left with in the second half are indeed the only choices left for a reasonable person.

But through both the first and the second part, here’s one argument Rev. Keller makes for Christianity (that I’ve also seen Pastor Allan make, I think last week) that I do find compelling. Christian Bible, especially New Testament, is a true account, at least to the best knowledge of authors and as well as it has been transmitted to us (as verified by agreements between a number of papyri and archeological evidences), and here’s the reason why: the accounts in the gospels are so embarrassing (e.g. Peter denying Jesus three times) and so counter-productive (e.g. women, who didn’t count for much at the time, being the first witnesses of Jesus’ resurrection) that one wouldn’t make up things like that as propaganda. In fact, the only reason one would even tell such a story is because it is true and one feels obliged to tell the truth.

I found the very last chapter a little … too mysterious for me, but other than that, the book provides plenty of food for thought. In the end, there’s no guarantee that it will convince a non-believer—or even a seeker—or that it will not derail a supposed Christian, but one would be better off for having read this book than not.

I finished reading Mrs. Palin’s Going Rogue: An American Life. It’s a good memoir / political treatise, and I am very glad that she got to tell her side of the story—it was so frustrating with the “mainstream” media bashing her with tips from “anonymous sources” and not getting answers from McCain-Palin campaign, but with this book, I see that for every one of the frivolous complaints (about her wardrobe and her children traveling with her) there is a very good explanation.

But this is a good book not only for getting her story out, but also for explaining her political and policy views and her expertise—especially in energy policy, which will only become more important as time goes on. I suppose if you are reading the book just to get her positions on various issues, you’ll get frustrated because of all the narrative in the way, but then, if you are so interested you can probably find other sources. On the other hand, for the ordinary Americans who identify more with Mrs. Palin on the personal level and not just her political views, this book takes a very good approach to sell her positions, surrounded and explained by her narrative.

As for liberals who attack her for “settling scores”, well. I guess bias is a liberal characteristic and we can’t really … blame them for being so bigoted all the time, but read with an open mind. There is only one person Mrs. Palin is settling score with, i.e. Steve Schmidt, a.k.a. “headquarters”, and given all the nasty things Schmidt said about her, can you blame Mrs. Palin? At least she’s saying it out in the open, with her reputation on the line. Schmidt didn’t even give her the chance to face her accuser by making all those leaks anonymously.

In any case, this book is much heavier on her narrative (independent of the McCain campaign) and her political views than her settling score, and that should be evident to any fair-minded reader. If you hear or read anyone claiming that Mrs. Palin is settling score with this book, well, consider the possibility that they are simply repeating the leftist party line. The evidence may be more convincing than you suspect now.

The College Life group at New Church Berkeley wanted to do something to keep in touch over the winter break, so we are reading the book, The Reason for God: Belief in an Age of Skepticism by Tim Keller.

I’m just through the first chapter, and well, it’s an interesting read (I’ll have more to say once I’m done reading). At the moment, I guess I have a few points on which I think I disagree with Rev. Keller: the point of view that says every religion is equally right, that they represent different parts of the Truth (coupled with the elephant and blind men analogy) does not need to be coming from a position of arrogance (i.e. that you somehow know that Truth is bigger than any of these religions). It can be a simple logically consistent position that begins from a simple assumption: “Every religion is correct to the extent of what they claim.” Given the contradictions and disagreements between these religions, the only way this assumption can be true is if there are significant areas where these religions … do not overlap as far as Truth is concerned.

Of course, how one arrives at that assumption (is it out of charity and assumption of goodness of religions? or is it as to arrive at the conclusion which diminishes every religion equally?) is a different question, but direct assumption of a view at greater truth is not … required.

Anyways. Aside from this, I guess there are some areas where I don’t feel quite comfortable (“social justice”; when it means anything other than voluntary private charity, it’s a great tool for ambitious statists), but I’ll have more to say after I’m done.

This was the first book on libertarian philosophy that I sought out to read (as opposed to gleaning opinions and tidbits from the net), and it was good. It explains some of the libertarian principles rather well (“self-ownership”, and the sanctity of ownership-rights which is the basis for individual liberty which I hold so dear), and distinguishes modern-day libertarianism well from modern-day anarchism. Before reading this book I wondered whether I might actually be an anarchist, but now I know I don’t want to be an anarchist—and that’s not because I want police protection, it’s because I’d rather have my public actions be based on reason, not emotion.

Now, although I’d recommend this book to everyone, libertarian or not, I feel that there are a few corners where the author was, well, guilty of laziness. I am sure that if Mr. Walsh were to give the matter great thought and respond carefully, he wouldn’t have said what he wrote in this book regarding these few matters. First, the matter of “intellectual property”.

The fact that he did not give this matter great thought is evident. It only fills 2 pages, as an afterthought to a chapter devoted to property, natural, real property, not an imaginary one. He says, “The fate of the U.S. economy—or any modern economy—depends ultimately on a sensibly balanced system of intellectual property rights. The founders understood that. In the Constitution, they gave creators a limited monopoly over their creations as a means of fostering future creativity,” but he never questions whether current “intellectual property rights” are sensibly balanced, and perhaps in a haste to distinguish sensible libertarians from emotional anarchists that roam the net, vindicates the current system—only as a mean to condemn anarchists.

The matter of fact is, the system of copyrights and patents, as it stands now, goes way beyond ensuring ownership rights to the point where we effectively have a bureaucratic alliance of government and industry tycoons that work to limit the rights of individual owners and limiting free expression of individual artists (here’s a case in point). I think Mr. Walsh is guilty of laziness in looking at the system that the Founding Fathers have set up and assuming that that system is still standing. It is not, and it needs fixing to the point where not having this “right” at all would be better than the current situation.

The second point that I wish he had explored in more detail rather than glibly oversimplifying is capital punishment. He says, as if to make a case in point, “As many libertarians have asked, is the same bureaucracy that takes weeks to process a driver’s license up to the task of taking a person’s life?” But that is a strawman that he is knocking down. DMV is in charge of driver’s licenses; the court system is not the DMV.

Yes, the thought of judges and juries making a mistake at the expense of an innocent life is troubling. But, if we could ensure the absolute certainty of his guilt—or at least the willingness to accept it, as the legal system is not capable of stopping anyone who wants to make a criminal out of himself—and the deservedness, is “life without parole” a better punishment than capital punishment? In the former, the criminal is dead to the society in every aspect except one: the society must pay for his existence now. In the latter, well, the criminal is literally dead.

Perhaps resulting tax burden due to those in prison for life is not so great that it makes no practical difference—after all, these people are very few, and these very violent criminals are not the reason our prisons are overflowing. Perhaps it is still significant enough that killing them, and reducing taxes and the size of the government is more consistent to the libertarian principle. Either way, I think it would have been better if the author made a better-reasoned argument from practical and philosophical point of view, rather than a glib jibe at the monster that is the government.

On the whole, this was a good book and I’m glad I read it.