Reviews - books, movies et al

This page covers various reviews which i feel like writing from time to time.

Owing to the limitation on the "page" format of blogger, i can't publish each of these as a separate post. The following list includes the names of all the books and movies covered in the below page.
1. Book review - Thinking, Fast and Slow
2. Book review - Stumbling on Happiness
3. Book review - When Genius Failed
4. Movie review - Rashomon
5. Book review - Person and the Situation
6. Book review - Tao of Physics

Book Review - Thinking, Fast and Slow 

"Thinking, Fast and Slow" is a marvelous book by Daniel Kahneman (Nobel Laureate in Economics for his behavioral economics theory). It opens up a vast new paradigm to thinking about our decision making process - be it economic, emotional or medical. The central theme of the book is that we make decisions very unlike the rational economic agent of the textbook economic theory. Going beyond economics, the author claims that our decisions in most areas of our lives are governed by behavioral biases and limitations and are often not in sync with the mathematically rational choice. And no, this is not about the triumph of emotions over cold logic - even when we have enough time to reason and no purported emotional reason to decide otherwise (which is a common occurance in our day to day lives), we make decisions in a predictably irrational way (borrowing a phrase from the title of another book in this field by Dan Ariely).

The book is split in four sections - dealing with system 1 and 2 of our decision making mind, overconfidence we have in our decisions, the process of making choices and lastly the existence of two selves (the experiencing self and the remembering self). Through each section the reader gets to see systematically how we err in our judgment and how we are inconsistent in our choices.

I wholeheartedly agreed with the author. However, even if i were not to, the arguments are generally quite plausible and based on real experiments. There is of course the usual critique which can be applied here as well - the experiments can always be designed with an expected outcome to be liklier than others. However, if one carefully thinks about the experiments described in the book, it is hard to believe that they were open to manipulation. I have personally tended to believe aftersome scrutiny most results. Going beyond the experimental accuracy, there is a more subtle potential issue - many conclusions are drawn in the context of a given theory and its expectations. It might be that some variables might be subtly correlated and not accounted for by the proposed theory. For example, if we track the accident rates of various types of cars we might be tempted to declare on the basis of data that SUVs are more likely to be in accidents than sedans (not true, i am just taking a hypothetical example). The issue however is that we might be assuming implicitly something which is incorrect - that the buyers of all vehicles in general are similar including those of the sedans and SUVs. If it is observed that the buyers of SUVs are anyway aggressive drivers, that might have more to do with the accident rate. The correct methodology to read the data would be to then see the data for a country which does not have any SUVs (for cost, regulatory or availability reasons) and try to control for people's score on the aggression paramters if possible.

The subtler issues aside, the book's central theme is highly relevant - and very disappointingly left out in most textbooks and mainstream economic courses. Our decision making framework is at the heart of all of economics and ignoring a very important, directly challenging to the mainstream and adequately supported by experiment construct like behavioral economics should be given equal if more weightage in the study of economics.

On the whole, a must read for anyone interested in human decision making process. For the better informed, this can almost be a high-end self-help book. For students of economics, a highly relevant read even if one has no direct interest in the field of behavioral economics. For finance professionals, very relevant again, however, they can skip to section on over-confidence and prospect theory if pressed for time. For anyone grappling with the question of happiness and purpose et al in life, the last section is highly relevant.

Book Review - Stumbling on Happiness

I recently finished reading the book "Stumbling on Happiness" by Daniel Gilbert (psychology prof in Harvard). The title is a little misleading - in that it sounds like a self-help book. In a way it is - but for the very scientific and left-brain sort of reader. In that sense, it might put off a lot of intelligent reader. I thought ten times before buying it myself (but then read a couple of pages to make sure).

The book makes two starting points
1. We feel happy about thinking about the future and controlling our path to future
2. Our happiness is independent of the destination we reach

Of this the first is assumed to be an agreed on hypothesis. The second is explained through the book. The idea is that we don’t know what makes us happy. However we continue to believe that we do. The first of this – that we don’t know what makes us happy is due to the following
1. The limitations of imagination – filling in details in our picture of the future, without us consciously knowing it; and more importantly leaving out details without us consciously knowing it
2. The tendency of human mind to construct the view of the future in the light of the present.
3. The ignorance of human mind of its own strength to rationalize – which makes a person suffer less than expected due to a negative event

The author then goes on to claim with supporting evidence from experiments that human beings are very unlikely to learn from their own experience – since memory is a very unreliable guide to how one “felt” in each event.
The final recommendation from the author’s side then is to rely on the experience of others who are currently in the state that we are expecting to be in future. Adequate explanation is given to deal with the claims of uniqueness of human experience (we are not really that different from each other).

There is a small excursion into why we continue to believe in the eternal truths of more wealth being better and children being a source of joy. This is quite important. The theory of super-replicators in the domain of ideas/beliefs is the same as that of suitable genes in the domain of biological evolution. The simple idea is that false beliefs can last long and grow in societies since these make those societies as a whole stable, prosperous and long lasting. At the individual level though, these beliefs may not be (and often are not) happiness-maximizing.

Very interesting book to say the least. Definitely worth a read - almost without break if possible; so that the arguments stay connected in one's head. The book opens a lot of ideas but does not necessarily close any. This at once may be the asset or liability. Liability because the book has no solid recommendations - there is one weak reco at the end. But nothing of the sort say a weight loss book might tell you about losing weight. Asset because in this domain any "recommendation" is likely to fall on deaf ears. It is then for the reader to dig deeper. I have tried some of this in my post on this blog itself. Each reader should of course construct her own version!

Book review - When Genius Failed

This book on the LTCM debacle is by no means either new or contemporary. I just happened to dig it out from Landmark one evening and finished reading it today.

LTCM i.e. Long Term Capital Management, was a hedge fund promoted by a clutch of bond traders on Wall Street along with a few academicians (including Scholes and Merton of Black-Scholes-Merton fame). At its peak it had equity capital of more than $ 4 bn and assets of more than $ 100 bn.

The book covers the rise and fall of LTCM in great detail - in a very human rather than analytical way. It is written for lay persons and that shows. A good read for lay persons for sure, but also for the practitioners of modern finance, all the more so in emerging economies like India's. It is not implausible to expect an LTCM like debacle in India within next 5 years. As the complexity of the financial system grows, crises of LTCM variety are more and more likely to occur.

So what exactly happened? LTCM started out as purely a bond arbitrage portfolio with $ 1.5 bn in capital. It borrowed about 25 times that and invested in bonds of various types. It was not a directional bet on the bond prices though. It dealt in what is called convergence trades i.e. narrowing of spreads between two bonds. For whatever reasons if the spreads between two bonds are out of whac with the usual levels, an opportunity to make relatively low risk return arises. One needs to short the costlier bond and long the cheaper one. Over time, as the spreads do narrow, one squares off both the positions and makes a tidy profit. This is market neutral trade since absolute price levels of either of the two positions is not relevant for the profit and loss of the trade. Only the spreads matter.

LTCM did good business in first four years of its operation. However, its success prompted many others to enter the bond arbitrage business. This put the firm in a quandary. It was getting more investors but fewer opportunities. The firm reacted by diversifying into newer areas of convergence trade - including merger arbitrage, volatility spreads and so on. This however was a much more tricky turf than bond arbitrage. Owing to a blind faith in the validity of their lognormal price models and a financial storm precipitated by the Russian bond default of the 1998, LTCM found that the spreads in most of its trades were diverging rather than converging. Owing to its excessive leverage, this proved to be far too much for it to handle. The fund had to be rescued by a consortium of investment banks.

The efficient market hypothesis has turned out to be more a neat modeling tool rather than reliable predictive framework. The book repeatedly refers to fat tails and the ridiculous implicit expectation in normal distribution models that events of 1998 should occur no more than once in the lifetime of the universe! In reality, such events happen once in 25-50 years; and are occuring more frequently in recent decades.

An interesting meta-inference i could draw was as follows. The accuracy of the efficient market hypothesis itself is a market dependent variable. Think of it as the volatility of the volatility. During normal times, the normal distribution (no pun intended) holds much more accurately than during turbulent times. I recall my lessons as an aerospace engineer. In fluid mechanics we always specified whether our models were dealing with laminar flow or turbulent flow (when you open a tap just a little, its water stream is laminar, if you open it fully and the water pressure is good, it becomes turbulent). The models, one would guess, differed significantly. Something similar should apply to the financial world as well. The laminar models are already in place. The turbulent ones need to be developed. (Jump diffusion for option pricing is an interesting start.)

Movie review - Rashomon

Holiday season is upon us and I thought I would take a little break from the world of finance and economics to wander off into some interesting territories. I had bought this collection of Akira Kurosawa movies. Of this I finally got around to watching Rashomon. It is a great movie no doubt. Here's a humble attempt to analyse it.

The movie is narrated by a wood-cutter to a common man who has come to share a shelter named Rashomon during a heavy downpour. There is a priest as well. It transpires that the woodcutter and the priest had come to testify in a court for a crime of rape and murder by a bandit against a samurai and his wife. The woodcutter however recounts (from what he hears at the court as told by the witnesses) three different stories to the commoner - each of which are different in their reasons and details. These are accounts of the crime as told by the bandit, the wife and the samurai. The starting set-up, ending state and some of the major chunks of events are same in each story. The motives and specific actions by each of the three however are quite different.

Just as they are wondering which of the stories is correct, the woodcutter goes further to narrate his version of the story as well - supposedly the closest to the truth. As it turns out, the best availble version of the 'truth' has its own flaws as well. The commoner represents the utterly cynical worldview while the priest stands for the idealist variant. The woodcutter seems quite disturbed by his observation of the limitations of human nature.

The central theme of the movie is quite disturbingly accurate of the limits of the truth available to human beings. For one, it focuses on how truth gets deformed by the individual agendas and aspirations the observer has. This is shown through the three stories of the bandit, the samurai and the wife. Secondly the movie goes into the more disturbing exploration of whether there is any absolute truth whatsoever which is without any coloring by the observer. This is brought out in the slightly distorted version of the events produced by a supposedly unbiased woodcutter. One is almost tempted to revisit the principle of quantum mechanics that the observer invariably influences the observed and thus can never provide the accurate description of "things as they are". Rashomon seems to bring out a similar intertwining of the observer and observed in the moral plane.

5. Review of the book “The Person and the Situation” by Lee Ross and Richard Nisbett

The book attempts to bring to reader’s attention the gross underestimation typical human beings make of the influence of situation on an individual’s action and the parallel gross overestimation them make of the influence of disposition/motive of the actors.
Through several well documented and often-repeated studies, the authors make a compelling point about how most of our actions are heavily influenced by the situation/context rather than inherent motive. Stated with more nuance, the point they are trying to make is that the differences in the actions of different people are driven more by the differences in the situations and less by the differences in the disposition of the actors. Hence two people, deemed quite different in their dispositions will tend to behave similarly in similar situations whereas two people deemed quite similar in their dispositions will tend to behave differently in different situations.
The first part of the book goes about explaining the nuances of this claim and also the supporting studies. It takes on the obvious critiques and looks to answer some of the likely questions from opponents/skeptics/laypersons. The second part picks up on the implications of the social psychology as this domain is referred to. It talks about cultural influences as well as intervention implications in education, social policy, medicine and day to day life.
The book has a lot of takeaways. Hence I am taking the pains to write beyond the above review some key takeaways. The details of the review can also be found in the below.
Chapter 1: Introduction
This covers the claims stated above regarding the power of the situation. It also talks about subtlety of the situation and the predictability of human behavior. It does deal with the apparent conflicting experience from daily life that people do seem to have different disposition and predictable responses driven by these differences. The authors argue that these are not controlled environments such as laboratories and the ways they deviate from the strictly controlled ones are essentially those that lend the predictable structure to them. E.g. we see people in specific roles repetitively, people see us in similar role regularly and thus the reactions are predictable. There are other related arguments too.
The chapter introduces the tripod of social psychology (somewhat modified in the Afterword written ten years later). These are
1.       The principle of situationism: the recognition that situations matter lot more than we think they do.
2.       The principle of construal: subjective interpretation differences amongst actors make a significant difference to the way they perceive a situation and act
3.       The concept of tension systems: the cultural and social contexts in which the construal takes place and the actors act
The chapter goes on to talk about prediction by social scientists and prediction by laypeople and how the latter are grossly inaccurate in their predictive abilities. There is ample statistical discussion regarding the phenomenon.
An important point made in the section on the subtlety of the situation is that the situations do not all affect the actors in the same way. Some are weak some are strong and we are in general incapable of predicting which is going to be which. There are fascinating examples of non-effects of seemingly important parameters in early lives of individuals on their later life outcomes. What probably is important is the appreciation of the possibility that the more proximate situational factors play a much more meaningful role in influencing behavior than distant past. This point also comes up later in the book.

  • -          Being very aware of the special situations that lend some degree of accuracy to laypeople’s wrong predictive models of behavior based on dispositions
  • -          Based on above, being wary of making snap judgments or routine assessments of motives and outcomes in unusual circumstances (unusual defined as non-typical, not necessarily extraordinary)
  • -          Seeing actions of actors in the context in which they operate as well as with sufficient allowance for the subjective construal

6. Book review - Tao of Physics

Chapter 1: Modern Physics – A Path with a Heart
The author describes the beginning of physics with reference to Greek and pre-Greek philosophical discourse. He also refers to the Eastern Mystical philosophical outlook on the nature of the universe. He declares clearly that the aim of the book is to explore the parallels between modern physics and eastern mysticism. That is no doubt a tough enterprise. It is also quite prone to over-abstraction and finding patterns where none exist. However the author has a sincere attitude towards his endeavour and refrains from the over-dramatization or fleeing into garble in disguise of the profound.
His starting point in this endeavour is decidedly modern. He is a physicist and is formally trained in it. He wonders upfront that the worldview underlying modern physics is essentially mystical. It is hard to argue with it. Think about it – an electron in the nature of a cloud of probabilities instead of a particle nicely located in space. This is quite mystical. The uncertainty principle – indeterminacy of position and velocity of a particle – is also equally mystical. Relativity in special and general version, quantum physics, astrophysics, cosmology and particle physics all point to a worldview which is no longer deterministic, analytically cogent or “common sensical”. It is quite mystical, almost lyrical if you will. That is what probably inspires the author to seek the similarities between these and the mystical thought-traditions of the east. The first part is easy to appreciate for someone like me – trained in science and technology. I am looking forward to the rest of the book for the second part.
The author’s review of Greek concept of physics is quite interesting. He tracks the history of physics as studied then and its underlying mysticism. Apparently the most ancient of the worldviews even in Greek traditions had strong mystical elements. However with Eclectic school the split between mind and matter began and the mysticism gave way to analytical thought. It was good for the development of modern science since the earliest developments could not have been possible without the simplicity and tractability of the analytical approach.
The author contrasts the mechanistic worldview of the west with the organic worldview of the eastern philosophies. The eastern view seen through the author’s lens is not overtly abstract and thus potentially irrelevant. It says something really specific. It talks about the unity of the universe. That sort of view is prone to being derided as being too generalist and hence useless. However there is indeed merit to evaluating the underlying logic. I would almost think that it is not a competing and alternate description of reality vis-à-vis the analytical version. It is complimentary. It is telling us how the totality is and in what ways it is more than the sum of its parts. It is akin to studying the totality as a whole having finished studying the parts.
The author ends the first chapter on a note that the ignorance of the underlying unity of the universe has led to much strife and suffering in the human life. While that might be oversimplifying the cause of the strife and suffering, he does have a point that the over-obsession with self which is the hallmark of western thought is at the heart of much pain and anguish that human being experience in the modern world. Maybe there is hope in holistic worldview for addressing that as well.

Chapter 3:
This is a short chapter. The concept it conveys though is quite powerful. It talks of the limits of language. The chapter begins with two statements - one by Heisenberg and other by Suzuki. Both scholars talk of how the language we are used to is quite unable to convey the ideas they are working with. The ideas they are working with are of course quantum physics for the former and mystical experiences for the latter. This limitation of our language is very profound. I often maintain that language is not merely clothing of thought but the very body. So limits of the language are also the limits of thought. This links to the chapter 2 thought of compromising the content of the unexplainable by the attempt to explain it.
A linked but highly rational approach to this idea of limits of language is Wittgenstein’s "philosophical investigations" and "Tractatus". He talks of the limits of language and then declares that what cannot be logically discussed in language should be left unsaid since language will only confound matters instead of clarifying them as it does in analytical matters. That is a powerful statement. In one stroke it makes all the metaphysics as discussed in the west redundant. Capra effectively agrees with Wittgenstein in saying that the analytically heavy western approach cannot answer questions such as the nature of reality and our understanding of it or the relevance of human life and so on.
In identifying these limitations, we can progress in two ways. Firstly we can start to focus on non lingual experiences and expressions. Secondly we can start to grow the language to enable us to start communicating some if not all ideas in this domain. The attempts to use the current language for this purpose will do nothing more than confound us and sap our energies in the labyrinth of words and phrases empty of meaning but sounding big.

Chapter 4:
Chapter 4 deals with introduction to modern physics. It is a very interesting summary in its own right but also a good foundation for understanding what is to come later in the book i.e. the parallels between eastern mysticism and modern physics.
Most of the chapter deals with the nature of matter and reality at the sub atomic levels. The most important takeaway is that matter is not what we are used to at the so called middle dimensions. This concept needs some elaboration. Stars and galaxies behave a certain way that we will not be able to easily visualize or imagine since nothing of that sort happens at our scales. On the other hand, atoms and sub atomic particles behave in a certain way which again we can’t directly imagine because of the very same reason. The middle dimensions that we live in are hence merely one of the many scales possible. Our imagination having been shaped in the context of these dimensions is us a poor toolbox when trying to understand the very large or very small.
Matter is not solid, indestructible or isolated the way we are used to seeing it. At sub atomic levels, particles behave like waves of probability. Solidity of atoms is merely a side effect of fast moving electrons. The diversity of elements is merely a side effect of electronic arrangements in fixed "quantum" states inside the atoms. This shakes our faith in what we are so conveniently used to calling matter. But this does not stop here.
Furthermore, matter is not isolated pockets of solidity or existence in space like we normally visualize it. Instead it is a continuous whole which has perturbations locally. A continuous presence of energy which has high density packets in some locations, also called matter.
Seen thus, one clearly gets the foundation this is for the parallel Capra is hoping to draw later in the book. In isolation too the chapter has important thought provoking implications.
We inhabit a specific scale, a specific corner of reality which we get super obsessed about. Our endeavours are so localized that in the context of the entirety of reality, they appear puny and meaningless. This reminds of me of the Douglas Adams’ construct of "total perspective vortex" as also the civilization on pine tree. This civilization, Adams writes, is confined to one pine tree alone. They are borne on the tree, grow up in it, write poems about the beauty of the tree, lead vociferous campaigns on preservation of some branches and the importance of birth control and then finally go into remote corners of the tree to die. (I paraphrase since I don’t recall the precise setting). I feel like one of those pine tree civilizations sometimes. So much animation for pursuits so local.. So much anguish for troubles so chemical... So much happiness for achievements so random!

Section 2
Section 2 covers the various eastern mystical traditions. It covers Hinduism, Buddhism, Chinese traditions, Taoism, Zen.
The Hindu mystical tradition is more of a worldview in which the individual is later contextualized. The focus is on understanding the underlying foundation of the reality. The concept of Maya is borne out of this attempt. Maya is not illusion. It is the default state of human mind which sees e world as being distinct from itself. The Hindu tradition then goes on to describe yoga and other approaches to deal with maya and nirvana.
The Buddhist tradition is more psychological in nature and focuses on human suffering and salvation to start with. The mystical part here concerns with..

The chinese thought is seen through confucian and taoist approaches. Confucian thought is more pragmatic while tao is focused on sponteneity and naturality.
The zen describes the japanese approach. Interesting here is the approach of contradictions of almost absurdities to bring out the truth.
Across all the approaches, what seems common is the focus on non verbal and non descriptive methodologies. Some traditions even explicitly insist on not using language to describe the outcomes of their practices. The quote on zen and how if one asks what it is and the other answers then neither knows it, is an example of this.
What also comes out is a holistic use of mental toolbox. Unlike the established scientific method, these practices do not insist on using only the left brain. They might even underutilize it in a conventional sense. Nevertheless the feeling one gets is that these practices are not about arguing out the nature of reality. In this sense, as i noticed earlier as well, this sits well with the wittgensteinian emphasis on limits of language and leaving alone what cannot be gainfully described by language. The eastern traditions agree on the first part but differ on leaving it alone and in fact make it their primary goal to understand what the analytical mind can’t comprehend.
I am waiting to read the parallels now. I recall feeling a little intellectually uneasy during a Coursera course on quantum physics where I felt that the theory was just trying to fit observations with whatever abstractions it could muster. I almost rebelled and declared to myself that this is a very confused and potentially erroneous description of reality. Having read the first and second part of this book, I now feel that maybe the very nature of quantum physics is such that the theory does not make "sense" and the final interpretation of it has to be nearly a mystical experience!!!

Section 3:
Chapter 10
This chapter deals with the parallels. This is the first chapter in the section on parallels between eastern mysticism and quantum physics.
The author does take a few liberties in is chapter. At some places the parallels appear a bit stretched and based on flights of fancy. Nevertheless the attempt is laudable. The basic premise still carries sufficient weight. This chapter talks of the boundary-less-ness of the quantum world on one hand and the unity outlined in most eastern philosophies on the other. The quantum description of reality is one based on probabilistic principles. There are no well defined particles at well defined places but probability fields of "existence" if you will. Instead of bounded entities that we are used to dealing with In the middle dimensions, the quantum reality consists of a unity which has varying levels of existential thickness if we were to use such a term. Likewise the eastern mystics talked of a unified universe. One where there are no this and that, 'i's and ‘you’s, self and universe but a continuum of which everything is a part.
It is hard to imagine if the mystics ever genuinely "understood" the quantum nature of reality. It is quite possible that they created a description of reality which vaguely corresponds to the metaphysical foundations of quantum physics. On the other hand, it is also possible that the nature of reality as understood in quantum theory was always accessible to whoever thought deeply and sincerely enough about the topic and the eastern traditions just did a good job of it.

The author clearly believes the latter. I am neutral for now. As I read more about the parallels, I might change my inclination.

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