Is Your Reality Just a Simulation? Calculate the System’s Capacity.

Consider the idea that, unless intelligent civilizations tend to self-destruct, or they tend to lack the introspection to simulate their own origins, it is (apparently) statistically more likely that we (including you, dear reader) are a simulation – not the apparent, pinchable, free-willed “reality” we prefer to interpret our sensory inputs as. Personally I find this idea vaguely… off. Like the anthropic principle, it seems to smell of too much… convenience. Or like it might suffer the self-immolating trajectory of the ontological argument. Or the cringe-inducing conclusion that all things – including you – and a billion copies of you – must inevitably be found inside a universe that is infinite. But play along for a bit, and it is possible to roughly calculate the minimum processing capacity – or at least memory – of the system we’re running within, and some evidence in favor of the proposal.

Call it the number of Plank bits. The memory size of the apparent universe is the number of separate spaces that can be found within the hyperspace volume we find ourselves within, that are still causally-linked, measured in Planck lengths. If we assume the current Lambda-CDM model (Big Bang + Inflation + cold Dark Matter) isn’t significantly incorrect, we can think of the Hubble Horizon as a kind of inverted event horizon forming a causality-limiting sphere around us. That horizon marks the point at which space (or the stuff found within that space) is moving away from us at the speed of light, relative to us. Since nothing travels faster than the speed of light (which has also been called merely the speed of causality – as gravitational waves are also limited to this speed limit), nothing at or beyond this horizon can ever be reached or even communicated with.

This horizon forms a sphere around us with a radius of something like 14 billion light years (about 2 * 10^58 Planck lengths), or about 11.5 trillion cubic light years (3.5 * 10^175 cubic Planck lengths). If the bits of the simulation correspond to volume, the minimum memory capacity of the system is that Planck volume – about 3.5 * 10^175 bits (but subject to additional dimensions if they turn out to exist).

On the other hand, if AdS/CFT Correspondence and the holographic principle hold up, the real information content of the simulation we seem to find ourselves in would be the surface area of the Hubble volume, or about 5 * 10^117 bits. This is certainly a lot of bits, but in an infinite universe or one that exists infinitely long such a simulation not only may occur – it will occur. More interestingly, given a large enough universe, such an information-based simulation can arise spontaneously like a Boltzmann brain – or as the product of a Boltzmann brain. The fact that a simulation is only composed of information (that is, after all, the essential quality that separates a “simulation” from “reality”), the medium in which the information exists could be anything from charged particles, to… cupcakes! Don’t think that a simulation written in cupcakes wouldn’t work, either – the time it takes for the medium to evolve from one state of the simulation to the next state (eg the passage of one unit of Plank time within the simulation) can take any length of time in the informational medium – it doesn’t matter how long the “real” time-velocity is.

What I find really interesting about these considerations is that the Quantum Mechanical rules that make the Planck length arise have the effect of making a universe-simulation practical by limiting the fine resolution required, as opposed to a universe that has infinite detail, like a fractal. A perfectly accurate simulation would not be possible in an infinitely-fine, perfect-fractal universe. You could say that the fact that our universe has this fineness-limit is possibly evidence that we really do live in a simulation, and if we really are in a simulation, it may be that the Planck length was just an arbitrary fineness-limit our “creator” chose. Perhaps 1.6 * 10^-35 just happens to give our simulation good-enough results to still be meaningfully likely in the real universe that created our simulation. Likewise, something like the Hubble horizon is exactly what a simulation-programmer would want to use to prevent her from having to simulate “everything.” Looking at the way the Hubble horizon seems to have evolved over the life of our apparent universe, it could be that it – as well as the apparent Dark Energy expansion – is being used to set an upper limit to the system resources needed by the simulation to provide accurate results, enormous as this upper limit is, relative to the size of our apparent universe. A curious reverse way of interpreting the Hubble horizon and Hubble expansion of the universe is that it might not be a real phenomenon happening within our simulation, but rather is just an apparent feature – an emergent phenomenon that is simply a consequence of our simulation having a computational limit, similar to how the apparent flow-of-time would also not be a real phenomenon in the simulation, but rather just be an apparent phenomenon that emerges as a consequence of the “size” (in fractions of a second) of the “temporal steps” our simulation just happens to employ (corresponding to the Planck time!)…


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Tachyons and Intersecting Universes

Recently finished John Scalzi’s fine Old Man’s War. One plot point is that tachyons come to betray attacking ships emerging from wormholes. Tachyons have never been detected nor is their place in reality even theoretically firm. But considering the compelling hypothesis that there is an observer duality between reference frames outside a black hole, and the frame of reference  of an observer falling into a black hole (laid out in Leonard Susskind’s excellent The Black Hole War), combined with the ever more salient model of a multiverse (if you haven’t read it already, see Max Tegmark’s Our Mathematical Universe), it may be inevitable that tachyons are all around us.

First, presume Tegmark’s  “level-one” multiverse exists. If I remember his levels correctly, this is the simplest multiverse model that simply states that our observable universe is not special, that the Big Bang – whatever it was that started an Inflationary expansion – occurs from time to time within a larger space, like inflationary bubbles. Assume this has been going on for long time frames, such that many bubbles have expanded, like stars in our own reality – generations of universes that have come and gone. From time to time (possibly often, depending on how rare Inflationary expansions are), the 3- (or 11- or 12-) dimensional “domain” of one universe expands into another adjacent universe. We’re not talking about universes with differing “constants” – this multiverse is the model where the same laws of physics apply across the entire multiverse. We already pretty much know that there is an (inverted) event horizon at the edge of the observable universe, where the expansion of spacetime apprears to us to be faster than light. So what would it look like if another Inflationary universe was already expanding into our own observable universe?

For each of the reference frames in both intersecting universes to be consistent, it seems pretty necessary that either the particles of one universe will pass thru the other as high energy photons, with relativistic time dilation resolving the excess energy implied by the faster-than-light collision; or, if we suppose that time dilation is inconsistent or not in play between the intersecting universes, the particles of one universe will appear as tachyons to the other universe.

If it ends up as tachyons, what happens when these tachyons occasionally impact a particle in our universe? Perhaps tachyons decay into normal-looking matter in our own universe? Maybe they do this via neutrino creation. Maybe this constant influx of matter everywhere within the intersection domain (which might easily be as large as our entire universe – imagine the generations of intersecting universes in the same way that myriad dust clouds from generations of dead stars now intersect and overlap in our own universe as a tangled mess), is playing a part in what we currently call Dark Energy – a mysterious, unresolved acceleration in the expansion of our observable universe. Do tachyons, or at least the particles of intersecting universes, play a role in Dark Matter? Do they play a role in the statistical nature of Quantum Mechanics? Is the apparent randomness of QM transitions actually being influenced by unseen other particles? Could we test this intersecting-universes model by analyzing the cosmic microwave background – or maybe it is only visible by looking at the cosmic background in much lower or higher energies? On the other hand, maybe such a survey  would see nothing but a random tangle of exotic decays, because that’s the only pattern…?

The thing I find most compelling is simply the near necessity that this is what is occurring. To say that this is not what the larger level-1 multiverse looks like requires invoking a special place for we humans – or our universe. This view seems to be the natural extrapolation of assuming that not even our position in time, within the lifespan of the multiverse, is special.



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Libertarian Nirvana, or how I realized Objectivism is a slippery slope to pointlessness

Many of my posts exists within a dialogue-debate between my siblings. Lately, I realized I’ve been posting few thoughts on this blog because they were all going into reply-comments on Facebook… So I’m going to try to post more of those here, where I hopefully will have a little better access to them in the future… (after all, this is, basically, my journal…). So here’s one of those that arises out of Facebook comments…

My brother re-posted this from Nassim Nicholas Taleb:

Some clarity.
The Golden Rule (do to others what you want them to do to you) is an invitation to interventionism, utopianism, and meddling into other people’s affairs, particularly poor nations, as represented by the the NGO clowns at TED conferences trying to “save the world”, and causing more harm with unseen side effects. Remember that Mao, Stalin, Lenin, and were following the positive Golden rule. At the personal level, I may feel good trying to nudge a vegetarian to eat raw kebbeh (Lebanese steak tartare) because I like it myself.

The Silver rule (do NOT do to others what you don’t want them to do to you) leads to a systematic way to live “doing no harm” and gives rise to a liberating type of ethics: your obligation is to pursue your personal interests provided you do not hurt others probabilistically unless you are yourself exposed, & not transfer risks to others (skin-in-the-game at all times). But, and here is the key, should there be a spillover, it will necessarily be positive. It is therefore convex.(Typical via negativa rules are convex). It separates the “self-interest” in Adam Smith from the “selfish” version. And if you want to help society, just try to benefit WHILE at least harming no one.

This distinction puts a lot of clarity behind the idea of free markets and morality. You should never have to prove that what you do is GOOD for society (hard to express in words and rationalistic framework), but you can certainly show you are NOT hurting others more than yourself via skin-in-the-game.

My brother only added the comment, “Gold or Silver?” As usual, I’m not 100% sure what he wants to say – or wants his audience to get. More importantly, as I generally agree with Taleb and have cited Taleb to my brother in our debates, I feel the need to explain how Taleb’s comment is not actually in-line with Ayn Rand Libertarians. My response to my brother was this:

While I agree with the general concept, I want to point out that there is, absolutely, a COLLECTIVIST aspect to “The Silver Rule.” You cannot judge whether or not you are “doing no harm to others” objectively without drawing on the perceptions, considerations, opinions, and (potentially) tyranny of others. I throw in that last “tyranny” one just for you, since you seem to believe The Silver Rule – and definitely believe other Libertarian ideals – are some how the opposite of Collectivism – yet the Tyranny of The Majority – just as the Tyranny of a Monarch – is inherent within any political system that seeks to two or more people to “live” together – it is all a matter of degrees.

Automatically, anytime anyone speaks of “objective’ truth (using whatever terminology) they are invoking socialized arbitration of reality – a position where each individual BY DEFINITION “subjects themselves” “TO” “REALITY” – but where, of course, “reality” is always, everywhere, a social construct.

Do no harm? GREAT! However, people will disagree about what harms and what does not.

If you find yourself irritated that your Libertarian freedom is under attack here – just imagine the way out. It is educational to do so. There is a way out of this collectivist trap – but it comes with cosmic unintended consequences:

       ===== The Libertarian Paradise =====

Choose not to care.

Choose to put blinders on, and focus only on your own self-interest.

Does someone think something you did harm them? Say you don’t care. Tell them they can try to do the same back to you, but since you refuse to accept any kind of left-wing, socialistic, collectivist dealing or bargaining or the slippery slope of validating any social considerations…. tell your complainants that you are FORCED 🙂  to not care about any alleged harm they say you caused.

What does that kind of reality look like? Well, for one thing, it’s a SUBJECTIVE reality where each individual is “FORCED” to choose not to consider the perspective of others, and thus must suppress the notion that any objective (which, in this view, is just code for COLLECTIVE) facts exist. Everything is opinion (not just perception – but subjective perception), and since in a Libertarian paradise, all opinions are equally valueless, there are no facts but those you CHOOSE to accept as truth.

Okay, switching back to my own voice now (rather than The Libertarian Paradise…)

This is precisely what Taleb was talking about – this is that dividing line between “self-interest” and “selfishness.” But I’m trying to show you that your views often draw from the “selfish” side of this line, often ignorant that the line even exists: You cannot have philosophical Unobtrusive Self-Interest without a very healthy dose of Collectivism. There’s no way to purify one from the other – the blend of the two is what DEFINES the dividing line.

Acceptance of this realization is why I’ve become a “Liberal” and vote for “Liberals” – and why I say not only are Conservatives in error, but Ayn Rand and philosophical Libertarians and Austrian economic idealists, too.

The only way to avoid the problems of Collectivism (and they certainly do exist! I’m not denying that) is to find yourself in a situation where you are truly disinterested in everything around you, and even disinterested in your past and future. Only then are you free from the constraints – the dictates – of others. (Any addict can tell you that even our own minds dictate to our “selves” – but not just pathological addicts – we’re all “addicted” to air, water, and sustenance – and most of us are addicted to self-preservation, most of the time).

If you see notes of Zen Buddhism here, you’re on the right track – and yes, I am aware of the link. It is absolutely true (I’d say “self evident – but with difficulty“)  that we can only achieve total freedom by giving up all desires. And from that arises the paradox: what is the point of freedom if, in giving up all desires, you can no longer CHOOSE TO DO ANYTHING WITH IT?

To that, I say, “Exactly.”

Libertarianism is a slippery slope to pointlessness.


Literally. And I really do mean LITERALLY.

In all of these philosophical links you can see the music of modern libertarian conservatives:

– lack of empathy for those that disagree with them
– lack of desire to negotiate policy
– rejection of “science” and “academia”
– rejection of collective judgements, except for claims of NON-infringement
– pursuit of hyper-rationalism (only through rational calculations can you have preferences without actually caring)
– tone-deafness to the disagreement between human realities and rational ideals

Atlas Yoga Injury

Atlas shrugged, went to the beach, then got tangled up while exercising his new-found freedom.

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Fed Up: The real GMO

I’m really happy to see a documentary like Fed Up be released. I didn’t hear of Robert Lustig’s viral lecture (or his other one) until just 9 months ago, but it crystallized everything I’d been reading up to that time.

Reading this NY Times blurb about Fed Up I couldn’t help but think about how sucrose is, actually, the real instantiation of what pure-food advocates have been concerned about in GMO’s. I’m not “pro” GMO, but I’m also not explicitly against them, either. I think it is entirely accurate to say that hybridization has a roughly equivalent potential to produce unforeseen side-effects. (To any anti-GMO advocates out there, I do realize that GMO can produce never before seen proteins or side-effects – but so can hybridization). I do possess that vague worry we all feel about eating GMO food, (“what if?”) – and I prefer to avoid it. But my fear of unknown chemicals has been softened as a result of having to research what various drugs and their metabolites do in the body, if anything. I’ve been surprised how many are harmless. However, this makes sense. There are infinite shapes carbon chains can assemble themselves into, with a few atoms of nitrogen, sulfur, phosphorus, etc, thrown in. The reason any chemical causes problems in the body is that it just happens to fit (or interfere with) an enzyme protein (well, usually). Since the number of configurations that will fit an existing human enzyme/protein is so much smaller than the essentially infinite number of possibilities, it shouldn’t be surprising that most chemical configurations are harmless.

Anyway, I do realize this is an imperfect security blanket. This is why I’m biased against GMOs. But my point is that what we’re beginning to realize on a vast, cultural scale is that fructose is the GMO poison we’ve all been afraid of! But it isn’t a new chemical – which makes sense, since for anything to hurt us, we would tend to need to already have an enzyme or protein that actually interacts with it. This existing chemical (fructose) occurs naturally, but as Lustig teaches, in the natural world, fructose tends to come packaged with similar parts fiber (such as sugar cane), historically limiting the amount of it we get – and limiting blood-sugar peaks. And like the GMO mystery chemical we’ve all been vaguely fearing might eventually pop up, fructose became a problem when we learned how to mass-produce it via an industrial process.

Think of that. We’ve been complaining about GMO possibilities – fearing that some unknown or rare chemical might suddenly pop up in all our farm-grown food, when the actuality is that a depressing number of us are dying and will die from a chemical added to our food that we knew (or could have known) all along was industrially mass-manufactured…

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Fiscal Stimulus: Target The Oversupplies

Adding a bit to Krugman’s latest.

Think about it: what would the true costs be of repairing our roads? It wouldn’t divert capital from other investments — capital has no place to go, and markets are practically begging the federal government to borrow funds and put it to work.


Conservatives and Libertarians and Austrians want to ignore the fact that government debt is amortized, and fall back on Say’s “Law,” saying that deficit stimulus doesn’t work because the market adjusts spending based on future taxes. (The response is that no one has the credit score of the US government at the moment, so when the US government borrows, it borrows at a rate that is lower than anyone else currently gets, so there is no spending the free market can offer that costs less over time).

But some will object on the grounds that government spending causes over-investment – causes market resources to be devoted to something that only the government is interested in buying, and once the spending on that terminates, the market adjustment will produce another shock. Also, a big expenditure by the government will surely lead to opportunistic price-setting, forcing the government to overpay for whatever it decides to buy during the stimulus. These two inter-related points are what I really want to address.

If you’re going to engage in stimulus, you want to focus on goods that are oversupplied. There’s an oversupply of capital into government bonds, so we’re good on deficit spending. There’s an oversupply of construction labor, so we’re good there, too. The only real limits to infrastructure spending are the fact that a lot of construction workers and companies have either gone under or started looking elsewhere. It would have been better to do this five years ago, of course.

But the real key here is to see that, for instance, stimulus is a bad idea if, say, you focus it on purchasing services from physicians. The supply of physicians is limited and not elastic (because new ones take about 8 years to train up, and there’s a very small supply of physicians that gave up medicine to work elsewhere in the economy). Thus, supply-vs-demand pricing tells you that a large, sudden increase in physician-services spending by the government will cause a huge shortfall in the supply of physician services – leading to a huge increase in prices, and, TA-DA, inflation. This is the inflation people like Peter Schiff and Ron Paul have been prognosticating about continually, claiming it’s going to hit us any day now. But if you focus government spending on parts of the market that are oversupplied, you don’t get inflation.

This doesn’t merely work during recessions, nor must it be limited to infrastructure. What is the preferred teacher to student ratio? State and local governments laid off large numbers of teachers and to the degree they’ve begun to replace those jobs, they’ve been using teaching aids much more than actual teachers – because teaching aid jobs allow districts to pay people less for a very similar job. All of this means we have an oversupply of people qualified to teach, an oversupply of students, and a ripe opportunity for “stimulus” spending on restoring the number of teachers to the preferred teacher-to-student ratio. (Personally, I think the teacher-to-student ratio is a poor way of measuring education quality, but we’ve underfunded schools so much and laid off so many educators over the past 5 years that the ratio is good enough for speaking about where we have a “buying” opportunity).

Once we get through this recession, nothing will have really changed on the general principle that it is a perfectly valid use of government spending to weigh the borrowing costs of government bonds against the price at which government spending can “stimulate” market sectors that are essentially “under-priced.” Defense spending is one such area – not that we “need” to spend more on defense, but rather, in our society, the private sector doesn’t spend much on national defense. If it did, we wouldn’t need a Federally-financed military (as far as funding is concerned – the needs of the power hierarchy are another thing). Since we happen to live in a culture that sees fit to offload this investment (the wisdom of the investment varies depending on the international climate), it is appropriate for the government to execute what amounts to a military-goods market stimulus – even when we’re not in recession.

Many Conservatives critique calls for stimulus during a recession, saying that to liberals, the solution is always stimulus – not just during a liquidity-trap – but even during the mildest recession. They are partly correct – but they’ve missed the general rule: A government should always look at its borrowing costs and its “market opportunities” – and spend if and when a “buying” opportunity arises. This is a subjective process in many ways – president George Bush saw a military “buying” opportunity in Iraq that others didn’t agree with. But when federal borrowing costs reach something close to 0% interest, infrastructure projects that have a 50-100 year payback start to become no-brainers.

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Misunderstanding the Mistake in Black-Scholes and Fama’s Rational Markets

Abstract: Probability has been getting a bad rap in finance and economics due to modeling mistakes that have led to many of the biggest financial catastrophes of the past 50 years. This has bled over into popular misconceptions that the human mind has some mystical power arising from Free Will that explains market unpredictability and even the power of the mind over the universe around us. However, physics and probability can, actually, allow us to model markets just as we do particles (to a high degree of certainty) if we properly identify the mistakes of previous attempts. These mistakes include the collapse of Long-Term Capital Management, the 2008 financial crisis (as a result of misuse of Value at Risk), Black-Scholes, Eugene Fama’s “Rational Markets” work, and even underlies the misunderstanding of the Phillips Curve that ultimately led to stagflation of the 70s. Probability estimates failed in all of these because they did not model feedback loops, and assumed the volatility being sampled was not merely random, but also a “closed-system.” A proper market model must account for the feedback loop created by introspection – the property of humans and markets to act on any prediction, undermining the prediction. Introspection does not make humans and markets unpredictable – these feedbacks are still fundamentally deterministic, and are the hidden correlation that causes financial volatility to exhibit a “fat tail” when compared to the Normal Distribution.

The effect of this feedback is analogous to analyzing the entropy of a system of non-intelligent particles when the system is not “closed” – ie, is subject to periodic exogenous influences – which can cause sudden, rapid changes in the apparent entropy as during a phase transition. Example: a water vapor cloud is exogenously cooled into liquid or solid, and the hydrogen bonds progressively “communicate” a completely different, non-linear order onto the system. Example #2: paramagnetism: introduction of a relatively small magnetic field suddenly imposes order on a system of particles that is much larger than the field’s extent and strength in a vacuum. The “randomness” of the particles under inspection is still perfectly random when the exogenous effect is “absent” (that is, sufficiently “distant” such that it seems to be “outside” the “system”) – and thus Probability and the Normal Distribution are perfectly sound if the entire system is properly accounted for.

Thus, the “fat-tails” in finance, the apparent non-randomness of markets, and even the consequences of “Rational Expectations” are ultimately still within the domain of accurate probabilistic predictions. Further, this reality supports (and provides further strong evidence for) the philosophical positions that the effects of subjective human “consciousness” and “free will” do not rise above deterministic Materialism.

I’m reading an “oldie” right now, When Genius Failed: The Rise and Fall of Long-Term Capital Management, by Roger Lowenstein. It repeats the assessment presented in his other book, The End of Wall Street, and many other books on economic crises, such as All the Devils Are Here: The Hidden History of the Financial Crisis, by Bethany McLean and Joe Nocera, as well as Micheal Lewis’s pair, The Big Short: Inside the Doomsday Machine, and Flash Boys: A Wall Street Revolt, as well as quite a few books written by economists.

At their core, they indicate that modern financial collapses tend to arise when highly educated people put too much predictive value in the science of probability, then leverage-up in a bad bet. These bets-that-go-bad are critiqued as failing to appreciate the fundamental uncertainty in the market. As Lowenstein writes in When Genius Failed, the problem is that markets are almost rational, almost predictable (using probability and enough historical data), but not quite – and the problem is that you can’t identify the start of unpredictability accurately enough to avoid it.

The Black-Scholes model is frequently cited (as is Value At Risk), both of which simply treat asset pricing as a random variable whose value obeys the Normal Distribution. If it does obey that distribution, you can assign very precise probabilities to the likelihood of the value falling within any particular range – and many firms have started making their money (and also collapsing) by placing bets using these probabilities. These probability models arose from the natural sciences, such as Entropy, where they really are extraordinarily accurate. Thus, math and physics nerds brought what they’d learned to finance and economics, and birthed the notion of “quants” – very smart people who believed that there was no good reason why markets shouldn’t ultimately be about as predictable as atoms and particles.

This post is about how far the probability-critics are right, but how they are also wrong – and they’ve gone too far. The academics and quants simply have not yet correctly mapped the physical models to market models – and this mistake can now be fixed. It’s an important issue, because this mistake led to many of our worst economic failures over the past 30+ years, but also points the way to avoiding the mistake and making market predictions that are much closer to the inherent Heisenberg Uncertainty limit. It’s a rebuttal to the current anti-academic, anti-quant view that even many academics and quants have now adopted (such as Nassim Nicholas Taleb in The Black Swan), questioning whether the Normal Distribution is ever as accurate in human systems as it is in physical systems. This is a modern quantitative mysticism that, while not explicitly spiritual, leads many to suppose that there must be something about (human) consciousness that rises above physical reality and Quantum Mechanics. This has led to the misunderstanding of the Observer Effect as apparently showing that, for instance, electrons behave differently when a human is watching what they do, leading to the popular documentary, What The Bleep Do We Know?, which is just the cover photo for a dizzying field of books and videos by “experts” that will explain to you how modern physics shows that your mind controls the universe around you, from The Secret to, surprisingly, the popular advice of people like psychologist Daniel Goleman, that there’s a hidden “power” in “positive thinking.”

The popular judgement on failed market bets based on quantitative probability has coalesced on these conclusions:

  1. The sample of historical values is too limited.
  2. The prices of pairs of assets are not independently random, but correlated.
  3. People (and as a result, markets) are not as rational as we think.
  4. People (and as a result, markets) occasionally exhibit “herd” behavior.
  5. People (and as a result, markets) have a fundamental degree of uncertainty that cannot be overcome, arising from the simple fact that humans can “choose,” and thus anyone trying to model human behavior is just another idealistic fool.

The sample of historical values is too limited. If more data were available, the probability estimates would be more accurate. Some think this means the uncertainty would be smaller, but this is not accurate. Historical data contains more (unexplained) volatility, so the uncertainty increases when you include it. This makes your probability estimates “more accurate” but less useful, because adding in historical data ultimately just increases your “error bars”. For example, suppose an asset is hovering around $100. Based on the past few years of price data, probability suggests a price estimate of $100 (+/- $5 about 90% of the time). But if you include the past 50 years of historical data, the estimate is now $100 (+/- $15 about 90% of the time). The latter represents a more shallow normal distribution (like the yellow one, above), and more accurately matches the rare price spikes and collapses – but is less useful in the short-term, because the former estimate tends to be accurate 99% of the time in the “current” economy, when markets are “normal”. The difference between the two estimates is what writers like Taleb call a “fat tail” (ie, the actual distribution isn’t quite like the normal distribution – it has a longer, wider tail than it “should” based on current volatility). In the book on LTCM, Eugene Fama (winner of the Nobel for the “Rational Market” theory), while defending the idea that markets are rational, is noted as accurately admitting that crashes like the 1987 stock market crash should only happen once every 5000 years or so, if the usual volitility we see in them is interpreted using a normal distribution, but they clearly happen more often than that.

(to be continued)


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Sovaldi: Risk vs Uncertainty, Innovation vs Facilitation, and How Patents and Ownership Don’t Differentiate Them

(This is an extension of my previous two posts on Sovaldi, particularly the second one.)

Piracy is simply the free market saying, “Your markup is ridiculous.”

As Nassim Nicholas Taleb mentions in his books The Black Swan and Fooled By Randomness, there’s a difference between risk and uncertainty. I’m sure I’m going to butcher the distinction, but roughly speaking, risk is the more or less finite quantity you know you may loose if a bet goes badly. Uncertainty is the unknown behind probability estimations – the degree to which your estimations are just wrong – and how wrong. Uncertainty is open-ended. Risk is supposed to be a tangible, calculable quantity. I’m uncertain if a meteor will destroy the Earth in some time period, but if one does, I can estimate the value at risk of this happening (by saying this, I do not mean to defend the historical use of VAR in finance).

When Gilead’s vice president Gregg Alton says,

“Those who are bold and go out and innovate like this and take the risk — there needs to be more of a reward on that. Otherwise, it would be very difficult for people to make that investment.”

he is actually mixing risk and uncertainty, and innovation vs facilitiation, in a socially destructive way. Pharmasset, the company that developed Sovaldi, was bought by Gilead in January, 2012 for $11.2 billion, as the results of clinical trials of Sovaldi crystallized, was the organization that worked through the uncertainty of real innovation. When they started working to produce the RNA polymerase inhibitor of the hepatitis C virus, they didn’t know they would be successful at all. It took years of preemptive effort to realize success. At the end of that process, Pharmasset had produced something new and unique for our society – a new cultural asset that should last as long as humans maintain knowledge. And it is an asset that will likely continue to benefit our culture long after the current 175+ million people who current have hepatitis C are cured or, effectively, die waiting for the financing to obtain treatment. The employees and shareholders of Pharmasset were compensated, in addition to the salaries and wages they’d already been paid, $11.2 billion for this work. I don’t know how much of that ended up back in the hands of venture capitalists who were merely financiers – not innovators, but I imagine it’s a significant chunk. Still, since I believe such venture capitalists redirect their earnings to funding more innovative start-ups, I really don’t begrudge anyone in this $11.2 billion payout (well, besides the few that very probably gained a lot more than they earned – but I believe this is the least of our problems in this series of events).

When Gilead purchased Pharmasset, Sovaldi was in final clinical trials. It’s effectiveness was largely known. The final trials seek to illuminate optimum dosing, treatment duration, dosing of the cooperative drugs interferon and ribavirin, and get a handle on side-effects (so far, Sovaldi seems to have few if any side-effects, since as far as is currently known or disclosed, it’s only apparent effect is to inhibit the particular variant of RNA polymerase present in hepatitis C viruses).

So what did Gilead have to do between the time it purchased Pharmasset and the time the FDA provided expedited approval for Sovaldi? It had to complete the clinical trials (these would have been completed anyway, of course). It surely did a lot of legal hand-wringing on liability considerations. It surely spend several (over-priced) millions on people who ushered the drug through the FDA process. A few million were surely paid to ramp up production processes and branding, etc. But in all of this, was there any uncertainty? Relatively speaking, no. By the time much of this money was spent, the knowledge that they could either sell their work to another pharma-giant or obtain remuneration for their work through selling the drug themselves was essentially guaranteed. And that’s just looking at it from the perspective of the corporation. The actual people within Gilead were already paid throughout the process. Even if Gilead suddenly, mysteriously collapsed, much of their personal gains would already be locked-in (even the $11.2 billion paid for Pharmasset was partially financed by banks, not Gilead).

The point is that the purpose of innovation – and the reason we ought to remunerate it – is to offset the risks associated with the uncertainty of working on an innovation, especially when it takes years to develop the innovation. What Gilead did was not innovation. It wasn’t even unique. Any pharma-giant would have been happy to do it, and more than capable of doing it. The work they’ve done adds essentially zero to the cultural wealth of the human race. Yet they want to extort as much as $150 billion from the human race for “taking the risk” of doing whatever it is they think they are doing for us.

But we didn’t ask them to do that for us. They volunteered! Suppose Merck had bid $10 billion for Pharmasset, and Gilead won the bidding by offering $11.2 billion. By doing so, Gilead proactively volunteered to do what it has now done over the intervening 27 months (or so). In effect, Merck would have been saying, “I’ll do it for $10 billion…?”And Gilead said, “Hmmm. No, we’ll do it for the extra interest costs on $1.2 billion more than Merck is willing to volunteer.” If Gilead now finds their work so onerous that they can’t bring themselves to do it for anything less than $150 billion, I offer up advice to them of, “Go fuck yourselves!”

In the Gilded Age of Robber Barons, we gradually formed the FTC to regulate – and block, if perceived necessary – firms from using public law and physical realities to create what we call a monopoly. But what, exactly, is a monopoly – the bad parts, anyway? At it’s core, the part that makes a monopoly economically and culturally destructive is using the social constructs of ownership and/or patents to set the price of some good far higher than the mark-up the rest of society is customarily charging for most other goods. This is why we perceive “monopoly rents” as “unfair” – the monopolist is asserting that they deserve much more profits than the rest of society is offering.

This isn’t the way monopolies are typically presented, but just consider: Gilead is saying they somehow need or deserve a markup of 41900%. This bugs us because in our current economy, typical markups (of all services – not just the markup on the final product cost) run from 10% to, say, 2000%, with the distribution heavily skewed to the 10%-200% range. Getting everyone to increase their markups to something of the same order as Gilead’s in a free-market economy is virtually impossible due to the phenomenon John Nash described as an Equilibrium. Thus, we feel powerless to retaliate against Gilead in the way we would really like to – the way a “free-market” is supposed to retaliate against elaborate prices – by using counter-pricing to either “extort” a more reasonable price, or indirectly finance a competitive product. Since we can’t coordinate this level of action, we feel this nebulous unfairness about markups like Gilead’s. We may even refer to it as “anti-social” or just “immoral.” But at it’s core, the only problem with such a markup is the fact that we’re unable to change all other markups to match Gilead’s (or the futility of doing so, since if we actually could do that, society would likely find itself in an endless markup-war, upward markup spiral (downward moral spiral)).

This is a paradox of free markets. We’re all “free” to set prices of products we “own” however we want – except that this is an illusion. We aren’t actually “free” to do that at all. Our freedom to set prices is dictated to us by the reality of the number of alternative products – or alternative “pricing paths” – such as piracy or legal retaliation.

That’s where the FTC comes in. One way we deal with monopolists is to use the apparatus of government to implement a socially coordinated legal retaliation – to get past our social Nash Equilibrium that may otherwise leave us all frustrated but powerless to respond. Another path is to fund an alternative drug and then “force” (wait, I thought the market was “free”?) Gilead to lower their price (or make no sales). Along this line, Gilead’s pricing is in-effect saying that they either:

  1. believe it is extremely unlikely anyone will find (or there even exists) any other hepatitis C virus RNA polymerase inhibitors, so they can charge whatever they want
  2. believe other companies are on the verge of bringing other hepatitis C virus RNA polymerase inhibitors to market very soon, so they need to recoup their $11.2 billion very quickly (unlikely)
  3. believe in setting their price so high that they implicitly foster the development of piracy

#1 and #3 are not mutually exclusive, of course, and #3 is inevitable, given the price Gilead is charging. The only question is whether Gilead was consciously choosing to foster piracy of their product? I think we can assume they aren’t that dumb. Therefore, we should also assume that Gilead plans to use the patent and legal system to suppress pirated copies of their drug from being available, and enable themselves to charge the 41900% markup. I can imagine they may even complain about their legal expenses. They might even try to take action against Americans who fly to India to buy the treatment there at the “low thousands” price they plan to offer the less wealthy nations.

Well, I would propose our legal system explain to Gilead that it isn’t in the business of policing the market. This would, actually, be the non-judicial-activism proposal. Piracy is simply the free market saying, “Your markup is ridiculous.” Gilead could subvert piracy by simply offering the product at a competitive price – or selling their ownership of that product to another company that is willing to market the product at a competitive price. In effect, when piracy takes the form of selling the equivalent product at a much lower price (as opposed to misrepresentation of a brand name, or misrepresenting equivalence) the only reason piracy exists – and is perceived as a “problem” – is because the firm or person complaining about the piracy overpaid for ownership rights. The “free-market” solution would, actually, be to cut your losses and move on, not use the courts and law to try to make up for your past purchasing error.

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