Tito's Blog

Social Graph Clustering

If someone had doubts about the value of the data that can be inferred from the social graph, take a look at this clustering of the US: PeteSearch: How to split up the US

Social Agents In A System Dynamics Environment

Since I read Social Atom by Mark Buchanan, I have been investigating agent-based models applied to economics and finance. Andrew Lo at MIT is working on behavioral finance models based on adaptive agents that evolve and are selected in a “survival of the fittest” environment. Rajiv Sethi refers to a Nature article applying agent-based models to macroeconomics.

What is interesting in agent-based models is that very simple rules at the individual agent level can create extremely complex system through interactions and networks of agents. Such networks would be able to model non-linear effects, by introducing stocks, flows and delays as suggested by System Dynamics theory.

That reminds me of a the Mandelbrot set fractals, where the iteration of an extremely simple equation generates an infinitely detailed image.

I think that a behavior rule for agents as simple as “do what the most successful agent did and avoid what failed/bankrupt agents did” would be enough to generate interesting results. As I develop my simple agent-based model, I will keep you posted with the results.

The Bond Vigilantes Spared Italy. Why?

I am quite astonished that Italy was mostly left out of the government government debt scare of the past two weeks. Today I even saw a blog post where the “I” in PIGS meant mostly Ireland … Even Paul Krugman initially forgot about how bad our situation is. With public debt above 100% GDP and for over 50% financed by foreign investors, I would argue that we are in a shakier position than Spain. Fortunately our deficit of about 5% range looks austere compared to our other club med fellows.

I just hope those deficit figures are for real. Corruption and waste of public money in Italy look definitely worse than in Spain and Greece. At the same time it is true that the banking system held up quite well and unemployment figures are better than elsewhere, although propped up at least temporarily by government support to redundant workers (“cassa integrazione”). Personally I will not buy Italian government bonds and if there was a way to short them as a retail investor, I would do so.

Private Equity And Paul Volcker Reform

As banks evolve to become government-regulated utilities, private equity firms and hedge funds will have an even harder time securing financing for their investments.

The specific points at issue are ownership or sponsorship of hedge funds and private equity funds, and proprietary trading — that is, placing bank capital at risk in the search of speculative profit rather than in response to customer needs. Those activities are actively engaged in by only a handful of American mega-commercial banks, perhaps four or five. Only 25 or 30 may be significant internationally. Apart from the risks inherent in these activities, they also present virtually insolvable conflicts of interest with customer relationships, conflicts that simply cannot be escaped by an elaboration of so-called Chinese walls between different divisions of an institution.

If this re-regulation process continues, private equity funds and hedge funds will need to adapt their business model to a “new normal” where debt financing might be scarce. Or the new regulations will open up a space for investment funds focusing on providing debt for “speculative” activities.