Wednesday, October 8, 2008

Celestial Economic Sphere, Data Viz for the Finance Biz

(This is a revised segment from a very long post I wrote before starting this blog)

I came across this imag
e of the Celestial Economic Sphere on a post by Shae Davidson one of the authors of the Creative Synthesis Blog, and thought it was a good symbol for the topics of this post.

The Celestial Economic Sphere was created by Lise Autogena and Joshua Portway for the Black Shoals Stock Market Planetarium. The sphere relies on financial data from 4,000 public companies to create a real-time visual display of stock trading:

"Within this environment, a complex ecology of glowing amoeba-like “artificial life” creatures emerge. The creatures live in a world composed entirely of money and they feed on trading activity. Whenever a stock is traded its’ equivalent star produces food for the creatures – the bigger the trade, the more food is produced. . . .Because the stock market has the kind of cybernetic properties of biological systems and other complex phenomena (feedback loops etc.), it can be studied in the same was as biological systems. This tends to give rise to a sense that the market is somehow a “natural” expression of some fundamental forces.

According to the Black Shoals creators, the planetarium was a response to the collapse of a capital management firm in 1998:

"Watching the news we would hear that the FTSE 100 had slipped today, and we knew that meant bad things would happen in the future, but the connections were invisible and mysterious, like the forces the ancient Babylonians thought were exerted on our lives by the stars of the zodiac. These were the time of the boom and the height of media interest in all things stock market related -- a time where the market was often equated to a kind of ecosystem with a life of its own, and where the internal dynamics of the markets appeared to be more important than it's ties to the real world....So Black Shoals was designed as a kind of parody of the trading desk of the ubermench-the Mount Olympus from which they would survey their creation."

The data visualization incorporates a complex artificial life algorithm or genetic algorithm, which is described in detail in Black Shoals: Evolving Organisms in a World of Financial Data.

Spore meets Wall Street!

Note: Black Shoals is a play on words. Shoals are a group of fish who swim together, but in this case. Black Shoals also refers to the Black Scholes formula based on the work of Fischer Black and Myron Scholes. Black and Scholes built the formula on the previous work of Louis Bachelier, known for the mathematical model of the stock market that gave birth to the concept of stock options.

Catherine Mulbrandon's Visualizing Economics blog provides a variety of data/information visualizations related to the US and World economy that are grounded in reality. She collects and creates interesting representations that make it easier to understand economic concepts. Topics include Nominal vs Real 3-Month Interest Rate 1934-2008, Percentage of World GDP - Past 500 Years, (take a look at the comments for the post), Two Thousand Years of Growth: World Income & Population, and US Inflation: Annual Percent Change (1774-2007).

When I first heard about the Wall Street storm, I wondered how things could have Saul Hansell, the author of "Where Were the Quants? How Wall Street Lied to Its Computers".

Were the quants mesmerized by their faulty numbers, insisting that no hurricane was coming our way?

According to Hansell, part of the problem is that the computer models related to risk analysis in the financials simply did not account for the complex changes in the industry. The information entered into the computers was faulty, and in turn, the data modeling was flawed. Important decisions were made based on what streamed out of the computers. One of Hansell's quotes indicates that this was not a mistake:

“There was a willful designing of the systems to measure the risks in a certain way that would not necessarily pick up all the right risks,” said Gregg Berman, the co-head of the risk-management group at RiskMetrics, a software company spun out of JP Morgan. “They wanted to keep their capital base as stable as possible so that the limits they imposed on their trading desks and portfolio managers would be stable.”

As I mentioned previously, the Celestial Economic Sphere/Black Shoals Stock Market Planetarium was created in response to a 1998 collapse of a capital management firm that sent the London FTSE 100 spiraling downward. If you visit the Black Shoals website, you'll see that there was plenty of information that was available to the public at the time that outlined the economic problems going on at the time.

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