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NSA and the Fat Tail

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Sometimes, the most intriguing examinations of current events stem from an analysis that eschews the political mindset and replaces it with a different style of thinking.  RantAWeek adopted a mathematical tone for last year’s analysis on the connection between Olympic medals and GDP.  Similarly, a use of mathematical concepts can benefit a discussion concerning the NSA’s spying on the communications of world leaders.

The mathematical concept in question is the fat tail.  A fat tail describes a statistical result far from the expected value that nonetheless has a reasonable chance of occurring.  Mathematicians often like to simplify calculations by ignoring outliers, but the whole point of the fat tail is that these outliers really matter, and ignoring them is dangerous.  Take the financial markets as an example.  Classical views of the financial markets held that daily changes in large stock indices like the Dow Jones followed a normal distribution, which is characterized by ‘skinny tails’ that make large changes a statistical improbability.  However, since records began for the Dow Jones in 1896, the index has experienced more than 38 days with a daily price change greater than 7%.  Assuming a normal distribution, large price changes occurring with that frequency is almost statistically impossible.  Financial traders trusting in the assumed impossibility of rapid price swings would have seen their theory, and their market holdings, disintegrate before their eyes on Black Monday in 1987, when the Dow Jones dropped 22.6%.  The fat tail in the financial market had manifested itself in a nasty way, wiping billions of dollars off balance sheets across not only the country but also the world.

So how does this all connect to the NSA scandal?  The NSA’s strategy in spying on the communications of world leaders was to gain an information advantage.  In other words, there was an expected benefit.  The U.S. government was able receive some additional intelligence on the thoughts of world leaders through the implementation of this spying network.  On the other hand, and equally important to note, is that on a macro scale, this benefit was relatively small.  After all, President Obama summed up the power of diplomacy in garnering information by saying,  “…if I want to know what [German] Chancellor [Angela] Merkel is thinking, I’ll call Chancellor Merkel.”  Even without the massive spying program, the U.S. government would have been able to acquire most necessary information through less secretive strategies.

Obama’s remarks seem rather hollow in retrospect, as Angela Merkel has now accused the United States of spying on her internal communications to gain information.  However, the extent of the alleged spying extends well beyond Germany.  France, Argentina and Mexico are all accusing the U.S. of spying on their leaders.  All the news begs the question, why did the NSA pursue such a extreme spying program if some of the benefits were limited to extra information about countries that are already our allies?

The answer- they forgot about the fat tail.  The risk/reward scenario played out well when it was assumed the spying program would be safe from international criticism because it could never be reported by the media.  But in doing so they ignored the possible outliers in the fat tail.  This mistake became clear when Edward Snowden’s leaks began, and the unexpected result of international news coverage greatly changed the situation.  The NSA would never have embarked on the program if they knew the damage Snowden’s leaks would cause.  But that’s what makes the fat tail so difficult to take into account, it is by definition unexpected.

Even though a fat tail event is not expected to occur, the challenge lies in planning for them.  That way, embarrassing situations like the one the NSA currently finds itself in can be avoided.  Luckily for the United States as a whole, most countries are simply accepting the NSA spying as an inevitable consequence of the information age.  While there has been some backlash, it has not been nearly as devastating as it could be.

Still, the NSA got lucky with the response.  Not all fat tail scenarios end as well.  And that’s why when any policymaker makes an important decision, they should always consider the fat tail.

Filed under Domestic, Technology
Oct 27, 2013

Facebook’s Floundering Stock

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This month, shares of Facebook’s stock have fallen below $20, just over half of the Initial Public Offering (IPO) for Facebook, $38. Yet, what happened to a stock that at one point caused so much excitement and how can its problems be remedied?

One of the biggest problems for Facebook started early, with a failed IPO. After its IPO, many realized that Facebook was drastically overpriced. This meant that many true investors simply abstained from Facebook. While there was excitement, the major players in the market forced the stock down at its inception to a more reasonable price. Yet, since this, the price has continued to drop. There are also a number of purely financial reasons, like poor earnings reports, but here, I will focus on the problems within the company.

Much of it has to do with a transition within Facebook. For a long time, Facebook has simply been able to feed off of growth. They made money as the network grew simply because it was growing so quickly. Yet now, Facebook has reached a saturation point. It has mostly infiltrated many developed markets, and infiltrated, to the extent it can, the developing markets. While it still has growth, the growth is slowing. With this, Facebook, in order to maintain profitability, needs to change its advertising revenue. It can no longer depend on advertising revenue to grow with the expansion of the network, but rather must make its advertising more profitable. Facebook continues to change and tweak their system to make it better, yet advertising is the one area that is not improving.

But the underlying cause of this largely comes down the management. As a private company, funded by a few investors, Facebook, led by Mark Zuckerberg, was able to basically run free. It could continue to be on the bleeding edge technologically, and go whatever way Zuckerberg saw fit. The network, from the beginning, had Zuckerberg’s fingerprints all over it. Yet now, with saturation, the company must shift focus. Additionally, being publicly owned, Zuckerberg needs to listen to his investors. But he is instead caught in the crossfire between bleeding edge technology and sound business choices. This means that his performance as CEO has been lackluster, both technologically and business-wise.

Aside from revenue, many investors and consumers are wary of Facebook’s privacy policy. Facebook has updated their policy many times over the past few years, each time restricting privacy more and more. Yet now, as a publicly owned company, they will find that they will not be able to do so. Additionally, many are afraid of what Facebook might do with all the information it holds. Facbeook is essentially a receptacle to peoples’ lives; it holds all sorts of vital information. For this reason, Facebook’s privacy policy has been a great source of fear for many, leading some investors to be even more wary of it.

So with Facebook in this state, what can they do? The issue of privacy can simply be remedied by putting in steps to lock down people’s privacy and become less of a walled garden. However, the issue of transitioning, both from its constant growth as a network and from a privately owned company, is a bigger issue. Mark Zuckerberg is undoubtedly a technological genius, but he is just that, not a business guru of any sort. While he has grown Facebook privately, as a publicly owned company Zuckerberg is not the man for the job. What Facebook should consider is a similar process which Google went through in 2001. While before Google’s 2004 IPO, in 2001, Eric Schmidt came in and took over as CEO of Google, after having managerial experience as CEO of Novell and president of Sun Technology Enterprises. While founders Larry Page and Sergey Brin maintained primary control over the technological direction of Google, Schmidt handled the legal and business aspects of Google. Page and Brin, like Zuckerberg, were simply programmers, not businessmen. Like Google, Facebook could benefit from having a more business-minded person step in as CEO and make sure that Facebook is on the right path. This will not only ensure Facebook remains profitable, but also boost investor confidence.

Facebook is becoming a ubiquitous social network, yet if they continue under the poor business direction of Mark Zuckerberg, they will flounder. However, by simply inviting in a businessman to help get Facebook on the right path in its turn around to a developed network and a public company, they will excel. The stock has fallen not because of a lack of technological innovation, Facebook remains on the bleeding edge, but because of a company that is not yet ready for its new chapter.

 

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Aug 27, 2012

The Revolution Paradox

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The Computer Age has revolutionized modern life, but it has also revolutionized the act of a revolution itself.  Take a look at the chart below, and discover the changing nature of revolutions.

 

Revolution              Year                Notable Leader

American                    1775                 George Washington

Russian                       1917                 Vladimir Lenin

Cuban                          1953                 Fidel Castro

Arab Spring               2010                 Facebook???

 

All four revolutions follow the same basic beginnings: a group of people who feel wronged rise up against the government that is oppressing them.  However, the Computer Age has ushered in the leaderless revolution.

Think about it.  In the first three revolutions above, the group of oppressed people had a leader to rally around.  When the revolution was over, that leader took control.  Whether the revolution involved a transitional period (American Revolution), a coup (Russian) or a prolonged insurgency (Cuban), the end result was basically the same.

The Arab Spring Revolutions, engineered largely through social media, often did not have the luxury of a leader ready to take power.  This has handicapped the revolutions, as the lack of a leader who already has gained widespread popularity hampers both the formation and the function of post-revolutionary governments.

The prime example is Yemen.  Protesters were able to force President Ali Abdullah Saleh out of power, but the revolution failed to create a new leadership figure.  Ultimately, Saleh’s vice-president took control of the country, a less successful end result than many of the protesters hoped for.  What could be considered a coup (it was a shake up of power amongst the elite) was far less successful in Yemen than Lenin’s coup in Russia.

Another good example is Egypt.  A successful revolution deposed President Hosni Mubarak, but the wake of the revolution left no leader ready to take control.  This forced a transitional period led by the military.

At first glance, Egypt’s transitional period can be compared to the transitional period the American Revolution faced after its completion.  However, under closer inspection, this comparison fails.  After the Americans noticed the failings of their Articles of Confederation, they were able to create a stronger central government with Washington as a ready executive.  The Egyptian transitional period did not have an experimental governance system like the Articles and was instead overseen by the military.  Sure, the transitional period is coming to an end, but the military still seems dominant.  Additionally, new President Mohammed Morsi may have narrowly won an election, but he lacks the near-universal popularity Washington had upon starting his administration.  The competitiveness of the first round of the presidential election proved that no one candidate stood out with the Egyptian people.  Washington, on the other hand, was elected unanimously.

Tunisia stands as an interesting example because its revolution was by far the most successful of the Arab Spring Revolutions to date.  President Ben Ali was deposed after protests, but a new leader in Moncef Marzouki was quickly elected.  The success of Tunisia’s revolution lies with the previous roles of Marzouki himself.  Before the revolution, Marzouki was a political dissident and outspoken critic of Ben Ali, making him a sensible leader to take over after Ben Ali’s ousting.  More than any of the other Arab Spring Revolutions, Tunisia follows the example of historical revolutions.

Perhaps the most important lesson can be found in Syria.  Not following the classical example of a revolution like Tunisia, Syria’s revolution still lacks a leader and sufficient organization.

The Syrian revolution, as a sort of insurgency, could be compared to its Arab Spring counterpart in Libya or to Castro’s Cuban Revolution.  But unlike the Libyan rebels, who were able to organize under a transitional council, the Syrian rebels are still mostly unorganized.  The organized Libyan opposition was created because the rebels had a stronghold in the important city of Benghazi.  Lacking a major stronghold, organization is a more difficult task for the rebels in Syria.  And unlike with Castro in Cuba, there is no dominating figure in the revolution.  Apparently, organization is far from guaranteed in the modern age of revolutions.

Technology, as seen in many of the countries affected by the Arab Spring, is changing the very nature of revolutions.  By examining the changing courses of revolutions, we can better predict their outcomes.  After all, the world is constantly changing, and it makes sense that revolutions should change with it.

UPDATED: JULY 31, 2012

Jun 9, 2012

The Revolution Will Be Blogged

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I recently wrote an essay about the rising influence of heterodox economic theories with the internet acting as a catalyst. It is very long so I did not want to make it a post itself, however it is it’s own page. I hope that you read it, and get a better understanding of the two theories I discuss: Neo-Chartalism and the Austrian School, as well as Keynesian economics, which I also discuss. Enjoy!

 

Feb 27, 2012

Steve Jobs

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Last week, the world lost a true visionary in Steve Jobs. For those of you who know me, you know I have never been fond of Apple. My reason for this is simply that it will not do what I want to do. But Steve Jobs realized that he did not have to market to everyone, only to the masses. I am not your average electronics consumer, I am a programmer and hardware enthusiast, but I am a minority. rather than cater to those like me at first, as many technology companies did, Jobs noticed that other people might be drawn to use computers and electronics, if only they could figure out how to use them. There was a large learning curve associated with using technology. For enthusiasts, this learning curve was well worth it, but most people could not see over it to see the advantages. But Jobs did something revolutionary, and did it well: he lowered this learning curve. He made devices that were as close to dead-simple as anyone got and also made them beautiful.

When watching Jobs keynote, you see him use words like “magical” to describe aspects of devices. This word choice is poked fun of by many, but the word seems fitting. In all of his systems, there are levels of abstraction in place that make it hard for someone to comprehend what is happening at the lower levels. But these levels of abstraction are what make it easy to use and beautiful. These levels make it so that you do something as you would expect to, and somehow it does what you want it to. When it does this, it acts “magical.” The levels of abstraction act like a magician’s cloak, making something seem truly magical just by hiding what is going on from your view.

With this “magic,” Jobs has acted as a major catalyst to jump start the consumer electronics industry. Jobs made what was a niche industry to appeal to the masses, allowing the development and growth of this industry to what it is today.

While the death of Steve Jobs does not make me any more fond of Apple, it does make me reflect to what Jobs has done for the technology industry as a whole. The technology industry is probably the industry that I personally appreciate most, without which the words that you are currently reading would not be here. The spread of the industry is great, and it’s impact on our life is undeniable. When examining the history of this industry, there are a few forefathers that one can point to as true visionaries. Amongst these, we have lost a man.  However, the impact of this man lives on in every one of our daily lives. -MD

Filed under Technology
Oct 11, 2011

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