September 07, 2005
Book Review - A Civil War
When Charlie Weatherbie arrived to take up his first head coaching position, he was asked about Army-Navy. He'd seen other rivalries, he said. He knew about other rivalries, Oklahoma-Oklahoma State, for instance. Seemed no different to him. People at Navy spent way too much time worrying about Army when there was a whole season to play.
A subtitle to the Navy side might be "The Education of Charlie Weatherbie." Even going into the game, after Army Week and a whole season of "Beat Army," he was more focused on the winning season than on Beating Army. At the end of the game, Weatherbie broke down in tears, repeatedly apologizing to his players for a critical coaching mistake that probably cost them the game, taking responsibility in the best Academy tradition.
Talk about a transformative experience.
Army and Navy have been playing each other in football for 100 years, they've been fighting wars together for over 200. What Weatherbie didn't understand - what most people don't understand - is that while the Academies live to beat each other in football, they respect rather than hate each other. They save that for the Air Force, the kid brother who thinks it's about winning games.
The book is 10 years old by now, and the football programs have changed a little. In 1995, both academies had programs on the rocks. Army had a respectable program, but Navy had suffered through a couple of 1-win seasons. Both schools were in the lower tier of Division I-A, and were regularly scheduling I-AA teams to pad their win totals. Bowl games were fond, distant memories. Since, while Army's coaching has completely fallen apart, Navy has gone on to several bowl games and has recently dominated the series.
The Naval Academy was also suffering through a series of scandals - an Electrical Engineering cheating scandal, alumni involved in a murder-suicide, and three midshipmen killed in a freak car accident returning to the Yard. Army had won the previous three games by a total of five points, leaving this as the last chance for Navy's graduating firstclassmen to win The Game. A popular superintendent had reluctantly returned to Annapolis at the end of his career to right a ship gone horribly wrong.
While West Point as a whole didn't need the win as badly as Navy did, their coach probably did. And the Army football team didn't lack for compelling characters with compelling stories. Often these reflect the harsh and somewhat anachronistic discipline that the Academies impose on their underclassmen. One of the best concerns Army team captain Cantelupe and Beast, the introductory hazing new plebes go through the summer that the enter West Point:
If Feinstein has a problem, it's that there are too many good stories, with too many good personalities. Guys who have to work their way through Academy prep school to make it in. Guys who fail out. And the ever-present tension between the Corps or the Brigade as a whole, and the football team's special privileges.
He's covering the story of two teams through a whole year, and it's hard to make the narrative hang together. While Feinstein nominally tells the story through Cantelupe and Navy's captain Andrew Thompson, they provide more of a common thread than a consistent point of view. Also, as the above passage indicates, his praise for his editor is somewhat misplaced.
That said, it was probably a mistake for me to read this book in August.
I already can't wait for the last weekend in November.
August 30, 2005
The book isn't just for military leaders. Cohen makes it clear that while military leaders have enjoyed business success, and vice-versa, there's no secret to military command that works magic in the business world. Asking questions - asking the right - questions, and then following through, is what works.
August 04, 2005
The (Mis)behavior of Markets
According to Modern Portfolio Theory, the basis for most of modern stock market analysis, the crash of October 1987 shouldn't have happened in our lifetimes. In fact, it shouldn't have happened in the lifetime of the country. It should have happened, perhaps, once in the lifetime of the universe. It was just our good fortune to have lived through it. Now we can relax.
In fact, even as Robert Merton and Myron Scholes were accepting the Nobel Prize for their contributions, the markets were preparing to given the Royal Swedish Academy second thoughts.
So what went wrong? Why did MPT fail so catastrophically? What assumptions failed? Why do academics and researchers continue to base their research on those assumptions? And is there anything out there that might be better?
Benoit Mandelbrot, Father of Fractals, Creator of Chaos Theory, Maker of the Mandelbrot Set, has some ideas, and The (Mis)Behavior of Markets tries to bring them to the public.
I fell in love with fractals and chaos theory in college, when both it and I were young. I didn't pursue a career in physics, and left them behind, I thought for good. Ah, but life is strange, and just a couple of years before I decided to turn towards finance, so did Mandelbrot and fractals, and there there are, my old friends, waving me over to the table for drinks.
Actually Mandelbrot started out as a market analyst, but got sidetracked for a couple of decades, and is now turning his attention back to the problem that got him started: why historical cotton prices don't look anything like a normal distribution.
Mandelbrot spends the first half of the book explaining the roots of Modern Portfolio Theory, and why the simplifying assumptions simplify it out of relevance to the real world. He doesn't suffer fools gladly, and while he doesn't actually come out and call anyone a fool, he does let the read draw his own conclusions.
I've covered the problems with MPT is previous reviews and comments, so I'll just touch on them here. MPT is based on the early 20th Century work by M. Bachelier, who took his cue from Brownian motion, the random motion of particles suspended in water. That motion is normally distributed. Well, if dust motes, why not stock prices? Bachelier posited that stock prices moved some small amount each day, that the movement was normally distributed, and that there was no memory from one day to the next.
Why normally distributed? Well, like the guy who loses his keys over there in the dark, but looks for them over here under the streetlamp because the light's better, it's the only distribution that we can really find closed-form solutions for.
Modern Portfolio Theorists follow Merton in assuming that time is continuous. On the way down, or on the way up, the stock price hits every tick, (this used to be 1/8 of a dollar, now it's a penny), so you can always get the share price when you put in your order,
These assumptions don't hold. They're made largely because they're the only way to get to a closed-form solution to the math. What's more, anyone with eyes in his head ought to be able to see that they're not even usually true.
Mandelbrot starts from his distribution of cotton prices, and works from there. First, prices are more likely to follow what's called a Cauchy distribution. More peaked in the middle, and with much, much fatter tails, the Cauchy distribution is very ill-behaved.
From there, readers familiar with fractals will find themselves skipping large sections. Mandelbrot reintroduces self-similarity, scaling, fractal dimension, and so on. But he also introduces the idea of time-warping, warping along the x-axis as well as the y-axis. Do this, the produces some very realistic-looking charts.
And that's pretty much where the argument ends. Mandelbrot has produced charts that look right, and returns distributions that mimic reality, but he admits that it's purely descriptive. There's no mechanism, only behavioral speculation, and there's no real way, yet, to make money other than by selling books about it.
What are the implications for finance? Well first, with those fat tails, the Cauchy distribution is much, much riskier than the normal distribution, with the likelihood of ruin much higher. Second, the thing about the realistic-looking charts, that are indistinguishable from real charts, is that they really are random. Technical analysts, beware! Mandelbrot has some sympathy for the illusory patterns you see in the charts, but illusory they are. If I can produce something randomly that looks like the real thing, and you think you see predictive patterns in it that aren't there, what does that say about the predictive power of the patterns you see in real charts?
Mandelbrot also reminds us that he started to come up with this stuff just before the advent of MPT, but that in the trendy world of finance, his uncertainly was overshadowed by MPT's promise of managing risk. He reminds us more than several times, and it does get a bit tiresome. There's nothing the matter with enjoying being right, but even the disinterested observer, who's only looking for something better, get weary of hearing "I told them so."
He make up for it, though, but devoting the last chapter of his book to an uncritical discussion of current research based on his work. He's boosting these guys, with no expectation of recompense, in the best academic tradition, and he deserves credit for that. If he can use his name and popularity to create a community pursuing these ideas, more power to him.
We are reminded that this is a field still in its infancy, not really allowed to grow by an industry that thought it had the magic key. Retrenching and pursuing this line of thought, which currently offers little if any profit path, is hard. But it's better than building on sand, on a coastline whose length you can't even measure.
August 03, 2005
Another New Review
James Surowiecki's The Wisdom of Crowds is finally reviewed. I finished it weeks ago, but, you know how things are.
February 17, 2005
The Blink review is up. It's a good book. But then, I only read good books.
January 18, 2005
Good to Great
Another week, another book review. I've finished reading Jim Collins's Good to Great, about how good companies transform themselves into great ones. Collins also wrote Built to Last, a study of the great companies, some almost 200 years old. The later book isn't concerned with great companies as such, but how companies were able to overcome the inertia of being good enough, and move on to being great. Given that the thing has been on the business best-seller list since the Nixon Administration, it hardly needs another review to pump up sales.
The thing about Collins's studies that distinguishes them from b-school case studies is their time scope. Usually, a b-school study will look at a decision point or a problem, and ask the student to develop and defend a solution. At the end, the professor tells the class what happened, but even cases with strategic scope usually only focus on one aspect: alliances, say, or positioning. While a typical case study might follow an industry for half a decade, Collins's work traces a company's success or failure over 30 years. And since he thinks institutionally, rather than financially, his results seem applicable to all sorts of organizations and even individuals.
For people who like big ideas (cough, Jared, cough), this is a terrific read.
December 31, 2004
A full review of Hugh's Blog is up. I haven't read any of the other reviews, so if this repeats what you've seen, it's not derivative, just unoriginal.
If you're already here, you know a lot of the facts. But Hugh's an institutional and contextual thinker, and his book puts the last year or so of blogdom into those perspectives. If you want a good review of how we got where we are, and some informed speculation on where we go from here, it's the book for you. And if you're familiar with blogs, and trying to figure out how your business can benefit, Hugh's got some ideas on that, too.
Check it out.
December 29, 2004
Look What Came in the Mail
I feel like Peyton Manning in that commercial.
December 27, 2004
Well, How Would You Move Mt. Fuji?
December 11, 2004
Pour Your Heart Into It
Spending Shabbat here in Frisco (Colorado, not San Francisco, as some Alliance Members seem to think), gave me time to finish off Howard Schultz's Pour Your Heart Into It, his memoir of building Starbucks from the ground up.
It's a good book. Virtually every course I've taken in b-school shows up in some way. But the heart of the book is about company values - for the product and for the employees. It's 7 years old now, but given Starbucks's ongoing growth, it doesn't seem to be dated.
On a political note, this is the same Howard Schultz who turned over $50,000 of his own money to Terry McAwful in 2000, and $2K to Tom Daschle in 2004. Fortunately for the country, he seems to be a much better businessman than political investor.
December 04, 2004
What's this? Sharf reviewing a book that's been published in the last year? Much less the last four months? Hey. a Costco membership can work wonders. And with Jared jabbering on about how Hillerman is his hero, I figured I'd better beat him to the punch.
On the other hand, I just got the first book in the Baroque Cycle, Neal Stephenson's Quicksilver, which was only written last year. Still, it's 916 pages long, not including Bonus Author Postscript Material, so don't expect a review for a while.
December 03, 2004
"Churchill on Leadership"
A full review of Steve Hayward's terrific character study is available here. But for the moment, consider Hayward's Four Keys to Understanding Winnie:
1 - Plain Speaking
There's a lot more, but, um, do these remind you of anyone?
November 29, 2004
The Name of the Rose
I'm not a big fiction-reader. Yes, I understand the uses of literature, but with so much to understand about the world, I don't have much time left over for novels. I re-read Orwell's Coming Up For Air every spring for a few years. As a kid, and later as an adult, I loved the Foundation Trilogy, before Asimov killed it through absolutism. Science Fiction was a fiction with ideas, and the fact that those three books worked for me at both ages shows the importance of plot, as well as "substance." (Short stories are different. Part of the reason I like Joseph Epstein's short stories is that they read like his essays.(
Which brings us to The Name of the Rose.
Let's face it, the Middle Ages are cool. And Eco, for all of his weird politics later on, let you inhabit them the way you, as a reader, would want - with other readers. Europe never really stood still, of course, be here's that last gasp of tranquility and misery, just before everything started to change.
Eco clearly admires Roger Bacon, an English monk with a scientific bent. He's looking forward to the scientific revolution (a revolution that the late Norman Cantor suggests was cut short by the plague). He fills the book with ideas - life in a medieval monastery, Artistotle, the destructive power of humor, superstition - but keeps the plot moving along at a brisk pace.
Eco is, in fact, one of the authors who helped revive plot, when it looked like novels were headed for permanent prison in their characters' inner lives. He discusses both plot and plotting in a slim little volume, Postscript to the Name of the Rose, which came out several years after the original. If you can get your hands on it, it's worth reading.
You read Name of the Rose once for the mystery, and again for the texture. A great novel, indeed.
There are more reviews here, but they're all non-fiction.