Lessons Learned 2009-11-29

It was Thanksgiving week, but it’s time to review the week!

1) Your late 20s is the real coming of age

The one thing I realized this week is that your late 20s are much more significant than your adolescence. While you shape habits and lifestyle in your teenage years, you’re making a lot of big decisions that can’t easily be reversed in your 20s and a setback or wrong decision could cost you years. If you make the wrong career decision or love the wrong person or buy the wrong things, you could lose a lot of opportunities. I suppose the problem is that people become very different, so there aren’t as many good generalizations to be made as there are for teenagers, where themes like perception, acceptance, and first love are more universal. I outlined some of the skills that I think are fairly common though – ability to sort out differences, the collar of money, and avoiding big mistakes. Happiness is very hard to define, but it involves a well-rounded sort of contentment. You don’t want to neglect friendship, money, love, career, or passions, because sometimes you can’t get them back.

2) As a man, you want wife and mother in law to get along

It was only recently that I realized how important this was. If you’re a girl and you’re reading this, it seems obvious – ugly relations with the in-laws will mean rocky times at family reunions and in Asian cultures, can really make the wife miserable. But as a man, it’s pretty important that you not get stuck between a war between your mother and your wife, because both will expect you to take their side and will be ENRAGED if you even sympathize with the other. I don’t think it’s as important for the husband to get along with his in-laws, but it’s nice to have two families bonded well together. In short, marriage isn’t just between two people, it affects two families. If they differ fundamentally on issues, it can cause a lot of trouble. It’s something to sort out before you put the rings on.

If you haven’t guessed where the bad blood starts, it’s usually over how to discipline a child and how hard to push expectations. Most disagreements up to that point can be suppressed to a degree, but people will go to war over their kids.

3) Calorie counting will depress you

The more ways I find to keep myself accountable, the more I realize that I’m not nearly as good as I thought I was. Keeping a count of calories is revealing a fatal love of juice and really an addiction to rice. Aki usually eats 1/4 cup of rice and feels full, while I pound the other 1.75 cups of rice. Except for the part that 1/4 cup of rice is considered a full serving at 150 calories, so I can eat like 1050 calories before I even get to the meat. One interesting side effect is that it has caused me to fall in love with kimchi, which is filling, tastes pretty good, and a jar of the stuff is like 80 calories. I now shudder to think about what I was doing when I could eat 2 cups of rice, a bowl of ramen, and a can of Spam – and think about a package of mochi ice cream for dessert.

An interesting side mystery is that my metabolism has slowed down severely and I’m not convinced that my age has everything to do with it. I think my multivitamins may be having an effect. My feet are always ice-cold these days and I don’t think I have as much energy as I used to, even though my multivitamin claims to have extra B vitamins for an energy boost. I might stop for a couple weeks and see if it picks up.

Avg sleep: 7.71 hrs
Avg calories: 1772

Goals from the week (brace yourself, it’s not good):
1) Run 12 miles – did not run at all
2) Write TKD papers – success!
3) 300 finance questions, 200 other questions – fell a bit short but not by far
4) 750 pullups, 1500 pushups, 8000 situps – not even close, maybe half
5) tuck planche, handstand for 15 seconds – I’m at maybe 5 sec, it’s harder than I thought
6) learn to juggle 4 balls – maybe for 2-3 seconds, it’s not good
7) job searching – eh
Verdict: Too much falling short, scale back or push harder

Quote of the Day 2009-11-29

Why, O my friends, did ye so often puff me up, telling me that I was fortunate? For he that is fallen low did never firmly stand.

-Anicius Manlius Severinus Boethius, Consolation of Philosophy

Added trivia: Boethius invented the wheel of fortune, as a philosophical theory of history that a turn of the wheel could turn poor men great and great men poor

Lessons Learned 2009-11-22

It was a rough week and there will be a lot of changes in the future. Let’s review what I learned.

1) An ounce of prevention is better than a pound of cure

If you feel sick or injured, take the time to assess the problem and treat it. It’s usually much easier to treat a minor problem than to suffer through the consequences. Keep in mind that professional athletes play through pain, but they have a team of doctors to monitor and test them too.

2) Bad statistics should be unforgivable

Statistics is the scientific tool of the modern age because it’s a way to measure uncertainty, which is what distinguishes it from guessing, sorcery, and religion. But the application of statistics is still the Wild West, a hodgepodge of various disciplines using whatever tools are most convenient for them. As such, you should view statistics with an extremely critical eye: what is being asked, is the sample truly random and a representation of the larger group, and does the data support the conclusion. This is especially important if the conclusion is being used for things like money or power, something that’s worth lying about.

3) Optimism and pessimism

An interesting feature I read is the differences between optimism and pessimism. Optimism is associated with qualities like creativity, flexibility, and cooperation. Pessimism is associated with problem solving, attention to detail, and careful thinking. It’s not about striking a balance because that’s impossible, the two qualities are mutually exclusive. What’s important is the timing. There are times to be optimistic and other times to unleash the pessimistic qualities. Either through luck or thinking ahead, what separates success from failure is often choosing the right attitude and using its qualities.

Goals from the week:
No review, I was sick. It would be brutal.

Quote of the Day 2009-11-19

We are suffering from a plethora of surmise, conjecture, and hypothesis. The difficulty is to detach the framework of fact – of absolute undeniable fact – from the embellishments of theorists and reporters.

-Sherlock Holmes, Silver Blaze

Ulysses – Alfred Lord Tennyson

The Great Wave

An excerpt:

Though much is taken, much abides; and though
We are not now that strength which in old days
Moved earth and heaven, that which we are, we are;
One equal temper of heroic hearts,
Made weak by time and fate, but strong in will
To strive, to seek, to find, and not to yield.

Milton: A Poem – William Blake

W. Blake, The Angel of Revelation, ca. 1805

From the preface:

And did those feet in ancient time,
Walk upon Englands mountains green:
And was the holy Lamb of God,
On Englands pleasant pastures seen!

And did the Countenance Divine,
Shine forth upon our clouded hills?
And was Jerusalem builded here,
Among these dark Satanic Mills?

Bring me my Bow of burning gold;
Bring me my Arrows of desire:
Bring me my Spear: O clouds unfold:
Bring me my Chariot of fire!

I will not cease from Mental Fight,
Nor shall my Sword sleep in my hand:
Till we have built Jerusalem,
In Englands green & pleasant Land.

Quote of the Day 2009-11-12

We stand equally against government by a plutocracy and government by a mob. There is something to be said for government by a great aristocracy which has furnished leaders to the nation in peace and war for generations; even a democrat like myself must admit this. But there is absolutely nothing to be said for government by a plutocracy, for government by men very powerful in certain lines and gifted with “the money touch,” but with ideals which in their essence are merely those of so many glorified pawnbrokers.

-Theodore Roosevelt

Self-Study Course for Finance

Sort of a bad title, but here are the stages, courses, and best textbooks that I find are necessary to advance oneself through the world of finance. Mastery of a stage can be assumed by passing certain standardized tests or through the more obvious path of passing the class in school. Standardized tests have the advantage of being uniform where academic standards can be different between schools or professors, while school or work provides a better structure to prove your competence or find a niche. Most university curricula are centered around pushing students through each level in a year or so. Students are expected to develop their learning capacity and discipline so as to accommodate the more difficult and larger workloads that higher levels require.

This is really just for me to create a structure for myself and hopefully lay the groundwork for a neat tree diagram which will make my goals clearer. It borrows heavily from a guide to being a pure mathematician, Amazon, and a variety of other sources on Google. I’ll use the level system to provide a basis for difficulty. Level E is fresh out of high school level, going up to A, which would be doctorate level. There will also be level S for those extraordinarily difficult subjects that are unnecessary unless you’re a masochist, an inventor, or a fraud.

Level E/D – Elementary stuff: calculus, probability, economics

This is for the intro level courses where professors are correcting bad habits learned from high school, where reasoning was usually just a lot of hand-waving and magic. For most students, this means taking a modestly formal class that teaches complex numbers, systems of equations, limits, delta-epsilon proofs, exponential functions, independence, conditional probability, expectation, and the basics of supply and demand. For people who want to learn programming, discrete math will lay the foundation for logical thinking. Learning these topics is crucial later on – gaps in knowledge about calculus or probability will really hurt when the math gets much heavier.

Standardized tests: SAT, AP exams

Spivak – Calculus (probably the best and most rigorous book out there)
Stewart – Calculus: Early Transcendentals (the standard with pretty pictures and lots of problems, but not the most rigorous mathematically)
Hardy – A Course of Pure Mathematics (if you really want to sharpen your logical skills)
Anton and Rorres – Linear Algebra with Applications (first few chapters)
Chung – Elementary Probability Theory (the best, although Ross is also good)
Mankiw – Principles of Economics (good standard text, but lots are pretty good)
Halmos – Naive Set Theory (very difficult but good for proofs and set theory)
Graham, Knuth, and Patashnik – Concrete Mathematics: A Foundation for Computer Science

Level C – Beginning the Education: linear algebra, multivariable calculus, statistics, micro/macro-economics

Most universities structure their math requirements to encourage students to choose their specialty, but this allows them to neglect portions that may be important. A balance should be struck between finding one’s strengths to choose a major and building a proper foundation for higher education. This is the area that is most dangerous, because a lot of authors and professors like to go back to the bad habit of hand-waving rather than making students take the difficult transition to rigorous and formal thinking. If you got the books from Level E that I suggested, most of them are good enough to carry you through here too. Topics to focus on are vectors, linear transformations, matrix algebra, orthogonality, double/triple integrals, Green’s theorem, Fourier series, basic hypothesis testing, distributions, maximum likelihood estimators, marginal cost/revenue/benefit, market structure, business cycles, and exchange rates.

If you’re programming (and sooner or later you’ll have to learn this), you should be learning how to use Excel, Access, and maybe a programming language; you should be able to know what programs and components are good and bad for your computer and how to fix minor problems.

Standardized tests: real estate exams, GRE/GMAT (math portion)

Apostol – Calculus Vol 2 (very dry and technical, but very good – better than Stewart, which will get you here too)
Boyce and DiPrima – Elementary Differential Equations and Boundary Value Problems (the standard text along with Anton and Rorres)
Freedman, Pisani, and Purves – Statistics (excellent overview of all topics in probability and statistics)
Ott and Longnecker – Statistical Methods and Data Analysis (good overview of statistics with a hands-on approach)
Ross – A First Course in Probability (pushes you farther than Chung)
Varian – Microeconomics (not the most intense but the best conceptually)
Mas-Colell – Microeconomic Theory (the most intense, for serious economists only)
Mankiw – Macroeconomics (the easiest to read and understand)

Level B – Mature education: analysis, statistical inference/computing, finance, accounting

This is it. The honest start of your education. Don’t expect “plug and chug” to work any more, because you have to know what you’re doing and why. This is an intense part of the field, because finance and accounting involve cramming a LOT of stuff into your brain. At this point, authors will often skip steps and calculations with the dreaded note “trivial proof left to reader”. It sounds mean but the serious student will spend the time understanding why it’s trivial by filling in the gap. It is a tool that will serve well later on when presented with new ideas, which must be critically regarded. If you have been, you should stop being impressed with resumes and school names, because you do not want to be brow-beaten into beliefs just because someone from Harvard treats you like an idiot. If their ideas don’t flow logically, then you should learn to identify it and point it out. Mastering this level would provide a strong foundation for graduate school and most likely marks the end of an undergraduate career. Topics covered are metric spaces, compactness, measure theory, Markov chains, parametric and non-parametric tests, time value of money, financial ratios, capital budgeting, managerial decisions, and derivative products.

On the programming side, you should know how to build and maintain a network, how the internet works, and feel comfortable with a programming language and/or software packages such as R. You want to be very strong at C++, Java, Matlab, or R. Don’t spread yourself thin learning a little bit about all of them.

Standardized tests: CMA (first 2 levels), Actuarial exams P and FM, Series 7

Ross – Introduction to Probability Models (a more thorough version of his other book, esp. introducing stochastic processes)
Rice – Mathematical Statistics and Data Analysis (lots of good illustrations and lots of gaps in proofs – if you do not have a good grounding in statistics, you will get hammered)
DeGroot and Schervish – Probability and Statistics (detailed explanations and points out common misconceptions)
Rudin – Principles of Mathematical Analysis (Baby Rudin, but still not for the faint of heart)
Brealey – Principles of Corporate Finance (a Bible in the field for MBAs and finance students)
Hull – Options, Futures and Derivatives (a common text, weak on math but a good introduction to derivatives)
Joshi – Concepts and Practice of Mathematical Finance (best intro book out there)
Horngren and Harrison – Accounting (another great intro book, but this is a wide open field)
Garrison, Noreen, and Brewer – Managerial Accounting (best budgeting text out there)

Level A – Grad school/Pro: regression, time series, martingales, modeling

These are the bread and butter tools that analysts and bankers use to make financial decisions. It can be mathematically rigorous but the real skill is to turn these advanced concepts into readable facts by the average person or more importantly, convenient packets of numbers for accounting purposes. These are extremely powerful in the right hands, as can be seen with examples like Enron and the housing bust, and if you didn’t follow my advice before about being impressed with resumes, it’s easy to be convinced that what you’re doing is very profitable, very effective, and very safe. The necessity for rigorous thinking here is absolute, because the translation from tremendous mathematical data into simple fact means that there’s a lot of room for error, misconception, and poor understanding. Remember that if statistical results seem to fly in the face of common sense, they’re probably wrong. Always moderate your faith in science with a healthy dose of non-mathematical skepticism. But if you’ve reached this level, you’ll have a graduate degree and/or a well-paying job.

The topics I listed above are the ones that best relate to advanced statistics and mathematical finance, but it’s very possible to have gone the less mathematical route through business school or law school. If you’re still programming at this point, you should build your own start-up or sell your programs.

Standardized tests: CPA, CFA, EA, NASD Series exams, bar exam

Casella and Berger – Statistical Inference (text used widely in grad school)
Kutner, Nachtscheim, Neter, and Li – Applied Linear Statistical Models (THE book on regression)
Tsay – Analysis of Financial Time Series (not easy, but a great book)
Chung – A Course in Probability Theory (the adult version of his elementary work)
Williams – Probability with Martingales (not an intro prob book, but an intro martingales book)
Chung – Introduction to Stochastic Integration (read and digest Williams first, or you will regret it)

Level S – Mathematicians/Physicists with a career change: interest rate modeling, credit derivatives, numerical techniques

The list is pretty much over, and you’d only learn this stuff if you were a quant, Einstein, or trying to commit suicide with math. At this point, you would be beyond exams because you would almost certainly have a PhD. Proving yourself at this point is a matter of accomplishment, publications, or millions of dollars. If you wanted to swindle the investing public, it is probably not difficult for you to scare up billions of dollars. You don’t fear Congressional subpoenas or the Supreme Court of the United States. Even for the so-called Masters of the Universe on Wall Street, the prospect of seeing those things makes their testicles shrivel into their abdomen.

Just remember that nothing hits harder than the ground. If something goes wrong and you melt down the US financial system, your career is effectively over and you should plan to die before you ever see the inside of a federal penitentiary (e.g. Ken Lay).

Brace – Engineering BGM (Brace is the “B” in BGM, because he invented the LIBOR market model that forms the basis for global capital flows. Brace believes in “less is more” when it comes to explaining things, which is why he’s smarter than you are.)
Schonbucher – Credit Derivatives Pricing Models: Models, Pricing and Implementation (an explanatory text for pricing credit derivatives, a booming industry before the financial system went belly-up, so either it’s all junk or everyone was doing it wrong)
Glasserman – Monte Carlo Methods in Financial Engineering (definitive reference on Monte Carlo methods in finance)

Level 0 – Nonessential reading and movies

If you want to know about the trials and tribulations of working in finance, here are some great books. A lot of these are cautionary tales about taking mathematical models too far and the excess of both work and play in the financial world.

Derman – My life as a quant: reflections on physics and finance (takes you through his career in physics and finance, and he lived through some very interesting times and was an interesting character. You see the egos in Wall Street and the vicious schadenfreude.)
Lewis – Liar’s Poker (shows the excess of Wall Street in the 1980s. Read by everyone who’s ever wanted to get in the money game)
Lowenstein – When Genius Failed: The Rise and Fall of Long Term Capital Management (story of statistical models blowing up a hedge fund. Not an exact sequel but a lot of overlap with characters from Liar’s Poker)
Taleb – Fooled by Randomness/Black Swan (two books, first details that most skill is masking extraordinary luck, second shows you that most mathematical theory and science is a house of cards built on sand. Writing is turgid and repeats itself ad nauseum, but it’s worth reading if nothing else to provide an exercise in why you think Taleb is an incredible douchebag)
Enron: Smartest Guys in the Room (documentary about the end of Enron. You get to see that incredible assholes are common in finance and how tenuous the system is between statistics, economics, and law when placed in the hands of very smart and very greedy people. The money game attracts sharks and most regulators and lawmakers are just blubber)