How can we differentiate between misuse of models and over-reliance on the same?

Misuse and over-reliance are both risks, but they are not the same, IMHO.

Over-reliance is not accounting for the risks of erroneous conclusions, given proper use of the models. That is the risk resulting from the fact that every model is just an approximation of the "the real world."

Misuse, on the other hand, is using a model, not as it was intended.

For instance, the recently prevailing assumption that the real estate prices were to go up, indefinitely, was an example of a misuse of statistical analysis. The statistical insignificance of observing the process for only a couple of decades constitutes the improper use of statistical analysis, given the prior knowledge of cyclical nature of economic process (to say the least.)

This, in turn, empirically supported the hypothesis that creditworthiness of borrowers was not very relevant in assessing the risks embedded in RMBS and related structures. The same assumption was being made by the rating agencies in assigning ratings, which resulted in misuse of other models.

That is, statistically insignificant series of observations of real estate prices led to using erroneous inputs into various models. This amounted to the misuse of statistical analysis and resulted into misuse of other models.

The use of statistics for the purpose of selling an "alternative" approach to measuring risk to the financial industry, which was based on disregarding cyclical nature of economic process, but concentrated on very insignificant series of observations, was a misuse, in my opinion.

The cyclical nature of economic process has been observed for centuries, and, as such, presents an assumption of a much stronger statistical significance than that of real estate prices going up indefinitely based on a couple of decades worth of observations.

Statistics is used to separate significant from insignificant (relative to the context of a study/method.) Trying to push an insignificant set of facts, as the basis for a conclusion that helps achieve an ideological objective of "American Dream" (a house for everybody) plus fame and recognition for those who pushed the idea, is not, principally different from some more subtle instances of misuses of scientific methods my Marx, Trozky, at al.

Over-reliance on models/methods is, in fact, a form of misuse (in the most general sense of the term "misuse").

Although, the usage of the terms in this context can be compared with the usage of the terms over-reliance on funding, and misuse of funding. There should be a way to differentiate between the two.

One is not knowing/accounting for the limitations of the approach in a particular context, while the other is using the object of the expression (be that funding or models/methods) for the purposes, for which it was not intended.

On the other hand, if "misuse" is too generic a concept, what would be the name for the types of misuses that are not over-reliance?

What would you say about plugging the assumption (and derivations thereof) that real estate prices would go infinitely up into any model? The model stays the same, whether you do that or not. How is that the model's fault? Is this misuse or over-reliance?

The Power of Uncertainty

Projects fail all the time because we unwittingly bake the end solution into our initial objective. Rather than enduring an uncomfortable (but highly necessary) period of ambiguity, we fall into the trap of limiting our creativity by setting a project goal that is too narrowly defined from the start.

Take the story of the American scientists and the invention of the “space pen,” for example. The scientists were given the task of designing and creating a pen to deal with the problem of ballpoint pens not being able to write in zero-gravity. They spent considerable time and money developing the idea, which resulted in using nitrogen under pressure, supplying the ink without the need for gravity.

The Russians just used a pencil. Instead of setting out to design a ballpoint pen that was gravity-free, they looked for ways of being able to write upside down.

Whether it’s true or not, this much-told tale illustrates the importance of not backing your idea into a corner early on. Creativity – and ultimately, sensible and appropriate ideas – come out of smartly identifying a problem that needs to be solved and working from there, rather than setting a narrowly defined goal that reads too much into what you want to create.

For instance, when Andrew Weinreich founded SixDegrees.com – the website that was arguably the first social network, preceding Friendster, MySpace, and Facebook – in 1997, his idea, and eventually his objective, was “What if I could share my rolodex with my friends?”

Note what this objective does not do: It doesn’t determine how the site is structured, it doesn’t determine how it’s coded, it doesn’t even determine that the right solution is a website. What it does do is build the project objective around solving an extremely interesting problem.

Social networks may seem “obvious” now but, at that time, there were any number of ways to “solve” the problem Weinreich identified. The Internet and a “social network model” just happened to be the best solution. And if you think about it, Weinreich couldn’t have defined the objective more narrowly – like say, “Build a social network” – because social networks had not yet been invented!

In developing your own creative ideas, the best place to start is by zeroing in on an objective that finds the right balance. Here’s how to get started:

1. Seek Objectives That Guide but Don’t Define

You’ll want to develop a project objective that guides you in the right direction without defining where you should be at any point in time – and certainly not where you should end up. If your objective is too broad, the possibilities are infinite and there are no rails to bump up against to spark new ideas. If your objective is too focused (like the “space pen” example), there is no room for the exploration that leads to true innovation. An objective that strikes a balance between these two extremes will provide the most utility. It acts as a guide, but isn’t too limited or pre-determined.

2. Think Mission, Not Medium

The greatest businesses solve problems. All too often, we get stuck defining a business by the medium it operates in; you're a “tech company,” “consultancy,” or “media company.” Instead, we should be mission-centric and medium-agnostic in our work. In the modern day of cloud-servers, open source software, and seamless connection with the masses, it is easier than ever before to pursue your mission using many mediums.

The Behance team has taken this to heart, pursuing the objective to "organize the creative world" via a massive online network, a line of paper products, an annual conference, and even this publication, The 99%. Don't limit yourself to a particular medium as you pursue your objectives, but stay fiercely loyal to your mission.

3. Be comfortable “working in ambiguity.”

The key to true creative problem solving is the ability to work in ambiguity – to explore the full range of possibilities without jumping to conclusions. The poet John Keats praised Shakespeare for this trait, which he called “negative capability.” As Keats defines it, negative capability “is when man is capable of being in uncertainties, mysteries, [and] doubts without any irritable reaching after fact and reason.” In short, we must feel comfortable moving forward without always knowing exactly where we are headed.

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What's Your Take?

How do you set project objectives? Are you comfortable working in ambiguity?

Source:http://the99percent.com/tips/7014/The-Power-of-Uncertainty

Markets get boost from Bin Laden death

LONDON - The death of Al-Qaida leader Osama bin Laden has helped lift the mood in the markets all around the world Monday at the start of an extremely busy week of economic news.

President Barack Obama's announcement that the man who inspired the deadly Sept. 11, 2001, terror attacks in the United States had been killed in an operation by special forces in Pakistan, prompted an increase in investors' appetite for risk. That usually benefits assets like stocks but dents widely-considered financial safe havens, such as gold.

"The immediate impact of Osama's death has been a boost to risk appetite although the U.S. has also issued a travel alert because of 'enhanced potential for anti-American violence,'" said Philip Marey, an analyst at Rabobank International.

However, due to holidays in Britain, China, Hong Kong, Malaysia, Singapore and Thailand, the reaction hasn't been too substantial.

In Europe, the CAC-40 in France was 0.4 percent higher at 4,122 while Germany's DAX rose 0.8 percent to 7,574, with airlines, such as Air France-KLM SA and Lufthansa AG, doing particularly well.

Wall Street was poised for a bright opening too later - Dow futures were up 0.7 percent at 12,842 while the broader Standard & Poor's 500 futures rose 0.7 percent to 1,368.

Despite the knee-jerk response to news of bin Laden's death, analysts said the markets will soon turn towards more fundamental matters for their direction, such as the state of the global economic recovery and how central banks respond to the threat of higher inflation.

Though bin Laden's death may have a beneficial short-term impact on U.S. consumer confidence, Rabobank's Marey said the main reasons for low confidence have not disappeared - unemployment is still high and so are gasoline prices

The coming week is awash with key economic developments that could have a huge bearing on all types of markets in the run-up to summer.

In the U.S., a run of economic data, which begins later with the monthly manufacturing survey from the Institute for Supply Management, culminates on Friday with the April nonfarm payrolls data from the U.S. government. That often sets the tone in markets for a week or two after their release.

In Europe, investors will be keeping a close watch on interest rate decisions from the European Central Bank and the Bank of England. Neither is expected to change interest rates though the ECB is tipped to indicate that it will follow up April's first interest rate increase in nearly three years with another rise in June.

Figures earlier reinforced market expectations that the ECB will sound a hawkish tone on Thursday.

The monthly manufacturing purchasing managers' index - a broad gauge of activity - for the 17 countries that use the euro was revised up to 58 in April from the initial estimate of 57.7 - April's reading indicated that the sector was enjoying its second-strongest monthly pace of expansion since August 2000.

"The survey reinforces belief that the ECB will pull the interest rate trigger sooner rather than later," said Howard Archer, chief European economist at IHS Global Insight.

That belief has helped bolster the euro currency over the past couple of months despite ongoing debt problems across the eurozone, most notably in Greece, Ireland and Portugal.

It has also helped shore up the currency against the dollar Monday, even though the U.S. currency has been supported elsewhere by the news of bin Laden's death.

By mid morning London time, the euro was 0.2 percent higher at $1.4827 while the dollar was 0.4 percent firmer at 81.55 yen.

Elsewhere, oil prices eased off 2 1/2-year highs to below $113 a barrel. Benchmark crude for June delivery was down $1.40 at $112.53 a barrel in electronic trading on the New York Mercantile Exchange.

Meanwhile, an ounce of gold was down 0.3 percent at $1,551, down from an earlier record of just above $1,575 an ounce.

Source: http://www.garp.org/news-and-publications/overview/story.aspx?newsId=27963

By: PAN PYLAS

Kelly Olsen in Tokyo contributed to this report.

A service of YellowBrix, Inc.