Thursday, August 30, 2012

Is Algebra Necessary? Are you kidding me?

A TYPICAL American school day finds some six million high school students and two million college freshmen struggling with algebra. In both high school and college, all too many students are expected to fail. Why do we subject American students to this ordeal?

Personal Finances
Basic algebra is quite necessary to stay afloat financially. Expected income much overcome expected expenses, there’s no way around it.

Conventional Business Operations
For any business model, practical estimates of expected earnings and expenses require some understanding of Probability Theory which requires basic algebra. E.g. a coffee shop would not make enough to overcome fixed daily expenses every single day, but would keep operating if the expected average daily revenue is greater than expected expenses. 

Winning at Games
Whether it’s soccer (Game theoretical solution for soccer penalty kicks) or poker, winning, or simply Not-Losing requires effective strategies; Nash Equilibrium mixed strategies, a big part of Game Theory. 

Typical Prerequisite for Game Theory: Linear Algebra
Typical Prerequisites for Linear Algebra: All Calculus Series
Typical Prerequisites for Calculus: Basic Algebra and Trigonometry

Lastly, Quantitative Politics
It’s a bit ironic that Andrew Hacker, the writer of Is Algebra Necessary? and a professor of Political Science, missed the growing field of Quantitative Politics, which is pretty closely tied with Game Theory.

Monday, August 27, 2012

Bernanke's Paper on Interest Rate Spreads

Came across Ben Bernanke's On The Predictive Power of Interest Rates and Interest Rate Spreads at Google Scholar. The paper asserts that some interest rate variables, especially the Commercial Paper - Treasury Bill rates, have served well as economic state predictors of following periods.

Did it apply for equity investments?

Here we have the Commercial Paper / T. Bill spread for the period from Bernanke's paper along with the S&P500 index for the same period. The spread appears to have a generally negative correlation to equity values.

 Predictive powers would probably be limited, especially now that we're in 2012 and market participants, products have changed dramatically.