Douwe Osinga's Blog: September 2005

Sunday, September 25, 2005

On killing our leaders

Pat Robertson suggested a few weeks ago that the assassination of Hugo Chavez, the president of Venezuela would be an easy way out for the US, much easier than invading a country, like the US did with Iraq. Now, no matter what you might think of Robertson, Chavez or the general usefulness of trying to change the leadership of other countries, I think he has a point. It is just not in the advantage of the US (and by extension the rest of the west).

War is an expensive business, even for a country as rich as the US (let alone for any country that should get invaded). Having a small band of professionals kill the leader of a country you're not so happy with, is much cheaper both in money and in lives for both the invaders and the invadee. Still, the world didn't quite agree with Robertson to the point where he was forced to make his apologies. Now that might have to do a little with the fact that he actually suggested a target and not merely suggested a strategy, but I doubt it. Political assassination as a means of foreign policy is for some reason not done, which isn't that strange if it weren't for the fact that it is less done than invading countries.

There are theories that Saddam Husein had his secret agents plan the assassination of Bush Sr and that this had to do more with the last Gulf War than all the Weapons of Mass Destruction. It certainly seems to be the case that the Americans after the invasion tried to specifically kill Saddam with aimed bunker busting rockets. The Israelis certainly aim for Hamas leaders, so this whole killing of enemy leaders isn't totally strange. But it certainly is frowned upon.

I think that it is partly because it levels the playing field and it lowers the cost of attack. If any country could just reasonably cheap eliminate any foreign leader it didn't like, things would become very chaotic. You sometimes hear that instead of war, the leaders of a country should just play a game of cards and this would make things much more peaceful. Rubbish of course. If say, Liberia could invade the US with a near fifty percent chance of success, they would certainly be tempted. Same with assassinations. It would make war too cheap to be not an option for a president in trouble.

Currently the US is the only country with enough financial resources to afford itself the odd invading of another country. China might get there, but isn't. It is in the advantage therefore of the US to make war more expensive, not cheaper (and arguably by threatening the Soviets to take the cold war to space, the US did make it too expensive for the communists).

Thursday, September 8, 2005

Crowds beating the market

There have been a bunch of books on the wisdom of mobs. The basic assumption is usually that the average behaviour of a group is for a lot of purposes better than most of that of the individuals. A popular example is usually the stock market. Individual investors quite often think they can beat the market, but obviously on average they can't. Mix in the transaction costs and the fact that some people do stupid things and you end up with a situation that on average it is actually better to follow the index than to think that you are smarter than the market. And indeed, index following funds have been rather popular and successful. Of course following the index means you're always going to do a little worse.

As long as you just follow the index, you are of course doing exactly as the market in general. However, every so often the index has to be re-weighted. Stocks that have done worse are taken out, or are getting a lower weight, stocks that are doing better are increased in weight, or new stocks even come in. If you follow this behaviour by buying more stocks in the better doing stocks and selling some from the worse performing, than you will be trailing the market, since your basically buying high and selling low (well, a new stock in the index might obviously still go up, but a stock that gets dropped presumably is on a lower price than when it came into the index).

Anyway, I was thinking, if you knew about all the trades that ever went on, you could do better. But how much? You could exactly follow the market by just executing all the trades your self too to some extend. Could you do better? I would think you could probably pick the very worst and maybe the best ones too of the investors you are tracking. If you just trade a little bit more like the best guys and a little less like the guys that are not doing so great, you're there.

What if you would track only a random sample of like ten percent of all people that trade on the stock market? It would probably still work. So how many people would you need? Probably any decent investment bank would have enough to go on. They can just look at the trades their customers make, disregard the customers that seem not so smart from what they're doing, overemphasise the trades of the guys that seem to excel and there they go.

Of course you could argue that this would never work, since there are these banker types that have the inside information and that the best thing you can expect is to nearly do as well as the market. So where do we think these bankers get the inside information from? Ah...