Asset Allocation and Reservoir Operation
After the stock group meeting yesterday, every market is coming back almost at the same time. The oil is way up today. The USO jumped over 5% today. What a surprise it is about predicting the future. Just one day, every thing about the oil market is changed. When you think deeper about the world, a day really makes that much difference. I do not think so. Giving up about the prediction might be a better way to go ahead.
To predict has always been a false sense of our desire of knowing the future. So there were no good future-predictors and there will be no good ones in the future.
In traditional mathematics, there are definite relationships between variables. But in the past century, statistics (originally as a branch of mathematics) has gone far beyond the math about definite relationships. So we have two math tools to describe the physical, chemic, biological, and social phenomena.
So in my opinion, knowing what to happen and when to happen is beyond the human efforts. Our geo-world in the past several billion has advanced so much that the definite understanding of any thing without uncertainty is impossible. Can we describe anything without using statistical tools? No.
Interest rate or stock prices are such convoluted phenomena which involve so much of every thing else. At the least, the stock index price is a function of physics, chemistry, biology, economics, psychology, politics, and the mixed soup of many combinations of these ingredients. Can we fully understand any of the subsets with certainty? No.
Another thing is about the rate of change. Our brains are getting smarter every generation. The world is also getting more complicated every second. From the Big Bang to now, we have come a long way to the current status. Can our brain develop at a faster rate than the rate of the world changes? No.
I just list three questions with no answers. There are many more questions like these. So I would suggest giving up non-statistical predictions and come to statistically describe processes with time. Do we still remember that the length of time is relative to the speed of the observer? So I can almost conclude that a day is much longer in 2000 than a day in 2006, especially for those who trading stocks at both periods.
In hydraulic engineering, the hydrologists or hydraulic engineers can never predict when floods or droughts are coming with absolute certainty. But they build reservoirs and water wells to serve all human kinds very well. We hardly feel the water shortage very often. A friend of mine who study the optimal operations of reservoirs in the Missouri River basis and founded out that we can only increase the annual hydropower generation by a few percentage points even if we know the incoming stream flow in advance. One of the main reasons for such a limited improvement in operational efficiency is due to the relative large reservoirs capacity to the total annual stream flow. In other words, after thoughts may not be a bad thing in reservoirs operations.
In a way, we can only build reservoirs large enough to catch some flood water and release them during the drought years. The size of reservoirs is a function of economic development levels. The developed countries can effectively control about 100% of the average annual flow with reservoirs while the developing countries can control much less. For example, the total reservoirs capacity in the US is more than 100% of the total average annual flows of all rivers. The number is less than 10% for China.
If analogy is used here, we can just build cash reserves large enough to mitigate any gyration of the financial markets. The question now is how we can determine the optimal cash reserve. Actually, the strategic and tactical asset allocation models are tools which can be used for solving this kind of problems.
To predict has always been a false sense of our desire of knowing the future. So there were no good future-predictors and there will be no good ones in the future.
In traditional mathematics, there are definite relationships between variables. But in the past century, statistics (originally as a branch of mathematics) has gone far beyond the math about definite relationships. So we have two math tools to describe the physical, chemic, biological, and social phenomena.
So in my opinion, knowing what to happen and when to happen is beyond the human efforts. Our geo-world in the past several billion has advanced so much that the definite understanding of any thing without uncertainty is impossible. Can we describe anything without using statistical tools? No.
Interest rate or stock prices are such convoluted phenomena which involve so much of every thing else. At the least, the stock index price is a function of physics, chemistry, biology, economics, psychology, politics, and the mixed soup of many combinations of these ingredients. Can we fully understand any of the subsets with certainty? No.
Another thing is about the rate of change. Our brains are getting smarter every generation. The world is also getting more complicated every second. From the Big Bang to now, we have come a long way to the current status. Can our brain develop at a faster rate than the rate of the world changes? No.
I just list three questions with no answers. There are many more questions like these. So I would suggest giving up non-statistical predictions and come to statistically describe processes with time. Do we still remember that the length of time is relative to the speed of the observer? So I can almost conclude that a day is much longer in 2000 than a day in 2006, especially for those who trading stocks at both periods.
In hydraulic engineering, the hydrologists or hydraulic engineers can never predict when floods or droughts are coming with absolute certainty. But they build reservoirs and water wells to serve all human kinds very well. We hardly feel the water shortage very often. A friend of mine who study the optimal operations of reservoirs in the Missouri River basis and founded out that we can only increase the annual hydropower generation by a few percentage points even if we know the incoming stream flow in advance. One of the main reasons for such a limited improvement in operational efficiency is due to the relative large reservoirs capacity to the total annual stream flow. In other words, after thoughts may not be a bad thing in reservoirs operations.
In a way, we can only build reservoirs large enough to catch some flood water and release them during the drought years. The size of reservoirs is a function of economic development levels. The developed countries can effectively control about 100% of the average annual flow with reservoirs while the developing countries can control much less. For example, the total reservoirs capacity in the US is more than 100% of the total average annual flows of all rivers. The number is less than 10% for China.
If analogy is used here, we can just build cash reserves large enough to mitigate any gyration of the financial markets. The question now is how we can determine the optimal cash reserve. Actually, the strategic and tactical asset allocation models are tools which can be used for solving this kind of problems.
posted by Unknown at 6:42 PM
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