Beyond the Random Walk

Beyond the Random Walk

It is difference of opinion that makes horse races (Mark Twain, Pudd’nhead Wilson).

Even a dart-throwing chimpanzee can select a portfolio that performs as well as one carefully selected by the experts. This, in essence, is the practical application of the theory of efficient markets. The theory holds that the market appears to adjust so quickly to information about individual stocks and the economy as a whole that no technique of selecting a portfolio – neither technical nor fundamental analysis can consistently outperform a strategy of simply buying and holding a diversified group of securities such as those that make up the popular market averages.

The broad acceptance of this thinking by financial economists and market practitioners became evident as the 1980s progressed. More and more, individual and institutional investors threw in the stock-picking towel and opted for indexing – that os, simply buying and holding one of the broad market indexes such as the Standard & Poor’s 500-Stock Index or perhaps the Wilshire 5,000 Index, an index that contains an additional 4,500 smaller companies. By 1990 literally hundreds of billions of dollars of endowment and pension-fund portfolios were invested in one or more of the market indexes.

But the 1980s also spawned some new doubters about market efficiency and renewed attacks to batter the theory down. With easy access to large-scale computers and with financial and stock price data of all sorts available both to practitioners and to academicians, the search was on to make one’s fortune and/or academic reputation by proving the efficient-market theory wrong. An academic battle of epic proportions was under way as a new generation of financial economists tried to make their reputation (and gain tenure at prestigious universities) by proving their elders wrong.

New York downtown, Battery and Hudson parks. Photo by Elena

And then, in the midst of it all, the stock market crashed with such ferocity that the thundering herd was buried under the debris for months to come. Early in October 1987, the most popular stock-market index in the United States, the Dow Jones average of 30 major industrial corporations, sold at approximately the 2,600. After October 19, a day in which this index fell by over 500 points in unprecedented trading volume, the market traded under the 1,800 level – a drop of approximately one-third within a single month. This is efficient? To many observers, such an event stretches the credibility of the efficient-market theory beyond the breaking point. Did the stock market really accurately reflect all relevant information about individual stocks and the economy when it sold at 2,600 early in October? Had fundamental information about the economic prospects of U.S. Corporations changed that much in the following two weeks to justify a drop in share valuations of almost one-third?

In the view of one influential financial economist, Robert Shiller, stock prices show far “too much variability” to be explained by an efficient-market theory of pricing, and one must look to the behavioral considerations and to crowd psychology to explain the actual process of price determination in the stock market. This view was obviously shared by thousands of investors who left the stock market in disgust. No amount of esoteric academic evidence could convince them that the market was an efficient and hospitable place in which to invest.

We present here an ivy-tower view of the debate and the new evidence uncovered during the 1980s. We will review all the recent research proclaiming the demise of the efficient-market theory. Our conclusion is that such obituaries are greatly exaggerated. We’ll also refer back to the underlying rational model of stock valuation and describe the “fundamental” events that could provide a rational explanation for the October 1987 crash. We will see that while the stock market may not be perfect in its assimilation of knowledge, it does seem to do a quite creditable job.

While we will present all research results in nontechnical terms, the reader should be warned that the material is a bit tougher than was described in previous articles. But don’t skip this chapter. Some of the statistical findings suggest useful investment strategies for individual investors.

Burton G. Malkiel. A Random Walk Down Wall Street, including a life-cycle guide to personal investing. First edition, 1973, by W.W. Norton and company, Inc.

Consolation

Consolation

By John Kessel (excerpt)

Esmeralda

The blast blew the door across the lobby into the plate-glass front wall, shattering it. But then I was out on the sidewalk. I set off through the downpour in the direction of the train station.

Before I had walked a hundred meters the drones swooped past me, rotors tearing the rain into mist, headed for Marovec’s office. People rushed out into the street. The citycar network froze, and only people on bikes and in private vehicles were able to move. I stepped off the curb into a puddle, soaking my shoe.

Teohad assured me that all public monitors had been taken care of and no video would be retrieved from five minutes before to five after the explosion. I walked away from Dunster Street, trying to keep my pace steady, acutely aware that everybody else was going in the other direction. Still, I crossed the bridge over the levees, caught a cab, and reached the station in good time.

I tried to sleep a little as the train made its way across Massachusetts, out of the rainstorm, through the Berkshires, into New York. It was hopeless. The sound of the blast rang in my ears. The broken glass and smoke, the rain. It was all over the net. Makovec was dead and they weren’t saying anything about Alter. Teo’s phony video had been released, claiming responsibility for the Refugee Liberation Front and warning of more widespread attacks if Ottawa turned its back on those fleeing Confederated Free America.

Consolation. Photo by Elena.

Outside the observation window a bleeding sunset poured over forests of russet and gold. After New England and New York became provinces, Canada had dropped a lot of money on the rail system. All these formerly hopeless decaying cities – from classical pretenders Troy, Rome, Utica to Mohawk-wannabe. Chittenango and Canajoharie – were coming back. If it weren’t for the flood of refugees from the Sunbelt, the American provinces might make some real headway against economic and environmental blight.

Night settled in and a gibbous moon rose. Lots of time to think.

I was born in Ogdensburg back when it was still part of the U.S. There’d been plenty of backwoods loons where I grew up, in the days when rural New York might as well have been Alabama. But the Anschluss with Canada and the huge influx of illegals had pushed even the local evangelicals into the anti-immigrant camp. Sunbelters. Ragged, uncontrollable, when they weren’t draining social services they were ranting about government stealing their freedom, defaming their God, taking away their guns.

My own opinions about illegals were not moderated by any ideological or religious sympathies. I didn’t need any more threadbare crackers with their rugged-individualist libertarian Jesus-spouting, militia-loving nonsense to fuck up the new Northeast the way they had fucked up the old U.S. We’re Canadians now, on sufferance, and eager to prove our devotion to our new government. Canada has too many of its own problems to care what happens to some fools who hadn’t the sense to get out of Florida before it sank.

The suffering that the Sunbelters fled wasn’t a patch on the environmental degradation they were responsible for. As far as I was concerned, their plight was chickens coming home to roost. Maybe I felt something for the Blacks and Hispanics and the women, but in a storm you have to pick a side and I’d picked mine a long time ago. Teo’s video would raise outrage against the immigrants and help ensure that Ottawa would not relax its border policies.

But my ears still rang from the blast.

The Children of Gal

The Children of Gal

By Allen M. Steele (excerpt)

In the days that followed, Sanjay did his best to put his mother’s banishment behind him. With less than three weeks – thirteen days – left in summer, there was much that needed to be done before the season changed: fish to be caught, dried, and preserved, seeds planted and spring crops tended, houses and boats repaired. He and his father put away Aara’s belongings – they couldn’t bring themselves to burn her clothes, a customary practice for the families of those sent to Purgatory – and accepted the sympathy of those kind enough to offer it, but it took time for them to get used to a house which now seemed empty; the absence of laughter and the vacant seat at the dinner table haunted them whenever they came home.

Sanjay didn’t feel very much like attending the Juli service at the Shrine, but Dayall insisted; if he didn’t make an appearance, the more inquisitive Disciples might wonder whether Aara’s son shared her blasphemous beliefs. Dayall was an observant Galian if not a particularly devout one, and the last thing they wanted to do was draw the attention of the Guardians. So Frione morning they joined the Disciples in the dome-roofed temple in the middle of town. Once they’d bowed in homage to the scared genesis plant that grew beside the Shrine, they went in to sit together on floor mats in the back of the room, doing their best to ignore the curious glances of those around them. Yet as R’beca stood before the altar, where the box-like frame of the Transformer stood with its inert block of Galmatter in the center, and droned on about how the souls of the Chosen Children were gathered by Gal from the vile netherworld of Erf and carried “twenty-two lights and a half through the darkness” to Eos, Sanjay found himself studying the Teacher resting within his creche behind the altar.

The Children of Gal. Photo by ElenaB.

Even as a child, Sanjay had often wondered why the Teacher didn’t resemble the Children or their descendants. Taller than an adult islander, his legs had knees that were curiously forward-jointed and hinds lacking the thin membranes that ran between the toes. His arms, folded across his chest, were shorter, while the fingers of his fores were long and didn’t have webbing. His neck was short as well, supporting a hairless head whose face was curiously featureless: eyes perpetually open and staring, a lipless mouth, a straight nose that lacked nostrils. And although the Teacher wore an ornate, brocaded robe dyed purple with roseberry, every youngster who’d ever sneaked up to the creche after services to peel beneath the hem knew that the Teacher lacked genitalia; there was only a smooth place between his legs.

These discrepancies were explained by the Word: the Teacher had been fashioned by Gal to resemble the demons who ruled Erf, and the Creator had made him the way to remind the Children of the place from which they’d come. This was why the Teacher was made of Galmatter instead of flesh and blood. According to history, everyone diligently learned and recited in school, the Teacher and the Disciples had fled the mainland for Providence just before the Great Storm, leaving behind the unfaithful who’d ignored Gal’s warning that their land would soon be consumed by wind and water.

The Teacher no longer moved or spoke, nor had he ever done so in recent memory. Yet his body didn’t decay, so he was preserved in the Shrine; along with the Transformer and the Galmatter block, they were holy relics, reminders of the Stormyarn. In his sermons, R’beca often prophesized the coming of the day when the Teacher would awaken and bring forth new revelations of the Word of Gal, but Sunjay secretly doubted this would ever occur. If he did, he hoped to be there when it happened, he’d like to see how someone could walk on all fours with limbs and extremities and misshapen as these.

It Takes More Muscles to Frown

It Takes More Muscles to Frown

By Ned Beauman (excerpt)

“Cantabrian don’t have access to any pipeline data,” I said.

“But they built our security architecture. They have back doors.”

“The programmers are in Singapore,” said Soto.

“Doesn’t matter. The cartels have reach. Hey, that reminds me,” Obregon said, tapping his phone for another round. “So there’s this cartel boss’ son, right? Eight years old. And his nanny tells him that if he wants a lot of presents for Christmas this year, he should write a letter to Baby Jesus. Because if it wasn’t for Baby Jesus, we wouldn’t even have Christmas. So the boy sits down to write the letter, and first boat.” He looks at it, then he crumples it up and throws it away. He gets out a new piece of paper, and this time he writes, “Dear Baby Jesus, I’ve been a good boy most of the year, so I want a new speedboat.” He looks at it, then he crumples it up and throws it away again. But the he gets an idea. He goes into his abuela’s room, takes a statue of the Virgin Mary, wraps it up in duct tape, puts it in the closet, and locks the door. Then he gets another piece of paper and he writes, “Dear Baby Jesus, if you ever want to see your mother again…”

Everyone guffawed. And event though I’d heard the joke told better before, my guffaw was more convincing than anyone else’s, at least visually. Because I had help.

The electroactive polymer prosthesis had been developed at the UC Davis Medical Center as a treatment for paralysis. It still hadn’t been approved for use by regulators anywhere in the world. But the Nuevos Zetas’ hackers had stolen the designs and forwarded them to a fabricator in Guanghou that specialized in biomedical prototypes. Presumably both Cantabrian and the company that made the emotion detection software were aware that the technology existed, but thought they had a few years’ grace before they had to worry about it.

It takes more muscles to frown. Photo by Elena

There wasn’t enough metal in my face to show up on a body scanner, and even under a close examination the lacework under my skin could easily be mistaken for the titanium ally mesh sometimes used in facial reconstruction surgery. It worked on roughly the same principle as a shipbuilder’s powered exoskeleton, but in miniature: when you initiated a movement, the prosthesis detected that movement and threw its own weight behind it. A smile that would normally be thin and mirthless would instead dawn across your whole face. Then it would linger and fade, like a real smile, instead of clicking off like a fake one. Conversely, when you tried to keep your face neutral, the prosthesis would steady anything that might squinch or quiver or droop. No more nervousness, no more death face.

Because the emotion detection software that Cantabrian used could also detect spikes in facial temperature and perspiration, I had a unit in each of of my cheekbones to dispense a fizzle of magnetite nanoparticles into my facial veins, which in an emergency would partially neutralize both tells. So far, though, that had never been necessary, because the support of electroactive polymers meant I was always relaxed about telling lies (or listening to jokes). If I started babbling or gnawing my fingernails or squirming in my seat, an interviewer would certainly notice, and there was nothing the prosthesis could do about that. But it was easy to train yourself not to show any of those signs. Whereas it was impossible, as far as anybody knew, to train the microexpressions out of your face.

The prosthesis could be switched on and off wirelessly. On my phone I had a settings app disguised as a puzzle game. I took off my girdle for sleep and exercise and sex, otherwise I got a sore jaw. But the rest of the time, I kept it on. Once you get used to having full control over your face, it begins to seem very strange that you ever tolerated its delinquency. If a social network decided to broadcast your deepest feelings to the world without permission, spurting emojis left and right, you would delete your account. And yet your body does precisely that. Crying, blushing, sweating, goosebumps, involuntary facial expressions – not to mention erections, when visible, and stress-related incontinence, in extreme cases – are all serious data breaches. Strangers on the Metro have no more right to know how you’re feeling than strangers on the Internet

The Daughters of John Demetrius

The Daughters of John Demetrius

By Joe Pitkin (excerpt)

On waking he felt again the perfect confidence that he would walk out of Dessicant Wells with the child of Lupe Hansen. The night’s sleep, the revitalizing Ambrosias, the brilliant white tunic all convinced him that success was a foregone conclusion.

Then, walking out of the Hotel Vieja Delicias, he saw a lilith snooping about as she came up the road, peering into windows, swiveling her half-snake head to and fro like a flashlight. Mendel had worried about the blood on the old tunic. It wouldn’t have hurt him to have worried about it a little ore. But he had thought it unlikely for one like Perses to carry radio tags in his blood like a child or a criminal. Mendel’s main worry had been that the bloodstains would frighten the naturals.

The lilith was a good way up the street, moving past a trio of vulgaris hauling in enormous handcart towards some market or warehouse. Mendel was the only other divine on the road; she would spot him for sur if he began to run. To his left a laundromat operated out of a family’s garage. He turned into it as though that had been his errand all along.

A broad-faced natural with a thick braid of hair in the ancient style looked up at him from the pile of laundry her neighbors had left for her. Mendel wondered for half a second whether the old bloodstained tunic was in the pile, sent over by the hotel to be washed instead of incinerated as Mendel had demanded. He raised the back of his hand to her like a strange greeting; his fingernail, tapered and sculpted, began to grow out of his index finger into thirty fatal centimeters of talon.

Daughters of John Demetrius. Photo by Elena

“It there a bloody tunic in your laundry?” he asked in Spanish.

“No, lord,” she answered, emotionless.

He sheathed the claw back into his hand. “Is there a back door?”

“It leads to our house, lord.”

He asked if he could get to the roof by that way. He could. For a short, waddling woman, she moved in a hurry, and silently, and he followed her into a dusty cinderblock courtyard with a legion of geraniums growing in old rusted cans. The lip of the roof hung three meters or o above the ground; Mendel leapt, caught the lip, and vaulted himself up. He looked back at her only a moment to say in his antique Spanish: “From the day the gods bless your house.” Then, with the some finger that a moment before had been a blade of fingernail, he exhorted her to be silent. He stayed not a moment to see her bowing deferentially, but like a loon lifting off from the water he glided across the roof and leapt into the street behind, and then he ran faster than any lilith dep into the mirages of the desert.

He took a roundabout way back to Dessecant Wells, running far to the west into the creosote and circling back southeast. It was nearly noo when he arrived, and a call went up when he came into sight of them. By the time he walked into the central courtyyard they were arrayed in front of him in all their scabby glory like a choir. In the center of the formation, looking more desolate even than the day before. Yet at the girl’s feet was a backpack, and she stood dressed and washed and combed like a lamb for sacrifice.

The headwoman was the first to speak: “Will you, lord, cure us of our sickness?”

He showed them the trick with the water and ashes that would soften the corn kernels, that trick which even the poorest village in Mexico would have known in the last age, that trick which in fact had been discovered not far from Dessicant Wells nearly four thousand years before. As far as the villagers were concerned, Chloe Hansen was a fair trade for such knowledge.

During the celebratory dinner the little girl looked at him balefully and silently. If she had cried on learning that she would go with him, or if she was to cry about it later, she wasn’t crying now. Of course, Mendel had taken the other children whether they had cried or not. But it was always easier for him if they didn’t cry.

The sun was low before they were ready to set out. The headwoman and others clamored for him to stay one more night, to leave in the morning – give the girl one more night with her mother. But the girl would be safe at night, Mendel assured them and no marauder on the road would be so foolish that he would try to steal a child from a god