the psychology of successful trading

Independent Scotland: No Currency Options


Monbiot suggests that Scottish Independence is a good idea. He admits that an independent Scotland would have no control over its own currency. He reckons this is acceptable because Scotland in his view does not control its own currency already. I would dispute that but in any case, the real problem is that Scottish Independence means no currency options are available.

Scottish Independence Needs to be Justified

One immediate problem is that Monbiot begs the question, in that he assumes the conclusion he is trying to prove as a premise in his argument. This can be seen throughout the first four paragraphs. He aims to conclude that Scotland should be an independent country starting from a set of rhetorical questions premised on Scotland being a country. True but irrelevant, since the question at issue is exactly whether Scotland should be an independent country. To see this more clearly, note that his argument, if valid, goes through for anything you call a country: Wales, London, Pimlico, the local pub. Should Pimlico accept the hegemony of Westminster…?

A more serious problem is that whether or not Monbiot is right that there is a much better possibility in the offing depends on whether there is a feasible path to get there. Otherwise he is arguing that we would all be better off living on the moon in gold houses. True, but irrelevant, because we can’t do it. Here the currency problem comes to the fore. Monbiot concedes that Scotland might have no control over its currency post-independence, and seeks to minimise that difficulty by arguing that this represents no change against the status quo. Maybe, but the problem is much worse than that. Scotland in fact has no viable currency options post-independence.

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Scottish Independence: Currency Options

The possibilities are a) keep the pound or b) join the Euro.

Keep the Pound without Agreement

a). in fact splits into two possibilities. a1). is to obtain agreement from Westminster to retain the use of the pound on the same basis as the remaining-UK (RUK). a2), also known as Sterlingisation or the Panama option, is to use the pound without agreement from Westminster. This is the nuclear option for Scottish Independence.

It is possibility a1). that all Westminster parties have ruled out. The pro-independence camp here argues that the Westminster parties are bluffing here. They are not. RUK cannot afford to bluff here. The pro-independence camp says they will not take on their share of UK debt (£100bn) if Westminster does not let them use the pound. Westminster is in fact going to bite that bullet if need be.

RUK is already on the hook for the entire current amount of UK debt. This is because RUK has already been required by international bond markets to state that it will be standing behind all current UK debt because the international bond markets were not prepared to accept the risk that they might end up holding Scottish debt. (There is an interest rate at which they would be prepared to do so, but it is much higher than either the UK or RUK rates, because an independent Scotland would not have a Aaa rating.) So this option will not be available.

Use the Pound in Shops Only

Possibility a2) is where the pound is just used to make retail purchases in Scotland. It is true that Westminster cannot stop this and nor need it. It is simply not a problem for RUK, just as it is not a problem for the US that Panama uses the dollar. However, Westminster can and must prevent Scotland from issuing pound-denominated debt. It cannot be allowed since Scotland would be issuing debt for which RUK would be responsible. (This is fact is the other way around. No authority could be given to Scotland to issue debt.) Similarly, the Bank of England will not guarantee Scottish banks because it would not be in a position to regulate them. Since Scotland will continue to be in a financial deficit position after independence, like the UK and RUK, it will need to issue debt. So this option will not be available.

Euro Option

Possibility b). is the Euro. This again splits into two possibilities like the above, but no one has proposed b2) (`Euroisation’) which has the same fatal problems as a2). So b) means EU membership.

The first problem here is that Spain would have to veto membership or risk fission, starting with Catalonia.

The second problem here is that you don’t join on UK conditions. You join on currently available conditions. That means no opt outs and no rebate. The latter in particular is going to be particularly expensive.

Scottish Independence: Further EU Difficulties

Thirdly, a letter to the Telegraph from the former European Commissioner for Economic and Monetary Affairs is germane here.

Key points are as below. It is not possible to join the Euro if any of the following events have occurred.

  • Debt default
  • No stable central bank (I imagine that means at least three to four years)
  • “Sterlingised” during the candidacy period.

So this option is also impossible.

There are no more options.

See also: Cognitive Biases And How They Affect Stock Markets

the psychology of successful trading

Sherlock Holmes as Enemy of Confirmation Bias


I will argue that Sherlock Holmes is highly aware of the dangers of Confirmation Bias. As should we all be.

My recent paper on Sherlock asked whether fictional characters are real:

How can we reconcile the following apparent truths: ‘Sherlock Holmes doesn’t exist’ and ‘Sherlock Holmes was created by Conan Doyle’?

That was kindly tweeted by Dr Watson:

Dr Watson also pointed me towards some very interesting Holmes quotes aimed at showing that he is a fan of data-driven decision making:

That looked like a decent case, but what struck me more about the five well-chosen quotes is that they really show that Holmes is very well aware of the problem of Confirmation Bias. This is prevalent everywhere in everyone and completely bedevils our reasoning abilities. Given that this is very modern psychology, it is remarkable that Holmes was on to it so quickly.

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I will proceed as follows. First I will give you the quotes. Then I will tell you what Confirmation Bias is. Next, I will show how the quotes show that Holmes is aware of the problem. I will close with some brief remarks as to why Confirmation Bias is a problem.

Quotes from Sherlock Holmes

Here are the quotes; again courtesy of the Umbel blog.

1. “There is nothing like first-hand evidence.”

2. “The world is full of obvious things which nobody by any chance ever observes.”

3. “It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts.”

4. “I never guess. It is a shocking habit,—destructive to the logical faculty.”

5. “‘Data! Data! Data!’ he cried impatiently. ‘I can’t make bricks without clay.’”

What is Confirmation Bias?

First cut: Confirmation Bias is the tendency to confirm what you already believe.

This of course is the enemy of good hypothesis formation. You should instead attempt to falsify what you believe. That is the only way of proving anything, because attempting to prove what you already believe just gives you an endless series of facts which are consistent with your hypothesis. You can have an infinite series of consistent observations but that proves nothing; whereas a single disconfirmatory observation disproves the hypothesis!

Given the remarkable asymmetry in power of potential observations, it is remarkable that few people ever look where they ought to. Of course, one reason for that is that if you falsify a hypothesis you already hold, you will have to track through the ramifications of that for your whole belief structure. If for instance, you find out that the man in the hat is not Moriarty, you will have to discard a large number of other beliefs. If you saw the man in the hat at the station, you now have to believe that the man at the station was not Moriarty, and so on, with potentially significant consequences for your picture of the world. This takes time and energy so people don’t want to do it.

Confirmation Bias comes in three main forms: a) not looking for disconfirmatory evidence; b) ignoring disconfirmatory evidence if it is pressed upon one; c) discounting disconfirmatory evidence.

Sherlock Holmes on the Case

The key is quote 3, which is basically a statement of the problem of Confirmation Bias. The facts you actually see are twisted by what you are expecting to find. So you will then inexorably find what you were expecting. For that reason, guessing is a mistake, as Holmes points out in quote 4. Because a guess does not stand in a vacuum.

Currently existing half-beliefs and things you are prepared/want to believe go into guesses. So guesses are biased. Worse still, the guess becomes a hypothesis which by the twisted magic of Confirmation Bias will now find ways of becoming your truth. Holmes is right to call this a shocking abuse of logic.

Quote 2 speaks to the problem of ignoring data. Many obvious things are unremarkable merely because we have seen them so often. Take gravity. Why do we stick to the earth? Isn’t that odd? No-one thinks so, but how can we explain it?

(Incidentally I object to the latest TV version having Holmes say he doesn’t know that the earth goes around the sun because it changes nothing here. It would be shocking if he did not expose as an impostor a scientist who claimed the sun goes round the earth. So Holmes needs an excellent theory of the world in order to have the excellent Theory of Mind that he clearly enjoys.)

Quotes 1 and 5 speak to the primary importance of data. We must collect data impartially and not merely what makes it through after Confirmation Bias.

Why is Confirmation Bias a problem?

Think about just two things: religion and politics. Imagine that you have been trained from a young age to believe a set of random hypotheses. You then had a lifetime exercising Confirmation Bias to back up these hypotheses. Some people move on from religious fairy tales, but many do not. Also, have you noticed that most people vote the way their parents did? They seem to know *without listening* that everything that the other political party says is wrong. This sort of factor gives you the political polarisation currently visible in America and elsewhere.

This is not a good thing and Holmes is right to warn us strongly against it. Beware Confirmation Bias!

See Also:

What Is “Theory Of Mind?”

the psychology of successful trading

Simulation Theory


Theory of Mind (ToM) is the label for the abilities we have to predict and explain the behaviour of others, by ascribing mental states such as belief and desire to them, or otherwise. There are two major competing theories of ToM: the Theory Theory (TT) and Simulation Theory (ST). TT holds that we understand others by having a theory of them or their behaviour. ST holds that we understand others by putting ourselves in their place. There are also different types of ST. ST(Transformation) holds that I simulate you by becoming you. ST(Replication) holds that I simulate you by becoming like you. Below I briefly address three objections to ST.

ST(Transformation) is Incomprehensible

ST(Transformation) has been questioned. Stich and Nichols provide three possible interpretations of what Gordon’s position might mean, all of which they find unsatisfactory. They note that Gordon has characterised ST(Transformation) as meaning that “we explain and predict behaviour by “imaginative identification” — “that is, [we] use our imagination to identify with others” (Stich and Nichols [p. 91]{Davies95}) in order to fulfil that aim.

“Imaginative Identification”

They quickly dismiss the first interpretation of this. That was the idea that we experience conscious imagery when we simulate on the grounds of phenomenological implausibility. The second interpretation involves consideration of the explanation. Is the intention to cover all or merely some cases of application of ToM?Stich and Nichols think that if the change is made to `some’ then ST becomes “patently true [but] not very exciting, and […] not incompatible with TT”. (Stich and Nichols [p. 92]{Davies95}).

However, since it seems that there are ambiguous cases of use of both TT and ST, the serious defence of either should lie in the claim that one of the theories explains many important cases of application of ToM and not all. So Gordon’s line should escape Stich and Nichols particular charge here.

Stich and Nichols conclude though that Transformation ST involves “imaginative identification with the other” and that this is a label for “a special sort of mental act or process which […] need not be accompanied by conscious imagery” (Stich and Nichols [p. 92]{Davies95}). Stich and Nichols then ask what this means, bringing the charge that they find it incomprehensible.

“If I Were You” In Simulation Theory

There arise here immediate questions which are familiar. We might ask what people mean when they employ the popular locution `If I were you…’ when giving advice. The conundrum is that the person giving advice presumably means “if I were in your position with my outlook and abilities, I would do X.” However, those abilities and that outlook might preclude being in the situation being advised upon.

It does not seem plausible that the locution means “If I were you in your position with your abilities and outlook I would do X.” That is because a). presumably the person receiving the advice already has access to that type of suggestion and b). the advisor will not, necessarily. Daniel phrases this objection neatly when he asks “how much of myself am I to project into the other persons’s shoes” (Daniel [p. 39]{Daniel93}). The answer, of course, is `the right amount’.

What Makes Simulation Hard?

I will use the term S to refer to the subject doing the simulating. O is the target of simulation. S wishes to understand or predict the behaviour of O. In Simulation Theory, S does this by simulating O.

S will not be successful in simulating O if S ascribes to O abilities and experiences that are remote from those of O. That’s true irrespective of whether that profile of abilities and experiences match those of S more closely. Naturally this presents some difficulties for simulation. S’s will find it difficult to simulate O’s who are dramatically more or less intelligent than themselves.

Simulating People Much Smarter Or Dumber Than Ourselves Is Hard

Stich and Nichols may legitimately ask which line Simulation Theory takes on the conundrum. Re-examining the argument above produces the opposite conclusion. S does not want to use S’s own abilities and outlook to predict what O will do. To the extent O has different abilities and outlooks, S’s prediction will be wrong.

A chess grandmaster does not expect a novice player to use the same defence that he saw used against a particular attack in his last world championship appearance. The grandmaster may indeed struggle to reduce his abilities to the correct level. As a practical matter, this will not be a problem. The grandmaster will simply use his vastly superior playing skills to compensate for his lack of ability to predict what strange tactics the novice will employ. He will still exploit weaknesses easily.

In the other direction, the novice player would do well to predict a grandmaster-level defence against his attack. However, this information will not be available. So it seems as though there are difficulties in becoming the O when the O has significantly different levels of relevant ability.

These difficulties seem less marked when considering information asymmetry. This is because information asymmetries are ubiquitous in everyday life. They occur both between S and O and between the same S at different times. Step changes in ability in a single S are either much less frequent or indeed never seen; outside of perhaps some unusual pathologies.

Only Grandmasters Can Simulate Grandmasters

This challenge seems equally strong on both the replication and the transformation views. If S lacks the ability to become a chess grandmaster, then S also lacks the ability to become like one, in terms of ability at least. S has however no difficulty simulating information asymmetries between S and anyone else. That’s true since this is generally not related to ability differences.

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However, we need to remember what the challenge is, exactly. It seems to be demanding to know what is meant by becoming someone else. I have sketched out above what this might mean. Then Stich and Nichols can say that on the above outline, it looks as though Simulation Theory provides a picture on which ToM will fail to produce accurate predictions. That will happen when S lacks some of the relevant abilities or disabilities of O. S will perhaps be more successful when the differences between S and O are those of information asymmetry. Fine: there are systematic errors in ToM. These will need explaining; I will do this in later work.

Simulation Theory(Replication) Involves Impossible Ascriptions

One logical objection brought against Goldman by Olson and Astington is fairly easy for Goldman to deal with. The objection is to charge that Goldman

“argues that the ascription of beliefs to others is done by simulating the other’s state on the basis of one’s own. But […] the only definitive evidence for ascribing belief occurs in the case of ascribing false belief. Yet one’s own beliefs are never introspectively available as false beliefs, so how could false beliefs ever be ascribed to others? That is, how could one see in another what was never experienced in one’s self?”

(Olson and Astington [p. 65]{Olson93}).

No One Experiences False Belief

What do Olson and Astington mean by the surprising claim that no one ever experiences their own false belief? They mean that very quickly on discovering conclusive evidence for the falsity of a belief, we will change that belief such that it is no longer false. Or more precisely, we will eliminate the previous belief since it has been falsified. We will replace it with its negation that is a new true belief. So it is true that we never have current experience of a belief that is false now. That of course, is not what Simulation Theory needs.

The above line does not address some situations of cognitive bias. For example, some people continue to believe for example that Brexit is a good idea. That is despite overwhelming evidence to the contrary. That is lack of adequate processing of evidence. The Brexit voters continue to have the false belief that Brexit is a good idea.

It is only true that we have no experience of our own false beliefs if it is true that we have no experience of our beliefs changing. This is because both of those scenarios require only that we have an ability to use memory with some non-zero accuracy to compare our current belief states with our previous ones. We can see then that Introspectionist ST(Replication) needs such a memory capacity. It is though not committed to the claim that it must always function correctly.

Simulation Theory Cannot Account for Some Developmental Data

Stich and Nichols claim some developmental data can be explained by TT but not Simulation Theory. In developing a response to this objection, we may also learn more about the differences between TT and ST. The data in question derive from a variant of the false belief tests. The experimenters ask children about the beliefs of another child sitting in front of them about the contents of a box. The box is closed. The other child may have either looked in the box or been told what is in it.

The first child will be good at answering correctly that the other child knows what is in the box when the other child has looked in the box. But younger children are bad at answering correctly when the other has child knows what is in the box. Older children — five and up — are good at both tasks. They know that if you see what is in the box, you know what is in the box, but they also know that you know if you are told what is in the box.

Folk Psychology And Simulation Theory

Stich and Nichols claim that these data are consistent with TT but not with ST. They write that “as children get older, they master more and more of the principles of folk psychology” (Stich and Nichols [p. 262]{Stich93}). However, they say, while it is clear that even the younger children “form beliefs as the result of perception, verbally provided information, and inference” (Stich and Nichols [p. 262]{Stich93}) they do not have the latter two routes to assessing the beliefs of others.

Thus they are not using their own minds to simulate others, thus ST is false, according to Stich and Nichols. Of course, Stich and Nichols can’t have this conclusion. They can claim that these data show that younger children are unable to use all of the capacities available to them to form their own beliefs when simulating others. Their ToM is to that extent immature. Since Stich and Nichols allow that three-year olds have immature ToM, these data do not weigh one way or the other in the TT vs ST debate.

Maturation And Simulation Theory

We might on this picture suppose that the way ST abilities develop as the child matures is that more of the routes to knowledge that the child uses become available for the simulation as maturation proceeds. Perhaps exactly that just is the development in question.

There is a particular time course of development of these capabilities in the case of the child’s own beliefs. There is no reason to presume that the arrival of abilities to form knowledge from perception, testimony and inference are all simultaneous. So one would expect the same as the child’s abilities to simulate develop. This is exactly what we find. Empirical studies confirm that different ToM component abilities develop at different times.

As Farrant et al confirm, “[c]hildren typically pass the diverse desires task first, followed by the diverse beliefs, knowledge access, contents false belief, and real–apparent emotion tasks in that order” (Farrant et al [p. 1845]{Farrant06}). ST isn’t committed to anything by these data. But if it assumes that maturation means the child can bring more of its own abilities to bear when simulating others, ST will to that extent find empirical support.

See Also:

#Proust: An Argument For #SimulationTheory

What Is “Theory Of Mind?”

psychology the psychology of successful trading Trading trading psychology

Kerviel: How He Got Away With It

Jerome Kerviel, accused of being a rogue trader, is now on trial. SocGen lost $7bn in the incident which heads the list of major trading losses.

How did he do it?

This is actually a very similar situation to Nick Leeson at Barings – number 11 in the top list. They were both involved in forms of arbitrage, which exploits tiny differences in price which ‘shouldn’t’ really be there. In fact, pricing theory fairly obviously requires that there can’t be a price difference between two identical items. If that were false – say if one loaf of bread had a different price to an identical one – then I could make a risk free profit by buying at the low price and selling at the high price. And there can’t be a risk free profit because everyone would pile in. You can see that what would happen would be that the prices would equalise.

Now this is what the arbitrageurs exploit. It all hinges on what ‘identical’ means. Not quite identical introduces some risk. Leeson was buying one product in Osaka and selling the same product in Singapore. Clearly if the product is the same, exactly, there is no risk. You might ask what might cause a price difference – there might be transient local factors such as someone big in Osaka decides to buy something. And then there could be a delay before Singapore catches up. And that catch-up process is exactly what the arbs do.

Kerviel was involved in arbing equity index futures and underlying equities. Equities are stocks, indices are groups of stocks like the FTSE-100 and equity index futures is just a bet on where the FTSE-100 will be in six months from now. Clearly you can do that on a risk free basis if you, say, sell the index and buy all the stocks in it. [Incidentally, if you want to be an insider trader but don’t want to go to prison, maybe you could buy an index in which the stock you can’t trade figures and then sell everything in the index except the one you aren’t allowed to trade…but I don’t recommend it…]

Why is it dangerous?

There are two common factors between this case and Leeson. In both, the alleged misdeeds were possible because the trader and the back office person were effectively the same person. Leeson actually did his own monitoring, an extraordinary failure which rightly cost the jobs of many at Barings. I could go further and say it was so remarkable that everyone involved in the company deserved to lose all their cash, but I know there were lots of Barings debentures held by grannies and I suspect we can’t expect them to have known what they were doing. While Kerviel came from back office himself and knew the control systems and would have known how to defeat them. I also will claim that back office types are rather easy for front office traders to browbeat and this history will have played a part in Kerviel’s psychology and the desire to get somewhere fast.

Secondly, because you are exploiting tiny price differences, you need to trade in vast amounts. And all the time. The control problem comes when you do not have offsetting equal and opposite trades but wind up taking huge uncovered positions. Leeson sorted this out with a fax purportedly evidencing a large receivable from a hedge fund. Towards the end, he was drawing in funding from all over Asia, which should have alerted someone.

What is odd about this case?

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You can’t make large amounts of money from arbitrage. You just can’t, because risk and reward are closely linked. You can see from the loaf of bread example that that has to be true. So if you are a manager in an I-bank, you need to get very concerned if your arbitrage desk is making large profits.

Now this leads to the strange consequence that Kerviel must have been concealing large profits. And this is what you see.

“During the largely procedural first day of the trial, Kerviel’s lawyer said Societe Generale would have been clearly able to see data showing Kerviel’s extraordinary profits of 1.4 billion euros at the end of 2007”

Note that this is profit not revenue, and that SocGen as a whole might typically make a net profit around EUR600m in a quarter. Do you think you could spot Kerviel in there?

“Seated on a plastic chair in front of rows of lawyers in black garb, the ex-trader said his annual salary at Societe Generale was 48,000 euros in 2006 with an annual bonus of 60,000 euros”

Now that is not a lot of money for traders. They might typically expect to make 5% to 10% of what they produce, or more in some cases where they are reliably producing large returns. Apparently Kerviel was expecting to make EUR300,000 for 08, on a declared profit of EUR60m. That’s a 0.5% return. You can see that this is not enough. Someone with that type of track record could just set up on their own, use the track record to raise funds, and trade themselves for maybe 50%. There is another type of arb there.

The GBPEUR exchange rate in 07 was 0.67, so we are talking about someone earning a salary of £32k. This is not far north of what we used to pay graduate trainees in London. So what we have here is someone being paid back office amounts, a French I-bank culture in which you shouldn’t really pay very much or have high quality people, and back office resentment of the flash and the furious.

“Lawyers also read a transcript of a conversation between Kerviel and SocGen’s ex-investment bank chief Jean-Pierre Mustier when the scandal broke, in which Mustier reportedly said: “If you won 1.4 billion euros, that means you’re very good. What you did was a pain, but it’s not a big deal.”

If Kerviel can make that out, then Mustier has failed in a stunning way to understand what arbitrage is. It is a French word, after all. It may be difficult to see how Kerviel can avoid jail, but he cannot have been on his own in this one.

See Also:

What Is “Theory Of Mind?”

The Late Evaluation Effect And Financial Markets

The Psychology of Successful Trading: see clip below of me explaining my new book!

The RMT Is Right, Just This Once

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philosophy psychology the psychology of successful trading Trading trading psychology

Do We Harm the Global Poor?

Peter Singer argues that we harm the global poor. By ‘we’, he means those of us living in the developed world, and by ‘harm’ he means actively damage. He is writing in November 1971 at a time of famine in East Bengal. He observes that if I am walking past a drowning baby in a pond, I have a duty to assist even if I might get my expensive suit dirty. He is careful to specify that it is a shallow pond: I am not being required to endanger myself. He compares the aid spend of the Heath administration at that time (£14.75m) with the projected cost of Concorde (£440m, with the out-turn being £1,400m). [You can scale all those numbers up by around 10x if you want to use RPI as an inflator.]

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Thomas Pogge goes further. Everyone in the West is culpable as a result of the industrial revolution being founded on uncompensated asset transfers in colonial times. We must now assist much more than we are currently doing.

Now I don’t agree with the premises but the argument seems valid. Singer says there is no difference between helping the baby and helping someone in sub-Saharan Africa under famine conditions. I think there is a disanalogy in that as Pogge points out, it isn’t just one baby in the pond – there have been 270m deaths from famine in the 15 year period starting in 1990. You can’t save that number of babies from drowning. The 270m number is more than died in combat in the whole of the last century.

I don’t think there is any case for Jobseekers’ Allowance to be paid in this country, at least while there are any job vacancies. You will doubtless disagree with me and saying I am being too harsh, and that people have a human right to work. I also disagree with that, but it doesn’t matter. Because the question for you is how to deal with the Singer and Pogge argument if you think there is a human right to work or to subsistence at the expense of others. Then:

Why is it OK to spend money on people in Bolton to keep them alive but not in Africa?

Singer wants us to spend maybe 25% to 40% of GDP on aid. He doesn’t want to use all of it because he admits that that would be counterproductive – it would be better to retain a strong economy than overtax it. But then in a variant of the above question, which is phrased for physicists since that was whom I was in the JB with last night, is:

Why is it OK to spend £5.6bn on the LHC when people are starving?

I have given my response to this. If you want to deny my exit is conscionable, then you will need a different answer. Maybe you want to say something like ‘ we should look after the people who are already here first’. But do you really want to say that? Why does conscience end at the borders, if it exists and produces duties? Why should people fortunate enough to be born here get looked after? Aren’t you dangerously close to saying ‘we should look after the people who look like me’? Or are you saying ‘I can see that homeless person so I should help him’ while people you can see only on television who are much worse off can be safely ignored…?

So I would announce the end of Jobseekers’ Allowance in three months with a three month transition period after that. I don’t mind weakening it if you don’t think I have a right to insist that people move – the phase out can occur only to the extent that there are no jobs locally available if you like. Note that this is not Incapacity Benefit – paid to those who medically cannot work – or Carers’ Allowance – paid to those looking after someone. I have said nothing about those benefits.

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I think if we must spend this money, it is morally better spent in Africa and even the economics say so. It is mathematically the case that almost 3 of those 270m people were the smartest person in 100m. I don’t know of any reason why people with the capacities of an Einstein wouldn’t be born anywhere in the world. Shouldn’t we be finding those people and helping them? You can be as smart as Einstein and also incredibly diligent; it won’t help you or us if you don’t make it to three months old.

See Also:

What Is “Theory Of Mind?”

Jacob Rees Mogg Is Wrong To Say That Loss of Passporting Will Not Be A Problem For The City

#Norway Is Still A Safe Investment Option

The Psychology of Successful Trading: see clip below of me explaining my new book!

psychology the psychology of successful trading Trading trading psychology

Cutting UK Government Spending

This is a pair of pie charts showing the UK Government’s income and expenditure from a couple of months ago. This will doubtless be revised after the emergency budget on 22 June. You can see the size of the problem here. The difference between cash in and cash out is made up by borrowing. At the time these graphs were were produced, the gap was £704bn – £541bn = £163bn.

These numbers are generally expressed as a proportion of GDP. The limit under the Maastricht criteria was 3%. The UK is not in the Eurozone, but reports these numbers anyway. The situation improved somewhat recently to around £156bn p.a., but that is still bad at 11.6% of GDP.

UK borrowing below forecast, still worst since WWII

The questions are these.


Why is it OK for some people to spend other people’s money? If we continued on the previous path without cutting public spending, we would borrow maybe an additional £1,000bn over the course of a parliament. It would take probably 40 or 50 years to pay that back at best. We are spending it now, but will not hang around to pay it back. Why should people graduating with me this year have to pick up that tab?

Do we need cuts?

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There are still people who want to borrow more and spend more. “Now is not the time to be making severe cuts to the economy. Cuts too deep and too soon risk the economy falling back into recession,” said Brendan Barber, TUC general secretary, which has warned that the plans could increase unemployment and the benefits bill. Well, that’s true – but what is the alternative?

Where to cut?

If you want to solve a cashflow problem, you have to reduce spending and increase income (or taxes). The government has decided this split will be 80/20. If you want to do something serious about this problem, you have to look at the largest item, which is by far social security spending at £231bn p.a. on the above pie charts.

To put that in perspective, the LHC, which is the most expensive scientific experiment ever built, cost £5.6bn. What would the UK economy be like if we built 41 LHC’s in Leeds every year?

See Also:

What Is “Theory Of Mind?”

The Psychology of Successful Trading: see clip below of me explaining my new book!

Where To Cut UK Government Spending: An Alternative Approach

Where To Cut UK Government Spending: An Alternative Approach

psychology the psychology of successful trading Trading trading psychology

Problems With Quantitative Easing

So the G20 has worked out we need to stop pumping money in and start repairing the fiscal balances of governments. A good move. Even Strauss Kahn, who has been frankly a bit overly French on this, is on board with the change. Surprisingly, it seems to have been the Americans who have been dragging their feet the most.

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Still waiting for the Hungarian shoe to drop properly. Maybe that is containable since they are not in the Eurozone, but when the spokesman for the Premier says that talk of sovereign default is ‘not exaggerated’ you know things are serious.

The G20 also dropped the idea of a global bank levy, saying rather disingenuously that it would be up to individual countries to take their own steps. That’s disingenuous because the whole point is that you can’t do something like that unilaterally because it won’t be effective and it will be counterproductive.

Merkel’s ban on naked shorts (should be policy also for German holidaymakers) was a brilliant move if you were seriously interested in relocating three desks worth of traders from Frankfurt to London for a short period. If that wasn’t high on your policy agenda, then…not sure what you get.

Populist driven economic policy is generally even worse than the democratic outcomes elsewhere because people are actually actively bad at economics as opposed to merely being poorly informed and generally uninterested as in other spheres.

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So what does this mean? Markets seem to have been spooked more by poor NFP numbers out of the US than anything else yesterday, but in any case not enough may have been known during opening hours – the G20 communique is reported as of lunch time today. So we’ll see on Monday. And also whether this top cap thing in the Gulf is going to work.

See Also:

The Psychology of Successful Trading: see clip below of me explaining my new book!

UK Government Spending: Where It Needs To Be Cut And Why

Where To Cut UK Government Spending: An Alternative Approach

John #McDonnell’s Characterisation Of #Finance Is Misconceived

the psychology of successful trading

Thorium Profits

Current excitement in the Gulf of Mexico demonstrates one of the reasons why we need new angles in energy. That didn’t stop me buying BP shares at the weekend – after a price decline from 647p to 517p I put in a limit order with an upper limit of 500p, just to see if it would get that low. I got filled, which I thought was great until the top kill/junk shot tanked later on. So right now we are off 13% to 430p. My response to that was to buy some more – call me psycho. Anyway, in a year either I will have been wiped out or made out like a bandit, and those are the only two options I am interested in. Life choices are the same as trade choices. In case you were wondering.

But anyway, to the point. Nuclear power is better than carbon-based energy generation. It’s greener – and you can’t defeat that argument by pointing to the waste problem – because we already have that problem. So we may as well have it in spades, right? In any case, the Finns are going to sort it out by sticking it deep underground in a sort of fairly stable rock chamber. And isn’t it about time the Finns contributed something? Where have they been lately? There’s been lots going on and we never hear from them. Finland buries its nuclear past. But does that look like good press? Is there a different answer?

Yes – there’s even a better option: thorium. For three major reasons.

Less waste

Thorium-based reactors produce waste products which have a half life much shorter than the 100s of thousands of years involved with uranium reactors.

It’s available

The uranium is going to run out. And quicker than you think if you note that we have maybe 60 years worth. That is at current rates of use but you might want to assume greater energy use in the future and a higher nuclear component.

It’s not weaponisable

You can’t make nuclear weapons from thorium. So if one state, say the US, wanted to persuade another state, say Iran, to act consistently with the latter’s stated intentions only in the realm of power generation, it could offer them thorium based reactor technology and then be intensely relaxed about the consequences. Because there wouldn’t be any.

So who believes this story and does anyone care?


This is a Bill in the US Senate which notes that the energy dependence of the US is a national security issue for that country. There’s another Bill in committee which observes that the US nuclear submarine fleet would be grounded (I know that’s wrong – but what happens to non-flying vessels when they can’t go anywhere…?) without uranium fuel. And mandates the Secretary of the Navy to look at thorium as a replacement.

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Congressman Sestak’s Amendments in National Defense Authorization Act Pass House

So this is a US national security issue and a convincing picture in general. But the former element means one thing: lots and lots of money. Where’s the thorium? Virginia, for example. Not so much dealing with difficult people for essential products.

So what should you do if you believe the story? These are the two stocks to buy. Firstly you want exposure to the design story. And secondly you want some thorium. There’s the usual triple lock on investment decisions: compelling story, pure exposure, acceptable risk. The first box I already ticked. Secondly you can buy two stocks as listed below. The first one is a consultancy specialising in thorium reactor design. The second one is basically a very speculative outfit with at least three men and a dog in Canada. They have a licence to dig in a hill next to one where some people before found some thorium. [Actually it’s better than that – today they announced the hiring of a new experienced exec and they gave him “incentive stock options for 150,000 shares exercisable over 5 years at $0.14 each, subject to vesting provisions”. So this guy believes they are going north of there.]

Lightbridge Corporation

RockBridge Resources Inc

It will be apparent that option two is slightly more risky. Option one isn’t safe because nothing is, but it is NASDAQ listed so you have some better transparency and reporting. Though you should never forget that Enron was main board listed. Rockbridge are listed on the Vancouver startup board but you can get the exposure through a pink sheet OTC trade in NY. This is a pass-through derivative. So the recommended division should be something like 90/10. Which was what I was going for when I did this trade on behalf of myself and Mark L – except I got confused by the factor of two and ended up with 80/20. When you try to hold 20 numbers in your head at the same time, you always forget one, or mix up GBPUSD with USDGBP or something. But again, trades are like life and serendipity can be the new name for chaos.

See Also:

What Is “Theory Of Mind?”

The Psychology of Successful Trading: see clip below of me explaining my new book!

The Illusory Truth Effect And Financial Markets

The Late Evaluation Effect And Financial Markets