Heidegger’s Ontology


I will answer the question:

Does Heidegger Establish That The Ready-to-hand Enjoys ‘Priority’ Over The Present-at-hand?

This is the most famous painting by Magritte, entitled “La Trahison des Images” (“The Treachery of Images”), painted 1928-9. Except of course it isn’t. What it is really is an arrangement of ink dots printed in London that has the remarkable property of signifying a painting in oil currently hanging in the Los Angeles County Museum of Art. What is even more remarkable is that this strange and magical property of reference is completely invisible to us. The text means “this is not a pipe”, which is true. It is a picture of a pipe. You are currently reading this essay on paper; as I write I am looking at a picture on my LED-back-lit glossy wide-screen, which represents what the paper will eventually look like, which represents the painting in LA, which represents an idea of a pipe that Magritte had a year after the publication of Being and Time. But the first thing we see is something that someone could use for smoking, despite this lengthy and unwieldy chain of intermediates.

This illustrates the distinction between Heidegger’s concepts of ready-to-hand and present-at-hand. The multiplicity of levels in the above account shows how we as Dasein cut through an indefinite number of intervening levels of representation in order to see only what we need. The ready-to-hand is where we get to; the present-at-hand is what we ignore on the way.

Perfect translation is impossible, because of the way resonance and multiple meanings cannot easily be conveyed; there is no one-to-one mapping between single words in different languages. Poetry and Heidegger represent the sharpest form of these difficulties because both rely heavily on the multiple meanings to convey their messages. To understand Heidegger’s conception of ready-to-hand, we need to understand the idea of ‘equipment’ from which it derives.

Photo by Marc Mueller on

Equipment is the poor translation of das Zeug (p. 96, H. 68), which is something like the maddeningly versatile yet helpfully compendious ‘stuff’ in English. There is the compound das Werkzeug (tool) but there is also das Flugzeug (aeroplane). Heidegger deliberately chooses a term with a loose and wide application because he sees everything that we see as being seen in a way of being useful or usable by us. If I want to know the time, then only the clock becomes ‘lit-up’ for me of the objects in my immediate environment. It is important to note also his reference to the Greek term for things (pragmata), which is a further illustration of how all objects appear to us firstly and possibly solely in terms of how we can use them in order to achieve our objectives.

Further, this also gives us our first idea of what might be understood by priority: it could mean ‘what we see first’ about objects. A second sense could be ontological priority, which would mean that one category was less fundamental than, was dependent on or supervenes on a second category. This essay will examine both possibilities, and will argue that while Heidegger makes a good case in the first sense, the argument in the second sense only works if one has already accepted the phenomenological Weltanschauung.

The idea of significance (or reference, or ‘sign-ification’) is central: Heidegger’s two examples both rely on this. In a way, everything refers because everything is seen as ready-to-hand or referring to the use we can make of it.

The two examples are a hammer and an automobile turn indicator. The hammer exists in a workshop; we all carry around our own workshops in a kind of movable metaphor – (p. 98, H. 69):

“In dealings such as this, where something is put to use, our concern subordinates itself to the ‘in-order-to’ which is constitutive for the equipment we are employing at the time; the less we just stare at the hammer-Thing, and the more we seize hold of it and use it, the more primordial does our relationship to it become, and the more unveiledly is it encountered as that which it is – as equipment.”

This can lead us back to an understanding of present-at-hand by way of contrast to ready-to-hand – (p. 100, H. 71):

“ ‘Nature’ is not to be understood as that which is just present-at-hand […]. The wood is a forest of timber, the mountain a quarry of rock; the river is water-power, the wind is wind ‘in the sails’. […] If its kind of Being as ready-to-hand is disregarded, this ‘Nature’ itself can be discovered and defined simply in its pure presence-at-hand.”

This suggests that performing a kind of phenomenological reduction would allow us to derive the present-at-hand by stripping away the serviceability of objects from the ready-to-hand. ‘Serviceability’ should be understood as a spectrum of usefulness; an item is still ready-to-hand even if its primary purpose is defeated. A hammer, which is broken, could still be a paperweight. The power of Heidegger’s argument here lies in the fact that this is indeed how the world appears to us – and within phenomenology that is the only allowable line – but the central Kantian question as to the extent to which we make our world remains – (p. 101, H. 71):

“The kind of being which belongs to these entities is readiness-to-hand. But this characteristic is not to be understood as merely a way of taking them, as if we were talking such ‘aspects’ into the ‘entities’ which we proximally encounter, or as if some world-stuff which is proximally present-at-hand in itself were ‘given subjective coloring’ in this way. Such an Interpretation would overlook the fact that in this case these entities would have to be understood and discovered beforehand as something purely present-at-hand, and must have priority and take the lead in the sequence of those dealings with the ‘world’ in which something is discovered and made one’s own. But this already runs counter to the ontological meaning of cognition, which we have exhibited as a founded mode of Being-in-the-world.”

The example of the automobile indicator relies on the common experience we all have as Dasein of continual motion towards, understood either as a geographical or a conceptual objective: “Dasein is somehow always directed and on its way” (p. 110, H. 79). We experience the indicator proximally as something that tells us something about how we should adjust our behavior. We do not first see it in its mechanical format (or electrical these days, though it is striking and suggestive how modern an example Heidegger chooses, though writing before even the Ford Model T ceased production). We see it ‘immediately’ in its ready-to-hand incarnation as telling us we should not now cross the road because the car will shortly be in a position rendering that course of action unwise. This is how we behave. We do think we know something about electricity and other properties and how (modern) automobile indicators work. But none of this is available to us in a phenomenological approach. But does it not equally validly seem to us to be the case that we do have these other understandings? So while we can accept that within phenomenology, the ready-to-hand is prior for perception (and use), we are not necessarily then committed to applying that line as constitutive for reality or definitive for ontology.

As I write, I have next to me a photocopy of the Brandom paper. A sentence in underlined, and a previous student has written ‘very important’ next to it. The sentence seems to me to be of no importance at all, which means that the other student was incompetent or had a different essay in mind. The readiness-to-hand of the sentence is immediately apparent to me in its lack of serviceability for my current purposes, but this lack does not direct me to its presence-at-hand: in normal circumstances I will simply never consider the different marks beyond noting that some appear to be photocopied type and others appear to be photocopied handwriting, manifesting another Dasein and its concentration on the readiness-to-hand it saw in the sentence. But I can consider things in this way: only the phenomenological approach prevents me – (p. 111, H. 80):

“What gets taken for a sign becomes accessible only through its readiness-to-hand. If, for instance, the south wind ‘is accepted’ by the farmer as a sign of rain, then this ‘acceptance’ […] is not a sort of bonus over and above which what is already present-at-hand in itself – viz. the flow of air in a definite geographical direction. […] But, one will protest, that which gets taken as a sign must first have become accessible in itself and been apprehended before the sign gets established.”

Here, Heidegger anticipates the key objection to his line. Within phenomenology, he can claim that this is indeed how it appears to us, and we can agree with this. Yet outside, where we can take account of neurological pictures, it seems difficult to support. It simply must be the case that the first event that triggers any kind of process or processing within us is the arrival of photons from external objects at our retinas. There may well be then an immense amount of internal interpretation before the object and what it means is presented to ‘us’, assuming that ‘we’ means the conscious part of our minds and the remainder are the processing elements.

Heidegger can claim that the world is such that the ready-to-hand is ontologically, and that it is not true either that we just have an instantaneous process that selects the ready-to-hand, or even that we have a process that does this in a measurable time but we only respond to the results of this process. It does not look to us as though we do any processing – but to paraphrase Wittgenstein in a different context – how would it look if this were not the case? It would look exactly the same. Heidegger makes his case only within phenomenology and only in the sense of perception – not reality.

See Also:

Equality And Partiality

What Is “Theory Of Mind?”

What Ontological Conclusions Does Sartre Present In His ‘Pursuit Of Being’ And With What Justification?

Does The Observation That Knowledge Ascriptions Are Context-Sensitive Provide The Basis For A Satisfactory Response To Scepticism?


Husserl’s Phenomenological Reduction


Husserl’s Phenomenological Reduction is central to his philosophy. In this article, I answer the questions:

  • What Is It?
  • Why Does Husserl Believe It To Be Necessary?

The concept of the phenomenological reduction can be argued to have a long philosophical pedigree via the epoché (εποχη) of the Greeks and importantly via the program of Descartes. Husserl entitles his work “Cartesian Meditations”, because essentially his project is to revive and renovate Descartes’ foundationalism.

Among the Greeks, Pyrrho is described by Diogenes Laertius as using the term epoché to mean “introducing the form [of philosophy] consisting of non-cognition and suspension of judgment.”

Descartes sought to use a method of radical disbelief to establish secure foundations for knowledge; the attempt being to find indubitable facts that in turn could support a natural science of the world. Husserl moves on however, as described by Kuspit: “Husserl begins where Descartes ends: with consciousness suspended without its own sanctions for objectivity, purified and thereby certain. The essence of this suspension is epoché; and the beginning of epoché is, as, Husserl makes clear in Ideas, the predication of the possibility ‘to doubt everything’ ”

Husserl’s aim is to arrive at apodictic certainty. This is a level of certitude beyond what one might routinely term certainty; it is possible to be certain in a particular belief and yet be mistaken. Apodictic certainty is superior to this because the concept included the idea that the contradictory is unimaginable. Husserl appears to believe himself to be following Descartes in equating absolute apodictic certainty with indubitability.

The process to be followed in arriving at such apodictic certainty is the phenomenological reduction, which seeks to eliminate all that is not directly given. This is surely necessary to such a process, though being necessary does not make it necessarily possible. We can see why the reduction is necessary by considering with Quine the gross asymmetry between a “meager input and torrential output”, by which he means the significant amount of internal encrustation that appears to be added to the two dimensional visual field.

That field is all we can observe using the visual sense, and yet we seem to be able to produce a vast array of additional ‘commentary’ including statements about the third dimension and the likely history. Surely we can agree with Husserl that the attempt to eliminate these additions, which may be artifacts of our consciousness, is necessary to finding any apodictic truth. In Husserl’s own terms, “It is necessary to say that the reduction has apodictic significance, since it shows apodictically that the being of the transcendental Ego is antecedent to the being of the world.” This means that because some element of the Ego forms part of the phenomenological residuum that remains, after the reduction has taken the world ‘out of play’, it is prior to the world since that is in its entirety no longer in consideration.

We can picture the reduction in its visual incarnation as being like an attempt to see only colors and perhaps shapes without the immediately attendant and apparently automatic resolution by, as we know now, our visual cortices into objects at range with volume and a slew of attendant ‘assumptions’. It is immediately clear that there is a serious question as to whether this is actually possible or whether it can only be considered as a thought experiment.

The reduction achieves the remarkable feat of being simultaneously banally obvious and deeply shocking. We are to take what we see as it is and not as something else. This is obvious in one sense because surely any other course of action would involve the smuggling in of potentially unwarranted non-perceived items. It is shocking once we realize the vast amount of what we commonly take for granted is thus eliminated.

One forerunner of the frequently used slogan for the reduction as being equivalent to ‘putting the world in brackets’ can be seen when Husserl writes of “this universal depriving of acceptance” as being equivalent to the “‘parenthesizing’ of the Objective world”. This is a substantial departure from the line taken by Descartes. It is possible to accept at face value Descartes’ claim that he will resolve to doubt everything. Alternatively, it can be viewed more as a method than a fact; it is after all, unclear to what extent if any we are in control of our beliefs. Schmitt refers back to Husserls’ background to explain this bracketing terminology: “Husserl draws his metaphor from mathematics where we place an expression in brackets and put a + or – sign in front of it. By thus bracketing the objective world we “give it a different value”. Schmitt could continue that by use of brackets, we could also multiply an entire series of combined terms by zero.

Photo by Chris F on

Hume famously speaks of the skeptical doubts engendered in him by philosophical study as being dispelled by ordinary life including billiards, wine and friends. So both of those philosophers may be regarded, along with other members of their pre-Husserlian traditions, as being oscillatory in their belief status. Husserl on the other hand maintains a stable agnosticism; he seeks to remove the world from consideration rather than doubt it in order to cease doubting it. There seems much less scope to claim that Husserl is not able to restrict his focus in this way than to argue that Descartes does not really exercise a universal doubt.

Perhaps another useful approach to the reduction is to see it as an attempt to find a precise demarcation of the contours of the subjective and isolate the boundary thereof with the objective. Only in this way can one hope to achieve a scientific view by understanding what is true for everyone and what our consciousness, and theirs, has added, this latter being for Husserl suspect and to be removed from consideration.

Two significant elements of Husserl as an individual can be introduced that may provide useful background to his philosophy and the reduction which is at its heart as the first methodological principle. Firstly, he made a decision as a mature adult to convert to Christianity. Secondly, he had a strong scientific background, studying astronomy and mathematics at university and later wrestling with the decision as to whether to continue in mathematics or devote himself to philosophy.

This first factor can suggest a desire to attack skepticism and the corrosive effects that it could have on human behavior. For Husserl, it seems that skepticism represented an actual quasi-moral danger rather than an interesting intellectual exercise. He also compared the decision to undergo or undertake the reduction as akin to a religious upheaval, which can indicate its difficulty, its importance, its consequences and perhaps a certain evangelical inspiration on its behalf.

The second factor can suggest that Husserl would have liked to take a line redolent of Spinoza, starting with the reduction as a (producer of a) fundamental axiom and proceeding thence in impeccable Euclidian format to all the knowledge of natural science. There is a link here back to the reduction. As D Moran puts it, “nothing factual need exist at all for the geometer who is concerned only with essential possibilities”; likewise the phenomenologist does not need the world.

A D Smith claims that Husserl distinguishes the epoché from the transcendental reduction; with the former being the aim of the latter. In the epoché, we bracket the world, while in the reduction, we restrict our attention to that which is phenomenologically given. Clearly the epoché is closely linked to the reduction and necessary to it on this reading.

One common understanding of the process of the reduction relies on Husserl’s concept of noema, in which he revived a Greek term meaning the content of an intentional act, and wherein intentional is used in its technical sense to mean referring to or pointing at. A noema refers in some way to an object in the world. We could then see the reduction as being a dissociation of the intentional act or thought from its noema; it is important to note that this dissociation is not the same as one that would sever a noema from an external object. Hintikka makes the contrary point however, that we cannot imagine a relation without having an idea of both of its relata, in the way that drawing a line on a map from London to another place [x] is a process which makes no sense and cannot be begun unless we know the name and location of [x]. Again, this argument can be seen as part of a line-drawing exercise being conducted by Husserl, albeit an exercise of some importance, since a correct placement of the boundary will result in a method of approaching objective truth, if successful.

One of Husserl’s own slogans, which is relevant in the context of trying to understand the reduction, was ‘to the things themselves’. This however can be highly misleading and needs to be appreciated with a substantial measure of Kantian transcendent sensibility. It is worth noting that Husserl saw attaining a ‘transcendent’ perspective as central to his endeavor; this very Kantian term should serve to suggest that the things in question may not be what they seem and in fact may not be there at all. A D Smith believes that Husserl’s view is that the transcendental perspective is one in which we understand fully the constituting role consciousness plays in creating our perceptions and in fact the world. Kant holds that the noumenal world of things in themselves is forever and in toto inaccessible to us, yet he still claims they exist. For Kant, we can only have access to the phenomenal world, that of how things seem to us: this is what Husserl seeks to examine, to this he calls our attention in the slogan and for this reason he is the founder of phenomenology.

See Also:

Schopenhauer Claims Objects Are Representations — What Does This Mean And Can It Be Defended

Merleau Ponty’s Phenomenology: What Is It And How Cogent Is It?

What Is “Theory Of Mind?”

Schopenhauer Claims Objects Are Representations — What Does This Mean And Can It Be Defended


  • Richard Bett, ‘What Did Pyrrho Think about “The Nature of the Divine and the Good”?’ Phronesis, Vol. 39, No. 3 (1994), pp. 303-337
  • Donald B. Kuspit, ‘Epoché and Fable in Descartes’, Philosophy and Phenomenological Research, Vol. 25, No. 1 (Sep., 1964), pp. 30-51
  • W V Quine, ‘Naturalized Epistemology’, in Ontological Relativity and Other Essays, New York, Columbia University Press, 1969
  • E Husserl, ‘Cartesian Meditations’, Kluwer Academic Publishers, 1999, p. 18
  • E Husserl, ‘Cartesian Meditations’, Kluwer Academic Publishers, 1999, p. 20
  • R Schmitt, ‘Husserl’s Transcendental-Phenomenological Reduction’, Philosophy and Phenomenological Research, Vol. 20, No. 2 (Dec., 1959), pp. 238-245
  • D Hume, ‘Treatise of Human Nature’,, Volume One, p. 457
  • B Smith and D W Smith, eds, ‘The Cambridge Companion to Husserl’, Introduction
  • D Moran, ‘Introduction to Phenomenology’, Routledge 2000, p. 135
  • A D Smith, ‘Husserl and the Cartesian Meditations, Routledge 2003, p. 27
  • B Smith and D W Smith, eds, ‘The Cambridge Companion to Husserl’, Cambridge University Press, 1999, Chapter Two

Schopenhauer And Apocalypse Now

The link is Conrad’s novella Heart of Darkness. The movie is inspired by the book. Schopenhauer was born in Danzig, now Gdansk, Poland while Conrad was from a Polish family in Ukraine. The German philosopher was an influence, along with Nietzsche, on Conrad’s writing, with the inevitability and futility of struggle being prominent in the writings of all three.

Heart of Darkness

The story is told in flashback by Marlow, an English sea dog currently moored on the Thames. He is first shown to us in a Buddha-like pose. Schopenhauer cited his three major influences as being Plato, Kant and the Upanishads. The latter are Hindu scriptures which I understand have some common elements with Buddhism including the beliefs that the world is an illusion, and hence not particularly worth getting involved with, and a generally non-theistic approach.

Marlow retails the story of how he was dispatched to the Belgian Congo by an ivory trading company. His mission is to find an apparently rogue ivory agent, Mr Kurtz, who has ‘gone native’ and is no longer to be counted a member of civilized society. The irony of this maintenance of a moral hierarchy in a world in which slavery, death and exploitation are normal, is stark. Kurtz has become more effective than normal ivory agents, dispatching more than all the rest of them combined, but is doing so by using ‘unacceptable’ methods. This despite the Company, which is sinister and unnamed beyond that, engaging in random shelling of the bush.

A long, slow and extremely difficult journey up the river begins. More and more of the trappings of ‘civilisation’ are dispensed with as the journey progresses, with human activity being restricted to the essential. Marlow finally arrives to be greeted by a motley figure in harlequin patches. This is a Russian trader who has come completely under the spell of Kurtz.

Kurtz is some type of ‘universal genius’ with a talent for poetry. He is deeply charismatic and is worshiped as a god by the natives. Conrad describes this mostly through listing its effects and the deepening fascination of Marlow for the agent as he learns more both about his exploits and the complete moral bankruptcy and ineffectual nature of the Company’s operations. Everything about Kurtz is a lie – even his name. We are reminded that this is the German for ‘Short’, and yet the man himself is seven feet tall – not least in impact.

Apocalypse Now

The movie also takes place entirely in flashback, although this is less explicit here than in the book. The protagonist Capt. Willard has been dispatched upriver in Vietnam to ‘terminate with extreme prejudice’ the command of Col. Kurtz. The problem that senior officers and the CIA – known as ‘the Company’ – have with Kurtz is that he has become too effective by using unorthodox methods. He is no longer taking orders, because he has realized that this is not the most effective way forward.

Willard also spends an immense amount of time moving slowly up the river into the Heart of Darkness accompanied by a crew of lost souls and misfits. He finally reaches Col. Kurtz’s station and is greeted by Dennis Hopper, who is a photographer analogous to the Russian trader acolyte of Mr Kurtz the ivory agent. It is true of both characters that they are half crazed, obsessed by Kurtz and both talk much to much. This is because they have no one else to talk to – one doesn’t talk with Kurtz, one listens – and so they fill the silence with babble.

“He could have gone for General, but he went for himself instead.” Col. Kurtz has turned his back on the military hierarchy despite being a third generation graduate of West Point with possibilities of much greater further promotion. Kurtz has realized that the purity and futility of the struggle means that victory is meaningless but in any case will only be reached by those having the most pure accommodation with evil.
When Willard finally reaches Kurtz, the latter illustrates the point with the story of an inoculation trip into a Vietnamese village. They complete the mission but come back after the Vietcong have also been to the village, and they find a neat pile of severed five-year old right arms. This is the purity Kurtz means.

We learn from IMDB the following: “The photojournalist quotes two T.S. Eliot poems. In a late scene in the film, a slow pan over a table in Kurtz’s room shows a copy of “From Ritual to Romance”, a book by Jessie Weston that inspired Eliot’s poem “The Wasteland”. Indeed, Eliot’s epigraph to The Hollow Men begins “Mistah Kurtz – he dead”. And here is Kurtz reciting the poem. Kurtz is the archetypal hollow man, bereft of faith and morality. But can we judge that, without ourselves assuming a moral standpoint? Is it not true that Kurtz is just more clearly sighted than the rest of us?


The central theme of Schopenhauer, explored initially in his masterwork The World as Will and Representation, is that the world presents itself in two aspects, only one of which, The Will, is real. It is an endless pointless striving, with some comparability to the concept of energy. So a stone or a tree are both manifestations of The Will – but it is important to understand that Schopenhauer does not mean that the stone decides in some way to fly through the air or roll over in a stream.

The Will exists in the noumenal realm and is Schopenhauer’s characterization of the thing-in-itself of Kant. The extrusions of The Will into the phenomenal realm are the objects and persons to be seen there. The application of space and time to experience allow for individuation; in the noumenal realm The Will is undivided. Thus we ourselves create the individuation that makes conflict possible and inevitable. Different elements of The Will feed on each other without knowing that they attack different aspects of themselves. We are also therefore the source of evil. This must be true, because in the absence of moral facts, we create all values. The contact here with the film is with the story of the severed arms. Within one value system, that of the Americans, this is abhorrent. Within that of the Vietcong, the loss of the arms is a necessary sacrifice to the greater goal of expelling the Americans. While our sympathies may lie on one side or the other of this question, it is important to understand that no correct answer can be derived from logic or anywhere else. The struggle and the apparent evil cannot be avoided, but are without meaning. Col. Kurtz comes closest to realizing this.

The musician Wagner never met Schopenhauer, but idolized him. According to Bryan Magee, Wagner and Cosima would read Schopenhauer most nights. Some elements of Wagner’s librettos play on darkness in a Schopenhauerean sense which is confusing because it will be the opposite of the normal connotations of darkness as being related to ignorance and danger. The ‘enlightenment’ is a byword for increased knowledge. Whereas for Schopenhauer, following Plato and the Upanishads, studying the world of appearance is the opposite of enlightening because it is illusory. We are to seek redemption and truth and The Will in the darkness. Thus the doomed lovers in Tristan and Isolde seek to be united forever in the darkness, which makes little sense without noting the Schopenhauerean subtext. Wagner is a central motif in perhaps the most famous sequence of the film: The Ride of the Valkyries. Music was of the first importance for Schopenhauer. He believed that it represented a direct copy of The Will, but this is confusing since he adored music but saw The Will as the source of all the world’s suffering.

Schopenhauer’s advocated solution to the problems presented by the inevitable conflict brought about by the extrusion of The Will into the phenomenal realm is somewhat self-contradictory, in that he suggests a Zen-like suppression of desire. This seems to involve The Will deciding to will no more. What would this leave behind, if not an unmotivated Hollow Man?

See Also:

What Is “Theory Of Mind?”

#Narcissism and #Unexpected Behaviour

Does Heidegger Establish That The Ready-to-hand Enjoys ‘Priority’ Over The Present-at-hand?

Spinoza’s Style Of Argument In Ethics I

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

Photo by Inge Wallumrød on

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