Tue, Aug 21st 2007 5:36pm
Is there a connection between the recent meltdown at quant funds and last week's outage at Skype? Nick Carr makes the provocative argument that both events are the result of what happens when algorithms fail to anticipate behavior that is somehow out of the ordinary. In the case of quant funds, their models failed to anticipate the market's wild volatility, whereas with Skype (if you believe the company's official explanation), the glitch was the result of mass reboots taxing network capacity. Interestingly, both Skype engineers and hedge fund managers were heard using the phrase "perfect storm" to describe the sequence of events that lead to their respective collapses. Of course, as hedge funds learn every few years, these perfect storms that are mathematically supposed to occur just once in a thousand years, seem to happen quite a bit more often. The same goes for any network that suffers an outage despite the best laid contingency plans. The problem is that it's difficult to craft an algorithm or a model that's robust during 'normal' times and abnormal times. In finance, one hopes that the profits are big enough during the good so that you can survive the occasional mess. The one problem, of course, with the comparison between hedge funds and Skype is that Skype's explanation doesn't ring particularly true. The connection between Microsoft patches, mass reboots and the network collapse seems tenuous at best. Thus, it's entirely possible that this particularly outage had nothing to do with abnormal crowd behavior. Still, as the surprise outage at 365 Main demonstrates, it's difficult, if not fully impossible, to completely inoculate oneself against adverse events.
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