by Joseph Weisenthal

Filed Under:
algorithms, hedge funds, quant


From Hedge Funds To Skype, Collapses Prove Unavoidable

from the crashing-down dept

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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  • identicon
    Anonymous Coward, 21 Aug 2007 @ 8:38pm

    "as hedge funds learn every few years"

    Here's what hedge fund managers learn first - hedge fund managers don't lose their own money - their investors do.

    Their math doesn't guarantee anything in the real world, as has been proven many times. Just another Wall Street scam.

    reply to this | link to this | view in chronology ]

  • identicon
    dorpus, 21 Aug 2007 @ 8:57pm

    Sony's Latest DOA product

    Sony announced that in September, it will release its latest "ipod killer" product, the "Rolly". The Rolly is basically a credit-card-sized ghetto blaster, with no ear phones. Imitating Apple, Sony is refusing to publicize any pictures of the product.

    What will happen, though? Sony will insist on selling music only through its own outlets at exorbitant prices, and nobody will buy it. Sony already failed in their earlier tries like the "Connect" project, ATRAC3 software, and "memory sticks". cles/0708/20/news038.html

    reply to this | link to this | view in chronology ]

  • identicon
    Mack, 22 Aug 2007 @ 4:28am

    You gain a whole new perspective on such events after reading 'The Black Swan' by Nassim Taleb. Well worth a read -- insightful and even funny at times. He's the guy who wrote 'Fooled by Randomness', an earlier take on a similar topic.

    reply to this | link to this | view in chronology ]

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