http://www.nytimes.com/2008/10/12/opinion/12dooling.html?scp=1&sq=The%20Rise%20of%20the%20Machines&st=cse
October 12, 2008
Op-Ed Contributor
The Rise of the Machines
By
RICHARD DOOLING
Omaha
“BEWARE of geeks bearing formulas.” So saith Warren Buffett, the Wizard of Omaha. Words to bear in mind as we bail out banks and buy up mortgages and tweak interest rates and nothing, nothing seems to make any difference on Wall Street or Main Street. Years ago, Mr. Buffett called derivatives “weapons of financial mass destruction” — an apt metaphor considering that the Manhattan Project’s math and physics geeks bearing formulas brought us the original weapon of mass destruction, at Trinity in New Mexico on July 16, 1945.
In a 1981 documentary called “The Day After Trinity,” Freeman Dyson, a reigning gray eminence of math and theoretical physics, as well as an ardent proponent of nuclear disarmament, described the seductive power that brought us the ability to create atomic energy out of nothing.
“I have felt it myself,” he warned. “The glitter of nuclear weapons. It is irresistible if you come to them as a scientist. To feel it’s there in your hands, to release this energy that fuels the stars, to let it do your bidding. To perform these miracles, to lift a million tons of rock into the sky. It is something that gives people an illusion of illimitable power, and it is, in some ways, responsible for all our troubles — this, what you might call technical arrogance, that overcomes people when they see what they can do with their minds.”
The Wall Street geeks, the quantitative analysts (“quants”) and masters of “algo trading” probably felt the same irresistible lure of “illimitable power” when they discovered “evolutionary algorithms” that allowed them to create vast empires of wealth by deriving the dependence structures of portfolio credit derivatives.
What does that mean? You’ll never know. Over and over again, financial experts and wonkish talking heads endeavor to explain these mysterious, “toxic” financial instruments to us lay folk. Over and over, they ignobly fail, because we all know that no one understands credit default obligations and derivatives, except perhaps Mr. Buffett and the computers who created them.
Somehow the genius quants — the best and brightest geeks Wall Street firms could buy — fed $1 trillion in subprime mortgage debt into their supercomputers, added some derivatives, massaged the arrangements with computer algorithms and — poof! — created $62 trillion in imaginary wealth. It’s not much of a stretch to imagine that all of that imaginary wealth is locked up somewhere inside the computers, and that we humans, led by the silverback males of the financial world, Ben Bernanke and Henry Paulson, are frantically beseeching the monolith for answers. Or maybe we are lost in space, with Dave the astronaut pleading, “Open the bank vault doors, Hal.”
As the current financial crisis spreads (like a computer virus) on the earth’s nervous system (the Internet), it’s worth asking if we have somehow managed to colossally outsmart ourselves using computers. After all, the Wall Street titans loved swaps and derivatives because they were totally unregulated by humans. That left nobody but the machines in charge.
How fitting then, that almost 30 years after Freeman Dyson described the almost unspeakable urges of the nuclear geeks creating illimitable energy out of equations, his son, George Dyson, has written an essay (published at Edge.org) warning about a different strain of technical arrogance that has brought the entire planet to the brink of financial destruction. George Dyson is an historian of technology and the author of “Darwin Among the Machines,” a book that warned us a decade ago that it was only a matter of time before technology out-evolves us and takes over.
His new essay — “Economic Dis-Equilibrium: Can You Have Your House and Spend It Too?” — begins with a history of “stock,” originally a stick of hazel, willow or alder wood, inscribed with notches indicating monetary amounts and dates. When funds were transferred, the stick was split into identical halves — with one side going to the depositor and the other to the party safeguarding the money — and represented proof positive that gold had been deposited somewhere to back it up. That was good enough for 600 years, until we decided that we needed more speed and efficiency.
Making money, it seems, is all about the velocity of moving it around, so that it can exist in Hong Kong one moment and Wall Street a split second later. “The unlimited replication of information is generally a public good,” George Dyson writes. “The problem starts, as the current crisis demonstrates, when unregulated replication is applied to money itself. Highly complex computer-generated financial instruments (known as derivatives) are being produced, not from natural factors of production or other goods, but purely from other financial instruments.”
It was easy enough for us humans to understand a stick or a dollar bill when it was backed by something tangible somewhere, but only computers can understand and derive a correlation structure from observed collateralized debt obligation tranche spreads. Which leads us to the next question: Just how much of the world’s financial stability now lies in the “hands” of computerized trading algorithms?
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Here’s a frightening party trick that I learned from the futurist Ray Kurzweil. Read this excerpt and then I’ll tell you who wrote it:
But we are suggesting neither that the human race would voluntarily turn power over to the machines nor that the machines would willfully seize power. What we do suggest is that the human race might easily permit itself to drift into a position of such dependence on the machines that it would have no practical choice but to accept all of the machines’ decisions. … Eventually a stage may be reached at which the decisions necessary to keep the system running will be so complex that human beings will be incapable of making them intelligently. At that stage the machines will be in effective control. People won’t be able to just turn the machines off, because they will be so dependent on them that turning them off would amount to suicide.
Brace yourself. It comes from the Unabomber’s manifesto.
Yes, Theodore Kaczinski was a homicidal psychopath and a paranoid kook, but he was also a bloodhound when it came to scenting all of the horrors technology holds in store for us. Hence his mission to kill technologists before machines commenced what he believed would be their inevitable reign of terror.
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We are living, we have long been told, in the Information Age. Yet now we are faced with the sickening suspicion that technology has run ahead of us. Man is a fire-stealing animal, and we can’t help building machines and machine intelligences, even if, from time to time, we use them not only to outsmart ourselves but to bring us right up to the doorstep of Doom.
We are still fearful, superstitious and all-too-human creatures. At times, we forget the magnitude of the havoc we can wreak by off-loading our minds onto super-intelligent machines, that is, until they run away from us, like mad sorcerers’ apprentices, and drag us up to the precipice for a look down into the abyss.
As the financial experts all over the world use machines to unwind Gordian knots of financial arrangements so complex that only machines can make — “derive” — and trade them, we have to wonder: Are we living in a bad sci-fi movie? Is the Matrix made of credit default swaps?
When Treasury Secretary Paulson (looking very much like a frightened primate) came to Congress seeking an emergency loan, Senator Jon Tester of Montana, a Democrat still living on his family homestead, asked him: “I’m a dirt farmer. Why do we have one week to determine that $700 billion has to be appropriated or this country’s financial system goes down the pipes?”
“Well, sir,” Mr. Paulson could well have responded, “the computers have demanded it.”
Richard Dooling is the author of “Rapture for the Geeks: When A.I. Outsmarts I.Q.” .
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http://www.nytimes.com/2008/10/19/opinion/l19machines.html
Letters
Who’s the Boss, You or Your Computer?
Published: October 18, 2008
To the Editor:
Titus Neijens
Related
Re “The Rise of the Machines,” by Richard Dooling (Op-Ed, Oct. 12):
It’s true that computer models have tied a financial knot too complex for human understanding. Nevertheless, the financial crisis could have been prevented by regulations to limit leverage and to require transparency in the derivatives market. But now a much larger crisis looms later in the 21st century: the machines that are far smarter than humans.
But we need not despair if we turn to well-thought-out regulation and international coordination. The thoughts of such machines may be beyond our understanding, but we can require that they all be designed with benign motives.
Bill Hibbard
New York, Oct. 12, 2008
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To the Editor:
The financial industry’s quant formulas are not beyond the layman’s understanding.
“Derivatives” may sound familiar from high school calculus; they are functions whose value is derived from the value of another, known function. In the present crisis, our error was in trusting Richard Dooling’s “geeks” to provide the machines with accurate functions.
The math wizards who built these models used overly optimistic theories about real-life situations — few foresaw stagnation in wages leading to high rates of foreclosure — to produce hypotheses, and then put real money into flawed models. Certainly the value of a derivative is positive when it depends on the assumption that ballooning adjustable-rate mortgages will continue to be paid, but what if borrowers default en masse?
We can’t afford to forget that math is a science, bounded by the same empirical rules as any other.
Michael Niland
Boulder, Colo., Oct. 12, 2008
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To the Editor:
Richard Dooling suggests that we now have financial instruments that only computers can fathom, thereby disempowering, and even enslaving, their erstwhile human masters.
Mr. Dooling cites Dr. Freeman J. Dyson, the physicist, who has described his infatuation with the “seductive power” of “technical arrogance,” and then asks: “Are we living in a bad sci-fi movie? Is the Matrix made of credit default swaps?”
There is, of course, an alternative view: Dr. Dyson’s Los Alamos colleague, Richard P. Feynman, who famously said (and demonstrated through a number of brilliant, conceptually transparent books and lectures) that even the most abstruse concept should be explainable to anyone of normal intelligence using simple words, and props found around the home.
Caveat emptor.
David Sadkin
Bradenton, Fla., Oct. 12, 2008
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To the Editor:
In noting that very, very complex financial transactions underlie the subprime mortgage mess, Richard Dooling repeats something that is true, but not important.
The technical complexity of these transactions is not relevant to a broad understanding of the financial crisis, which can be explained, I believe, in a very simple way: imprudent behavior on the part of supposedly sound financial institutions.
These firms did not do this because they did not understand the risks of complex financial instruments; they did this because they were, while the party lasted, making enormous sums of money.
As usual, it is something simple — greed — that best explains why people do what they do.
Ezra S. Abrams
Newton, Mass., Oct. 12, 2008
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To the Editor:
Richard Dooling explains the dangers of computer-driven financial instruments, but I must protest his alarmist projection of “the havoc we can wreak by off-loading our minds onto super-intelligent machines.” We do not off-load our minds onto the machines — but off-load only certain reasoning processes, like algorithms.
Only a human could decide, like Warren Buffett, that these instruments are so complicated that I’m not going to trade them.
Bob Lucas
Oakland, Calif., Oct. 12, 2008
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To the Editor:
The truth is that computers are created by humans. They are not superintelligent. Even on Wall Street, they merely count very fast at the behest of their human masters, and only fools or idolators imagine they are wise.
You don’t have to be a rocket scientist to look at the world around you and conclude that natural stupidity trumps artificial intelligence any time.
Emanuel Derman
New York, Oct. 12, 2008
The writer is director of the master’s program in financial engineering at Columbia University.
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