April 28, 2016

Nautilus - Why It’s Hard to Recognize the Unlikely < 5min

We are exposed to possible events all the time: some of them probable, but many of them highly improbable. Each rare event—by itself—is unlikely. But by the mere act of living, we constantly draw cards out of decks. Because something must happen when a card is drawn, so to speak, the highly improbable does appear from time to time. ... It is the repetitiveness of the experiment that makes the improbable take place. The catch is that you can’t tell beforehand which of a very large set of improbable events will transpire. The fact that one out of many possible rare outcomes does happen should not surprise us because of the number of possibilities for extraordinary events to occur. The probabilities of these singly unlikely happenings compound statistically, so that the chance of at least one of many highly improbable events occurring becomes quite high. ... Persi Diaconis, professor of statistics at Stanford University, describes extremely unlikely coincidences as embodying the “blade of grass paradox.” If you were to stand in a meadow and reach down to touch a blade of grass, there are millions of grass blades that you might touch. But you will, in fact, touch one of them. The a priori fact that the blade you touch will be any particular one has an extremely tiny probability, but such an occurrence must take place if you are going to touch a blade of grass. ... The devil is in the details of how we interpret what we see in life. And here, psychology—more so than mathematics or logic—plays a key role. We tend to remember coincidences such as the one I experienced with my editor Scott and conveniently forget the thousands of times we may have met someone and had a conversation finding absolutely nothing in common.

Bloomberg - Fantastic Fakes: Busting a $70 Million Counterfeiting Ring < 5min

The bills were from a family of counterfeits that had bedeviled agents more than any other, with at least $50 million worth recovered around the world since 1999. Agents called them the Russian-Israeli notes. This particular variation, with “77” stamped in the lower right corner and a set of subtle errors—smudged chevrons, an extra line under one “THE”—was catalogued as Secret Service Circular 23332. It was so common and so good, agents referred to it as the No. 1 note. ... The heyday of American counterfeiting came in the decades before and after the Civil War, when each bank issued its own currency. Amid the confusion, an estimated 1 in 3 bills in circulation was fake. To stop the epidemic, Abraham Lincoln established the Secret Service on April 14, 1865, the day he was assassinated. (The agency wouldn’t officially be tasked with guarding the president until after William McKinley’s killing in 1901.) Then in 1877, the federal government began printing all currency. The counterfeiting trade never recovered, and today the Secret Service estimates just one bill in 10,000 is phony. But with $1.4 trillion in U.S. currency in circulation, that’s still a lot of money. During the last fiscal year, the agency seized about $146 million in fake bills. ... The Russian-Israelis weren’t “supernotes,” the nearly flawless counterfeits the North Korean government has made. They struck a balance between craftsmanship and cost. Any better, and they might not have been profitable.

Foreign Policy - Fear This Man 5-15min

The Blackwater of surveillance, the Hacking Team is among the world’s few dozen private contractors feeding a clandestine, multibillion-dollar industry that arms the world’s law enforcement and intelligence agencies with spyware. Comprised of around 40 engineers and salespeople who peddle its goods to more than 40 nations, the Hacking Team epitomizes what Reporters Without Borders, the international anti-censorship group, dubs the “era of digital mercenaries.” ... The Italian company’s tools — “the hacking suite for governmental interception,” its website claims — are marketed for fighting criminals and terrorists. ... “Privacy is very important,” Vincenzetti says on a recent February morning in Milan, pausing to sip his espresso. “But national security is much more important.” ... Between 2003 and 2004, Vincenzetti and two college friends worked in their dank, underground apartment and coded what would become the Hacking Team’s flagship software. Called the Remote Control System (RCS), it commandeers a target’s devices without detection, allowing a government to deploy malware against known enemies. (The product was later dubbed Da Vinci, then Galileo.) Think of it as a criminal dossier: A tab marked “Targets” calls up a profile photo, which a spy must snap surreptitiously using the camera inside the subject’s hacked device. Beside the picture, a menu of technologies (laptop, phone, tablet, etc.) offers an agent the ability to scroll through the person’s data, including email, Facebook, Skype, online aliases, contacts, favorite websites, and geographical location. Over time, the software enables government spooks to build a deep, sprawling portfolio of intelligence. ... A hacktivist known as Phineas Fisher had hijacked the Hacking Team’s official Twitter account and posted an ominous message: “Since we have nothing to hide, we’re publishing all our emails, files, and source code.” Following the message was a link to more than 400 gigabytes of the company’s most sensitive data.

Paper - Extrapolation and Bubbles > 15min

In the classical account of a financial market bubble, the price of an asset rises dramatically over the course of a few months or even years, reaching levels that appear to far exceed reasonable valuations of the asset’s future cash flows. These price increases are accompanied by widespread speculation and high trading volume. The bubble eventually ends with a crash, in which prices collapse even more quickly than they rose. Bubble episodes have fascinated economists and historians for centuries (e.g., Mackay 1841, Bagehot 1873, Galbraith 1954, Kindleberger 1978, Shiller 2000), in part because human behavior in bubbles is so hard to explain, and in part because of the devastating side effects of the crash. ... At the heart of the standard historical narratives of bubbles is the concept of extrapolation— the formation of expected returns by investors based on past returns. In these narratives, extrapolators buy assets whose prices have risen because they expect them to keep rising. According to Bagehot (1873), “owners of savings . . . rush into anything that promises speciously, and when they find that these specious investments can be disposed of at a high profit, they rush into them more and more.” ... In this paper, we present a new model of bubbles based on extrapolation. In doing so, we seek to shed light on two key features commonly associated with bubbles. The first is what Kindleberger (1978) called “displacement”—the fact that nearly all bubbles from tulips to South Sea to the 1929 U.S. stock market to the late 1990s internet occur on the back of good fundamental news. ... Second, we would like to explain the crucial fact that bubbles feature very high trading volume (Galbraith 1954, Carlos, Neal, and Wandschneider 2006, Hong and Stein 2007). At first sight, it is not clear how extrapolation can explain this: if, during a bubble, all extrapolators have similarly bullish views, then they would not trade with each other.

Fortune - Nestlé’s Half-Billion-Dollar Noodle Debacle in India 5-15min

Nestlé, the world’s largest food and beverage company, has sold Maggi (pronounced “MAG-ee”) in India for more than 30 years, and the brand’s ubiquity and cultural resonance on the subcontinent is something akin to Coca-Cola’s in the U.S. In 2014, Indians consumed more than 400,000 tons of the instant noodles—marketed in 10 varieties, from Thrillin’ Curry to Cuppa Mania Masala Yo!—and Maggi accounted for roughly a quarter of the company’s $1.6 billion in revenue in the country. That year Maggi was named one of India’s five most trusted brands. ... On June 5, 2015, less than a month after Khajuria’s phone rang in the middle of the night, India’s central food regulator announced a temporary ban on the manufacture, sale, and distribution of Maggi noodles. In its order the FSSAI pronounced Maggi “unsafe and hazardous for human consumption,” a designation supported by 30 government lab tests showing Nestlé’s noodles contained excess amounts of lead. ... The Maggi meltdown would prove costly. Nestlé lost at least $277 million in missed sales. Another $70 million was spent to execute one of the largest food recalls in history. Add the damage to its brand value—which one consultancy pegged at $200 million—and the total price tag for the debacle could easily be more than half a billion dollars. And the fallout continues. ... Nearly a year after the ban, Maggi noodles are back on shelves in India, but somewhat precariously so. The product’s future depends on two legal cases that are working their way through the Indian court system. Both pit Nestlé against the Indian government.