12/8/21
Paul Singer is Bearish; Covid’s back; The Intersection of Machine Learning & Cyber-Security; You Don’t Like Me When I’m Bored; Again: Beware of unregulated crypto exchanges and NFTs
So You’re Telling Me Paul Singer is Bearish
Paul Singer of Elliott Management in the FT
With all this in mind, it is puzzling that a growing number of otherwise sober money managers are in the process of boosting their allocations to riskier assets, rather than trying to figure out ways to make some kind of rate of return without giving back years of capital accretion in the next crash or crisis. Investors who have upgraded their risk levels, relying on policymakers to protect the prices of their holdings, may suffer significant and perhaps long-lasting damage when the government-orchestrated music finally stops.
Covid’s back
One of the most timely ways of measuring covid is to look for it in waste-water. Here is covid in Boston waste water.
The Intersection of Machine Learning & Cyber-Security
The intersection of two hot topics: an important risk management area where there has been little written to date.
A new paper by Grotto and Dempsey, Vulnerability Disclosure and Management for AI/ML Systems: A Working Paper with Policy Recommendations, is certainly worthwhile reading, and maybe you should forward this to the folks in your organizations that are responsible for such things.
Abstract
Artificial intelligence systems, especially those dependent on machine learning (ML), can be vulnerable to intentional attacks that involve evasion, data poisoning, model replication, and exploitation of traditional software flaws to deceive, manipulate, compromise, and render them ineffective. Yet too many organizations adopting AI/ML systems are oblivious to their vulnerabilities. Applying the cybersecurity policies of vulnerability disclosure and management to AI/ML can heighten appreciation of the technologies’ vulnerabilities in real-world contexts and inform strategies to manage cybersecurity risk associated with AI/ML systems. Federal policies and programs to improve cybersecurity should expressly address the unique vulnerabilities of AI-based systems, and policies and structures under development for AI governance should expressly include a cybersecurity component.
You Don’t Like Me When I’m Angry Bored
Folks who’ve worked with or for me know that bad things can happen when I get bored. Without self control, I would issue tasks and interfere in the day-to-day work. Well, I just want you to know that maybe it’s not just me.
Ethan Mollick has brought attention to some interesting research: let me quote from a few papers.
In 11 studies, we found that participants typically did not enjoy spending 6 to 15 minutes in a room by themselves with nothing to do but think, that they enjoyed doing mundane external activities much more, and that many preferred to administer electric shocks to themselves instead of being left alone with their thoughts. Most people seem to prefer to be doing something rather than nothing, even if that something is negative. (Just think: The challenges of the disengaged mind)
This might explain my fascination with binder clips
[W]e offered participants choices between performing a cognitively demanding task or experiencing thermal pain. We found that cognitive effort can be traded off for physical pain and that people generally avoid exerting high levels of cognitive effort. (Forced choices reveal a trade-off between cognitive effort and physical pain)
What gives rise to sadism? ... We help close this gap by suggesting that boredom plays a crucial role in the emergence of sadistic tendencies. Across nine diverse studies, we provide correlational and experimental evidence for a link between boredom and sadism. We demonstrate that sadistic tendencies are
more pronounced among people who report chronic proneness to boredom in everyday life. (On the relation of boredom and sadistic aggression)
Some might suggest that this is one reason I might not stay retired.
Again: Beware of unregulated crypto exchanges and NFTs
Past newsletters have probed the risks associated with Tether and other supposedly secured cryptocurrencies.
A recent paper, Crypto Wash Trading, sought to identify “robust statistical and behavioral patterns in trading to detect fake transactions on 29 cryptocurrency exchanges.”
“We show that many unregulated crypto exchanges are engaged in excessive wash trading.
We estimate the average wash trading to be 53.4% of trading on unregulated Tier-1 exchanges and 81.8% on Tier-2 exchanges and provide several robustness and validation tests.”
Non-fungible tokens, or NFTs, build further on the blockchain by providing the owner of the token with ownership of a registry on the blockchain that may or may not have value. Mostly, it seems NFT “investors” have been bidding up pictures of cryptopunk apes, but recently a group purported to try and buy a copy of the US Constitution using NFT technology.
It might not surprise you that this looks pretty shady.
Mapping the NFT revolution: market trends, trade networks, and visual features, analysed data concerning 6.1 million trades of 4.7 million NFTs between June 23, 2017 and April 27, 2021, obtained primarily from Ethereum and WAX blockchains. The top 10% of traders have traded 97% of NFTs which “definitely puts meat on the bones of the hypothesis that a lot of NFT trades are wash sales intended to artificially boost prices.”1
For those looking for a primer on the DeFi industry, the BIS just published a very good summary. It is much more extensive than ‘bitcoin’ but also has numerous challenges before it can fully compete with the existing financial infrastructure. DeFi risks and the decentralisation illusion. The paper looks at the risks of DeFi, in particular the high relative leverage, but also concludes that for the moment the potential spillover from DeFi runs to the traditional financial system is limited.
Decentralised finance (DeFi) is touted as a new form of intermediation in crypto markets. The key elements of this ecosystem are novel automated protocols on blockchains – to support trading, lending and investment of cryptoassets – and stablecoins that facilitate fund transfers. There is a “decentralisation illusion” in DeFi since the need for governance makes some level of centralisation inevitable and structural aspects of the system lead to a concentration of power. If DeFi were to become widespread, its vulnerabilities might undermine financial stability. These can be severe because of high leverage, liquidity mismatches, built-in interconnectedness and the lack of shock absorbers such as banks. Existing governance mechanisms in DeFi would provide natural reference points for authorities in addressing issues related to financial stability, investor protection and illicit activities.
What I’m Listening to: The War on Drugs - "I Don't Live Here Anymore"
What I’m Buying: Series I Savings Bonds yielding 7.1%
Dare Obasanjo, Twitter