Miss Otis Regrets

June 4, 2009

Once upon a time, a friend of mine had a cat — and I think that the cat, had she been a person, would have been certifiably crazy.  She used to race around the apartment at break-neck speed, until she eventually miscalculated on a turn or a stop, and ran head-on into a door or a bookcase or something.  The cat’s name was Miss Otis, after the Cole Porter song, Miss Otis Regrets.

I thought of Miss Otis today when I saw, on the New York Times Web site, an article by John Tierney from the Science section, “In That Tucked Tail, Real Pangs of Regret?”.   Tierney discusses some recent research on the degree of consciousness that animals have.  Traditionally, the view was that consciousness was a uniquely human characteristic, not possessed by “dumb animals”.  But more recently, we’ve seen increasing evidence that some of those animals are not so dumb, after all.   For example, crows have been observed to use tools, and also to make them.  I remember being told, when I was much younger, that my dog could not understand  words, and could only respond to my tone of voice.  Yet there is good evidence that at least some dogs can learn to retrieve specific objects by name (for example, “Bring the keys”). Our dog certainly knows how to “Find Grandma”.

Tierney reports on some  recent research that seems to show that at least some animals can feel something like the human emotions of remorse or regret:

When a coyote recoiled after being bitten too hard while playing, the offending coyote would promptly bow to acknowledge the mistake, Dr. Bekoff said. If a coyote was shunned for playing unfairly, he would slouch around with his ears slightly back, head cocked and tail down, tentatively approaching and then withdrawing from the other animals. Dr. Bekoff said the apologetic coyotes reminded him of the unpopular animals skulking at the perimeter of a dog park.

There is some objective evidence that there is some real part of the animal’s cognition that is being activated:

The latest data comes from brain scans of monkeys trying to win a large prize of juice by guessing where it was hidden. When the monkeys picked wrongly and were shown the location of the prize, the neurons in their brain clearly registered what might have been…

Of course, this is a long way from being able to understand how this feels to the dog, or to the monkey.  (It is perhaps just as well for our self-esteem that our dogs don’t keep diaries or blogs to record their impressions of life.)  It is possible, particularly in the case of dogs, which as a species have been closely associated with humans for so long, that the “regretful” behavior is just a learned response:

When we see a dog slouching and bowing, we like to assume he’s suffering the way we do after a faux pas, but maybe he’s just sending a useful signal: I messed up.

I’m not sure how that question can be resolved, but I think this research adds to the growing body of evidence that we are not nearly so different from other animals as we might like to believe.   But Tierney suggests at the end of his article one question that probably will never be answered: Do pet cats ever regret anything?


Formulas for Disaster, Part 3

June 4, 2009

I mentioned in my first post on this subject, a few days ago, that I had originally not intended to write about it at all, but had changed my mind.  Here’s why.  It occurred to me that, after reading a number of the articles about the factors that contributed to the Wall Street meltdown, it would be easy to come to the conclusion that all of the people involved were either totally venal or desperately stupid.  I think I could even weave quite a convincing “Just So” story to that effect.

Unfortunately, however, I think that story would be a little too economical with the truth.  I have seen, first hand, situations where otherwise well-qualified, intelligent, sensible people have temporarily, in essence, lost their minds.  The combination of rushed time scales and knowledge of how one would like the results of an analysis to come out can definitely impair one’s judgement.   I think the following remark of Richard Feynman’s is relevant:

Science is a way of trying not to fool yourself. The first principle is that you must not fool yourself, and you are the easiest person to fool.

I want to relate a couple of actual situations at which I was present to illustrate what I mean.  As is usual, I have tried to change the details to avoid any personal embarrassment.

The first example I want to talk about came about as part of the evaluation and pricing process for a proposed over-the-counter option deal.  This deal was for what is sometimes called a “barrier option”.  Let’s think about an ordinary option on Microsoft’s stock [MSFT], which Yahoo! tells me closed at $21.73 today.  An ordinary  American put option might give me the right to sell 100 shares of MSFT for $21.00 (the exercise price) during the next three months.  A barrier option might add the feature that, if the price goes above $24 any time during the three-month life of the option, the new exercise price would be $24.  In other words, it would give me the right to “lock in” a certain gain if it occurred.

At the time this took place, barrier options were something of a novelty.  So, before the terms of the deal could be finalized, a good deal of background work had to be done on how the option should be specified and priced.  One key question was whether (using my MSFT case above as an example) the barrier feature was “activated” if the price reached $24 at any time, or only if the closing price reached $24.  I can no longer remember the details of the discussion, which went on for some time, but the traders and the mathematicians came to the conclusion that, in terms of pricing, it didn’t matter which way it was done.

By the time the conclusion was reached, it was probably about 8:00 PM, so we were glad to call it a day.  A colleague and I decided to stop in the pub across the road to have a quick beer.  We got to talking about the prospective deal a bit, and something — neither of us, then or now, could put a finger on just what — bothered us.  So we decided to go back to the office, and set up a simple stochastic (Monte Carlo) simulation of the proposed option’s behavior.  (A Monte Carlo simulation essentially generates a large number of possible future scenarios by figuratively “rolling the dice”, and then computes the resulting gain or loss.  Although this approach is inefficient in terms of computer time, its great virtue is that it is simple, and thus relatively easy to check for correctness.)   We did it more from being stubborn than anything else; perhaps we also thought we’d score some points by demonstrating that our consensus view was correct.

We did the simulation; and to make an already long story a bit shorter, found out that our earlier conclusion, that the details didn’t matter, was severely flawed.  I lost the ensuing coin toss, and had the pleasure of telephoning the Managing Director at home, at about midnight, to convey the happy news.  I am glad to report that I suffered no permanent damage to my hearing.  The next day, though, he was suitably grateful that we had saved him a good deal of money, not to mention embarrassment.  The deal was eventually done, with only a minor delay, and with corrected terms.  As far as I know, all the parties were reasonably well satisfied with the outcome.

My purpose in telling this story is emphatically not to say. “Look how clever we were.”  Rather, it is to say someting like, “Even with a group of experienced and well-qualified people, look how easy it was to come very close to a disastrous mistake.”   I am as sure as I think I could ever be that no one involved had any bad intentions.  But all of us were intrigued by the possibility of doing a new type of deal, and we really wanted to make it work.  Despite what the motivational books might say, the moral of the story is that that can be a dangerous combination.

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