Klaatu Barada Nikto!

In the movie The Day the Earth Stood Still (sorry, Keanu, there is still only one version of this movie), the alien Klaatu, who suspiciously looks a lot like a human actor named Michael Rennie, trusts the heroine of film to say the magic words "Klaatu barada nikto" in order to save the people of our planet from destruction.  The film is an apt metaphor for fear of the unknown, our self-destructive and violent tendencies, and our ability to prejudge.  In the context of the film, the robot Gort acts as an overseer and enforcer.  Since we are so flawed, Klaatu's people built Gort and his like to keep us in check.

At the conclusion of my last three posts, I have proposed the concept of a multiple payoff game and the notion of a computer model or simulation whose purpose (unlike Gort, whose real purpose is to enforce--something that would be truly too dangerous to build) is to help us better understand the trade-offs and costs when exchanging one value for another.  Note that the language of multiple payoff games includes stochastic (random / probability) variables as well as well understood, deterministic ones.  I have also mentioned that, according to Sudipta Sarangi, such a model could not be used as an accurate predictor of events (no one has a crystal ball), but as a way for us to be able to understand the long reaching consequences of value choices.

It may sound like science fiction or technological gobbletygook, but these exact kinds of models are already being done by banks.  We already have multiple payoff models.  We like to think of the free market and business as being measured in terms of dollar bills, but the U. S. dollar (USD) is only one currency in a vast exchange that includes many currencies (GBP, AUD, EUR, etc.), commodities (gold, oil, pork bellies, etc.), equities (stocks), options and futures (the contract to buy or sell something at a specific price), loans (commercial paper, corporate loans, mortgages, government bonds, municipal bonds, etc.), and derivatives (insurance contracts such as CDS, structured products such as CMOs, etc.).

Each bank has its own private model of the financial world, and each bank keeps its methods secret, hoping to use it to its own financial benefit.  And yet, these models, which are part of what we call capitalism today, are absent of our other human values.  For all of their risk analysis, the payoff is still in terms of a single pure net gain.  If a bank has lots of USD and inflation risk is high, it performs a currency swap and expresses its wealth in another currency.  The collapsed Lehman Brothers, for instance, came under ethical fire for its Repo 105 tactic--taking a portion of its loss and "lending it out" overseas to be bought back later at 5 percent interest, removing it successfully from their balance sheet.  It's a bit like Bill and Ted's Excellent Adventure, where the time-traveling protagonists realize that, while they don't have time to do all they need to do, they have time after they succeed to come back and fix it (so long as they remember to).

Most of us are unaware that these kinds of multiple payoff games exist.  We think in terms of dollars, because that is how we get paid.  We don't stop to think, "what if the same dollar tomorrow won't buy us the same loaf of bread?"  Unless we travel or do business in England, chances are that we never trade in "cable."  And many of us don't have the foggiest idea why we would ever want to buy a credit default swap--unless we are following the media's version of the credit crisis and thinking of it the bane of all evil (though it has a very legitimate role).

While many of the holes in banking have been plugged through legislation that got mostly unnoticed this year (due to more sensationalistic news, such as the Tea Party and Lady Gaga), the essence of banking is still there and the mathematics behind examining multiple payoffs is still the same (positioning and risk).

My approach is to adopt the same economic models that banks use, but adapt them to include new variables.  Carbon emissions is an easy to quantify example, but the Gini coefficient (economic "fairness"), political instability, etc., all play roles in the model.  It is not that different an idea than what technologies such as Palantir have attempted to do, only in a more public way.