Ted Hu Responding to my Google IPO Post

I’m just going to pull his entire comment into the main blog because I thought it was interesting.

Basically, economics is about decisions made to rationalize scarce goods against relatively unlimited human desires. It also suggests that in the short-run, decisions aren’t particular rational (e.g. market bubbles), whereas in the long-run market decisions behave more rationally (though according the Keynes, in the long-run we’re all dead anyway).

Currency is very much faith based, a type of non-interest charging credit card issued by Uncle Sam or some other institution. Wrt stocks and IPOs, Google’s IPO is based on future expectations, and until you have enough data points to form a regressable time-series to establish a historical (and more predictable) pattern of actual vs. expected returns, the future expected valuation of a stock will remain pretty volatile. With more datapoints, better extrapolations can be made and the stock valuation becomes more accurate (e.g. Microsoft, albeit too predictable 🙁 ).

Many great mathematicians had mental problems. John Nash, before he went into 20 dark years of paranoid schizophrenia, pioneered game theory, based on groundbreaking work of math legends von Neumann and Morgenstern. It provided a highly rigorous mathematical framework to rationalize “non-cooperative” games [with incomplete information and for mutual gain]. Before Nash, von Neumann and Morgenstern’s work dealt strictly with the non-cooperative zero-sum variety between two parties.

The main purpose of game theory is to consider situations where instead of agents making decisions as reactions to exogenous prices (“dead variables”), their decisions are strategic reactions to other agents actions (“live variables”). An agent is faced with a set of moves he can play and will form a strategy, a best response to his environment, which he will play by. Strategies can be either “pure” (i.e. play a particular move) or “mixed” (random play). A ” Nash Equilibrium” will be reached when each agent’s actions begets a reaction by all the other agents which, in turn, begets the same initial action. In other words, the best responses of all players are in accordance with each other.

If you think of Google’s IPO Dutch auction as a long series of games played by many non-cooperating agents with mutual gains, digging into game theory will help you understand and perhaps predict a set of optimal strategies for such an auction.

Though all this would be super helpful at assessing Google’s valuation over time, the math to do it well in near real-time is beyond most people, including myself, since just remembering your calculus alone wouldn’t cut it. It’s an fascinating field, nonetheless.

Comments (3)

  1. 小说 says:

    You are right that it is interesting and useful for me .

  2. Gary Cornell says:

    I was a mathematician for 20 years before I co-founded Apress and still think about it from time to time. So forgive me but comments like this one really p*ss me off. It is total bul*sh*t to assert that mathematicians are any more prone to mental illness then other people. From two canonical examples, (Cantor and Nash) people spin completely out of control.

    What *is* probably true, is that, like great computer programmers and theoretical physicists, mathematicians are probably more likely to have a degree of "mind blindness" (in the sense of Simon Baron-Cohen). That is to be further along on the bell curve for Asperger. I would go so far as to say that it is likely that having a degree of Asperger syndrome (or equivalently Asperger like qualities) is *necessary* for sucess in a purely theroetical subject but, this ability has *nothing* do do with making one more prone to "metal illness".

    Gary Cornell

  3. Ted Hu says:

    I’m surprised to see so much was extrapolated from essentially a single, short sentence written weeks back. In it, no cause and effect was implied nor was it assumed that mathematicians are more prone to mental illness than other group of people.

    Perhaps "Many great mathematicians had mental problems" was too vague. While not rising to the clinical definitions of mental illness a la Cantor and Nash, "other ‘unusual’ mathematicians" that come to mind include Leibniz, Boole, Frege, Hilbert, Gödel, Turing, von Neumann, and a prodigal Indian mathematician of the early 1900s (whose name escapes me right now) that died in his 20s due to mental illness shortly after his arrival at Cambridge.

    Historically speaking – and in context of an earlier comment in JohnMont’s original entry along lines that Nash was uniquely insane – point remains, Nash wasn’t unique – others (mathemticians, physicists, economists, population in general) are similarly afflicted.

    My humble background in this area rests in my economics training which include some graduate work in economic development, before veering to computing/programming altogether.