robincheung.info MbAlog Finance Blog of an MBA Grad and PhD Student

March 6, 2010

Arrogance of Science, and Rubiks Cubes

I have found that modern scientists have a certain arrogance that was not as evident in the past–a sense that “science has arrived,” and “we didn’t know better back then, but we got it right, now.” And it is this feeling that science cannot do wrong now, I believe, more than anything else, that is dangerous. The other day, I heard on CBC radio (Canadian Broadcasting Corporation is Canada’s public broadcaster, and might be compared to NPR, but it also comprises three radio streams and does broadcast content from alternative, contemporary, and classical music to talk radio) the other day that some scientists had begun to think that the greenhouse gases were out of control and that a viable solution would be to build an orbiting solar shield to counter global warming. That is precisely the kind of thinking that I find is absolutely irresponsible that happens across the pure, applied, and social sciences. We see it in medicine when a researcher makes the leap from “low blood levels of X result in Y,” to a drug that raises X and causes all sorts of complications with Z, W, and the other due to complex interactions that were difficult to anticipate given the rigid framework of quantitative methods. We see it in economics when we build increasingly accurate econometric models that are great for explaining what is causing economic crises and then try to operate these models in reverse to fix economies.

Some of the most famous and pivotal scientific developments of our time were once developed by Catholic priests and monks. Some of the most compelling mathematical and engineering developments have been made by devout Muslims in the earlier years of Islam. Yet now, the divide between science and religion has never been greater; indeed, the father of modern genetics can be considered a Catholic priest, Gregor Mendel, who studied heritability in pea plants. Having completed my own degree largely in molecular genetics (although I also extensively studied evolutionary and population genetics) before I had converted to Catholicism, people look at me in amazement and wonder how I can responsibly call myself a Catholic, knowing what I do as a scientist. Still more are shocked that I converted from no religion to Catholicism after completing my degree.

Before beginning my MBA in 2000, I was faced during my GMAT exam with a question pertaining to government funding of the arts, as part of my Analytical Writing Assessment. I cannot, of course, go further into detail about the question since I signed an agreement not to disclose test questions, but at the time I still held the belief that arts, such as literature and visual arts, should be maintained as hobbies, while artists supports their own–and society’s–needs through being a regular employed contriburing member of society. I now see the value of government funding of the arts. I now see the value of what could not be achieved without this freedom. I extend the same belief to science. With increasing funding coming from industry–with its associated expectations to do science that satisfies an intermediate- to short-term business goal–it is vital that the government maintain adequate funding–especially to the pure sciences–such that research without directly obvious commercial application or that runs afoul of current industry wisdom will still be carried out. University research must not be allowed to become an extension of a pharmaceutical R&D lab.

It is interesting how I arrived at that belief through inductive reasoning. I have recently become a huge fan of the Rubiks Cube, and subsequently, all of its larger cousins available commercially, ranging from the 2×2x2 Rubiks Cube to the 7×7x7 V-Cube 7. I have made many discoveries in pure inductive reasoning through it. I often found that traditional logic puzzles have a weakness where any critical thinker can “outsmart” the questions by thinking of exceptions and “what ifs.” Indeed, that might be the *responsibility* of a critical thinker. But reduced to coloured cubelets moving around, the Rubiks-type cube puzzles present to me a pure opportunity to study reasoning, much like Chess is to strategy.

I realize that there exist many algorithms to solve the cube, some of which involve no problem-solving or strategic skills whatsoever, and while I do not find much value in using these mindlessly following steps to solve the cubes, I do now encourage all beginning cubers to learn the simplest beginner methods–which reduce solving the basic 3×3x3 cube to six basic steps, recognizing a simple situation, and repeating a series of repeated moves–in order to be able to solve the cube well enough without thinking that the cuber can begin to focus on watching the behaviours of the cubelets. When I begin teaching someone to DJ or play the piano, for example, it is impossible to learn things like phrasing or articulating motifs while still trying to learn the technical skills; thus, beginners to musical instruments must focus on technique before interpretation. Likewise with cubing, a beginner set of algorithsms helps be able to solve the cube and focus entirely on studying the cubelet movements without being distracted by also thinking how to solve the cube.

But once someone is able to solve the cube in under roughly two minutes, I advise abandoning the beginner method for more intuitive ones. My favourite of these, the Jessica Fridrich method, eschews the initial first- and second-layer algorithms for a set of intiutive steps that complete the first two layers simultaneously.

When one progresses to the 4×4x4 cube (and higher order cubes), they will recognize immediately that the most common general solutions for them are to reduce the cube into a 3×3x3 and solve as usual–all centre cubelets are filled in and move as a single centre, and all edge cubelets between corners are paired and move as a single edge piece. There are issues that can arise in a 5×5 that could not exist in a 4×4 (a 5×5 has a 3×3 centre, whereas a 4×4 has only a 2×2 centre–in order to fill in 5×5 centres, it is necessary to fill in a 2×3 on one face, and a 1×3 on a separate face; then displace a 1×3 line of the 2×3, rotate the face, and return the displaced 1×3 in the empty 1×3 slot). This strategy had to be deveoped because the 4×4 only had two 1×2 slots for centres, whereas the 5×5 has three 1×3 slots.

When generalizing, therefore, is the pattern to fill in centres layer-by-layer, or to fill in two separate halves of a centre and join them? That is also not evident yet because the 5×5 does not have enough layers to abstract that information.

Moving onto the 6×6x6 cube (which has a 4×4 centre), it is readily apparent that the way to fill in centres is buiding two separate 2×4 segments and merging them because once a 3×4 block is created, attempts to displace and replace a1×4 block will disrupt the portion of the block between the middle of the cube and the second layer. Moving onto the 7×7, new challenges to the approach that worked so well for the 4×4, 5×5, and 6×6 come into view that could not exist because of the fewer layers in previous cubes.

But all other strategies and algorithms remain the same as lower-order cubes.

It is that elegance, beauty, and simplicity, the complexity, that I have come to appreciate from cubing. And the process of abstracting generalizations that apply to all (n-layer) cubes that I learned by developing strategies for solving (n-1)-, (n-2)-, and (n-3)-layer cubes, for example.

The same inductive reasoning do we strive for in qualitative research designs.

March 3, 2010

CYA: Consider Your Audience!

Filed under: Business Education, MBA — djRobIncMBA @ 00:47

It is interesting that Dr. Winsten-Bartlett mentioned the Academy of Management as a potential audience. I recently completed reviewing two papers for presentation at the Academy of Management annual meeting this August in Montréal in the Business Policy & Strategy category. Both papers were highly theoretical and quantitative and nature. From reviewing these papers I gained the sense that the Academy of Management comprises highly educated members of the academic and professional community who are prepared to delve deeply into topical and compelling issues that are thoroughly grounded in theory. The Academic of Management is an example of one of organization to which the results of my proposed quantitative study assessing the performance of Islamic Shariah-compliant debt instruments could be presented. In selecting the data for presentation to the Academy of Management, I would include a comprehensive review of the literature outlining the background behind Shariah law and the potential number of customers the issue affects. I would include a balanced assessment of the results, including a sensitivity analysis to put the data into context as well as test statistics to demonstrate the validity of the findings. Presentation at the annual meeting as well as publication in one of the Academy’s peer reviewed journals would be the best avenue for presenting to this audience.

In presenting the results of the proposed study to the International Institute of Islamic Business and Finance (www.iiibf.org), the audience is already well-versed in issues such as potential market size affected. Members of the IIIBF are academics who would appreciate detailed sensitivity and statistical analyses and value comprehensiveness over visual presentation. Members would find most valuable a submission to their peer-reviewed journal that they could use as a reference and basis for their future work.

On the other hand, an organization greatly interested in the practical applications and interpreted results would be the Office of the Superintendent of Financial Institutions of Canada (http://www.osfi-bsif.gc.ca/), the regulator responsible for approving any applications for institutions to offer Islamic banking products in Canada. This organization, known for its stringent requirements that kept Canadian banks relatively safe during the credit crunch (OSFI, 2008), would be interested in knowing that the data are valid and accurate, but would comprise officials and practitioners who would appreciate a digest of the data in graphical format showing the potential impact on the financial market and market size. While statistical validation and sensitivity analyses are still important to support the conclusions, it is likely that these would be made available as appendices to the report and only graphical presentations and bottom-line conclusions would be presented. In this case, a brief Powerpoint presentation outlining only a distillation of the most important findings in graphical form as well as a concise written report with clear recommendations supplemented with comprehensive data in appendices would be the most effective means to communicate findings.

References

Office of the Superintendent of Financial Institutions (OSFI). (2008). Remarks by Superintendent Julie Dickinson. Retrieved February 17, 2010 from http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/speeches/Julie_Dickson_FSI_speech_2008_e.pdf

Evaluation Research: Motivations and Methods

Filed under: Business Education, MBA — djRobIncMBA @ 00:38
Powell (2006) outline numerous goals of evaluation research, including accounting for use of limited resources, increasing visibility of organizations, and to provide feedback to staff. With these goals in mind, organizations can employ one of the three methods previously discussed in the course: quantitative, qualitative, or mixed methods.

In terms of quantitative evaluation research, while experimental or survey designs can still be used, due to the dynamic nature of an on-going programme, it can often be difficult to establish and maintain control variables, resulting in an inability to determine authoritatively sources of variation in performance. Survey methods can identify trends but are less than compelling methods for identifying causal relationships which could be much more convincing arguments to maintain or increase funding in today’s fiscal climate of frugality.

Similarly to summative research, qualitative research can provide a more holistic approach to evaluating social programmes. Powell (2006) points out that they can provide subjective views of dynamic programmes with great flexibility without being unduly intrusive to participants; however, he cautions that qualitative research, being subjective, is not able to provide objective data and results may or may not be representative or generalizable.

When considering evaluating a social programme’s effectiveness and making improvements, it would therefore seem natural that a sequential quantitative-qualitative approach might be appropriate; first, a quantitative survey design to assess performance, identify areas of potential improvement or increased efficiency, and then a qualitative portion to explore feelings and identify diverse potential solutions.

Powell, R. R. (2006). Evaluation research: An overview. Library Trends. 55(1):102-20.

February 21, 2010

Walden Finance PhD Self Pre-Assessment

Filed under: Business Education, MBA — djRobIncMBA @ 23:42

In Commonwealth countries, there are commonly two types of degrees: a three-year “Pass” degree and a four-year “Honours” degree.  There are no Associates degrees and college credits are not readily transferable to university programs.  The major differentiator between a Pass and Honours degree is the requirement of formal research and preparation of an “Honours Thesis.”  Having completed a four-year Bachelor of Science, Honours, in Biology and Biotechnology (B.Sc.H.) degree, I completed two other formal research papers in addition to the requisite thesis.  As such, I feel that I have a solid grounding in scientific research and writing.  [CWB1] At the undergraduate honours level, however, the research design is not as rigorous as at the graduate or doctoral level.  While I had the benefit of a experienced thesis supervisor to guide me in the design process, at that point in my academic development, however, I was highly focused on how best to absorb the foundational knowledge required to complete the thesis and did not benefit as much as I would now from the research design process.  I did, however, spend an entire semester preparing the proposal itself as a research course credit.

Since then, I have matured both in terms of theoretical background as well as in how I decompose, parameterize, and solve problems.  I am much more able to distil a real-world issue into its theoretical components and isolate the crux of the issue to be researched.  I am also much better at understanding the relationships between the components of a problem and thus better at identifying the most effective ways to test and critically analyze individual components of research problems.[CWB2]

While there is a great diversity amongst MBA programs in terms of research emphasis, I attended a traditional brick-and-mortar AACSB program at McMaster University outside Toronto.  While the MBA program at my Alma Mater (Carleton University, Ottawa) comprised coursework, praxis, and research thesis, it was not an AACSB school; the emphasis of most MBAs is on professional development rather than theoretical or academic, however, and my uncle, a tenured professor of accounting and finance at an AACSB school continues to stress the importance of AACSB accreditation, my decision to attend Walden University notwithstanding.  That said, my presentation style since undergraduate had become more flashy and less formal.  During and after my MBA, I reported directly to a finance vice president at Canada’s then-second-largest bank, making my writing still less formal, favouring impact over substance.  Presentations to project leadership and executives often demanded ex post analyses to support their “pet projects” rather than formulate optimal ones.  [CWB3] Ever since a young age, I was placed in a segregated gifted program which nurtured a strong sense that I was destined for academia.  When I decided to complete my MBA, I felt that I was at once challenging myself in a new, more practical direction, but also that I was compromising on my dreams of making a significant positive contribution to humankind’s knowledge base as a whole and instead would devote my intellectual efforts to developing private enterprise, the results of which research would be hoarded as trade secret, or patented at best.

The dissertation rubric provides a rigorous yet flexible framework for the formal academic product demanded of doctoral students.  It does outline in detail the degree of detail stipulated while at the same time leaving enough latitude to develop and express scientific developments at the doctoral level.  I am confident that combined with the feedback of my mentor, Dr. Javier Fadul, an experienced researcher who has the advantage of having completed the Walden doctoral program, himself, I will quickly re-acclimate to more formal structured research methods of inquiry and presentation.

In terms of research methodology, I believe I am more comfortable with quantitative methods of inquiry.  From previous research in the pure sciences, I am accustomed to surveying the previous literature and identifying a potential area for development or critically analyzing previous findings to test in a new way, developing a quantitative methodology to test new hypotheses, and presenting these new conclusions in a compelling manner.  I do feel, however, that because of my background in the pure sciences, I am biased toward predominantly quantitative methods and will maintain a heightened awareness of this during my research design so as not to default to a suboptimal methodology.

While I understand that doctoral level research is of a much more rigorous and structured nature than any previous research I have completed, I am eager to develop new skills and perfect ones I already have in Walden’s doctoral program.


[CWB1]Excellent!

[CWB2]Very thoughtful

[CWB3]Yes, you will need to get used to formal, academic writing. The best way to do that is to read scholarly articles in your discipline. It will give you a sense of the style and expectations.

Portfolio Theory and CAPM

Filed under: Business Education, MBA — djRobIncMBA @ 23:36

Conventional wisdom amongst investors recommends maintaining a diversified portfolio.  The reasoning behind this, however, is not so common knowledge.  One theory put forth by Harry Markowitz, Modern Portfolio Theory, asserts that asset returns represent normally-distributed random variables, each with their own variances, and quantifiable risk being represented by standard deviation (Markowitz, 1999).  While variants of Modern Portfolio Theory are still in use in the financial industry, and its main theorists had won the Nobel Prize for its creation, it has recently been the subject of increased criticism, citing its dependence on rational investor behaviour and market efficiency (The Economist, 2009).  Building on Markowitz’s earlier work, Sharpe (1964) proposed the Capital Asset Pricing Model (CAPM) for pricing risky securities.[cwb1]

Before Markowitz formalized his portfolio theory in 1952 (Markowitz, 1999), investors had already held the belief that diversification of portfolios could reduce risk while preserving an adequate level of returns.  Portfolio theory assumes that investors are risk-averse; that is, given two securities with identical returns, investors will prefer the security with the lower risk (Markowitz, 1999).  What Markowitz (1952) contributed, however, was a formalization to diversification.  Prior to Portfolio Theory, informed investors understood that it was in their best interests to maintain a diverse set of securities in a given portfolio.  Markowitz (1952) demonstrated that correlation between securities can be quantified and as long as securities are not perfectly positively correlated, their combination in a portfolio will result in reduced overall portfolio risk.  Further, he explained that the variance of the overall portfolio is a function of the variances and covariances of the individual securities comprising the portfolio (Markowitz, 1999).  His landmark 1952 paper showed how a subset of the possible portfolio compositions, the efficient frontier, represented the lowest level of risk for a given level of return.

Building on the quantified risk concept described by Markowitz (1952), Sharpe described a pricing theory for risky securities comprising two components: a risk-free rate of return equal to the return of a security with no default risk (such as a US Treasury bill) and systematic risk (“beta”) coefficient of risk responsiveness relative to market risk premium (Sharpe, 1964).  The result of this relationship is encapsulated graphically in the Security Market Line.  While Markowitz (1999) pointed out that even Shakespeare included wisdom about portfolio diversification in The Merchant of Venice, it was not until Markowitz (1952) and Sharpe (1964) that widely accepted quantitative models of the relationships between risk, return, and asset pricing gained acceptance.

Although Portfolio Theory and the Capital Asset Pricing Model are key theories in finance, contemporaries of Markowitz (1952) and Sharpe (1964) have identified a number of opportunities for these theories to be developed further.  It is possible, for example, that returns may not be best represented by a normally-distributed random variable in all cases.  There are also special groups in the population that behave contrariwise to the typical “rational investor” either for psychological or, in some cases, even religious reasons: Islam is the fastest-growing religion in the US (Dar & Presley, 1999).  Islamic law forbids earning interest [cwb2] on debt but allows—even encourages—investors to earn a return for taking on risk in their investments (Chiu, Newberger, & Paulson, 2005).  Consequently, there are legitimate explanations for rational investors to make decisions that under previous assumptions would be classified as nonrational.  Very interesting

Game theory is another revolutionary development of the 20th century that at one time was hoped to elucidate investor behaviour.  Due to the complexities of large systems, particularly involving human behaviour, it too has proved to be somewhat underwhelming in terms of predictive ability.  I have long believed that such studies of economics are excellent tools to identify themes and understand behaviours, but that human behaviour is too complex for these models to propose appropriate interventions.  While blood levels of a certain nutrient may show a deficiency is causing a certain symptomology, supplementation of this nutrient may not have the desired effect because of complex interactions that were not readily apparent from observations.  I believe this is so with economics and financial markets as well.  Even if individual causal interactions could be identified from existing models, they might still not be applicable in situ.  Thus, I believe that the concepts Markowitz (1952) and Sharpe (1964) put forth in their theories, such as quantification of risk and interactions of risky assets, are important for future research; yet, research must still be done to find parsimonious models with predictive power, as well as interventions that can be practically applied to real-world investment decisions.

Excellent – very thoughtful discussion. Provide additional information about how the theories are relevant to your proposed study topic. Correct apa format
References[cwb3]

Chiu, S., Newberger, R., & Paulson, A. (2005). Islamic Finance in the United States. Society. September/October, 2005. 64-8.

Dar, H. A., & Presley, J. R. (1999). Islamic Finance: A western perspective. Int. J. Islamic Fin Svcs 1(1): 1-9. Retrieved from http://www.iiibf.org/journal.html

The Economist. (2009). 392(8640): 68-69. EBSCOhost Accession Number 43283844. Retrieved from http://ezp.waldenulibrary.org/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=43283844&site=ehost-live&scope=site

Markowitz, H. M. (1952). Portfolio selection. Journal of Finance.  7(1):77-91.

Markowitz, H. M. (1999). The early history of portfolio theory: 1600-1960, Financial Analysts Journal, Vol. 55, No. 4

Sharpe, W.F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk.  Journal of Finance.  19(3): 425-44.


[cwb1]Very good

[cwb2]Provide more transition to lead up to this. If important, expand

[cwb3]Correct apa format

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