George Sugihara models chaos: fish, brainwaves, climate change, and especially the collapse of financial markets.
Chaos takes many forms to Sugihara. He finds order in disorder, meaning in madness. Fascinated by complex systems, a self-described “kind of half-bank, half-ecologist guy,” he applies the underlying principles of advanced mathematics to the seemingly disparate worlds of biology and high finance.
In June, when the European debt crisis began in earnest and many very important people on both sides of the Atlantic were feeling the first tingling frisson of real fear, Sugihara, 61, jumped a plane from San Diego to Frankfurt and laid out some of his ideas to the heads of the European Central Bank. Simple stuff, you might say, to Sugihara, like the paradox of diversification, the homogenization of the global financial system, how connectivity whether in large banks or fish stocks holds the potential for systemic destabilization, how hyper- connectivity can crash a system, and has, and even how this can be charted.
Sugihara’s ideas, and those of Robert May, his co-author on several now-legendary papers concerning chaos theory and financial markets, have influenced the way the world’s banks and the U.S. Federal Reserve view risk, as well as infusing the Dodd-Frank bill with fresh thinking. Sugihara even has some calm and worrisome thoughts as to whether the world really is on its way out of the current downturn — or not.
Back in the day, the ’80s, Sugihara was a killer young mathematician from the University of Michigan with a yen for biological phenomena, studying lake cores in Africa.
He met up with a then-almost-famous mathematician named Bob May at the Institute for Advanced Studies at Princeton. (May eventually became Lord Robert May, Baron of Oxford, chief scientific adviser to the government of England, and president of the Royal Society.) After Sugihara became a professor at the Scripps Institution of Oceanography (he now holds the McQuown Chair in Natural Science) the two came up with an influential little paper called “Nonlinear Forecasting As a Way of Distinguishing Chaos From Measurement Error in Time Series.”
To this day, Sugihara is a little embarrassed by the title: “Too flashy.”
Even though the paper was the featured article in Nature, the gold standard of the scientific world, some scientists were a little, “I don’t know about this, I mean really.”
But people on Wall Street immediately understood the implications.
There’s a story that Sugihara was brought to a country estate in England, where a banker wrote him an offer on a napkin. The offer was so high that Sugihara was speechless, so the banker crossed out the figure and wrote in a higher one. Sugihara was even more dumbstruck and still couldn’t respond. The banker crossed out the number and wrote in a third amount. “Yeah!” Sugihara blurted out.
At any rate, in the 1990s, Deutsche Bank, then one of the two or three largest banks in the world, installed Sugihara on the 20th floor of Emerald Plaza, the downtown San Diego skyscraper that looks like a casino, with the heliport on top, made him a managing director, gave him a team of 20 bright assistants, the best computers in the world, and carte-blanche to “basically, model the fear and greed of mobs that trade.”
“What was that like, George?” I ask him, as we sit on a comfortable tan worn couch in his Del Mar home, surrounded by great art (Audubon, abstracts from Peter Mackie) and Japanese touches (tatami mats, Zen stone entranceway.)
“It was fantastic,” he smiles softly, wanly, like a child. “We had all this data. (Sugihara loves data.) We executed trades. We had a large amount of notional risk that we could take, billions.”
“Notional means?”
“Underlying value. So if you traded a future, then you wouldn’t need that much actual cash, but the notional value of the future contract is large.”
“And you developed a system, right, the Sugihara patent?”
“Yeah, STS, Sugihara Trading System. It’s not patented. But it is a trade secret.”
“Was that an attempt to use new ideas of modeling large data to predict trends?”
“Yeah, it was pretty effective. It was sort of a custom-built system for exploiting market inefficiencies, for finding what appeared to be imbalances and taking advantage of them.”
“Was it fun?”
“I loved it. It was high stress and fun. It’s great to have your profit/loss be your measure of success, and the quality of your work not be dependent on some arbitrary opinion. You can go, ‘Look, here are the numbers.’ That was nice.”
After four or five years, though, Sugihara gave it up. Money interested him, but he cared more about “the generic behaviors that seem to apply to all systems.” “Are there underlying principles in diverse phenomena, because at some level of abstraction they are all the same?” he asks.
“Everything should be made as simple as possible, but no simpler, Steve,” Sugihara quotes Einstein paraphrasing Occam.
Sugihara’s idea of a little joke.
“It ain’t what we don’t know that gives us trouble, it’s what we know that just ain’t so.”
“Mark Twain?”
“Josh Billings, actually, though Mark Twain is often credited.”
Where does Sugihara think the markets and economy will go next?
“I have no crystal ball. No one wants to hear this, but the economy is like a Ponzi scheme. It really is. It’s totally arbitrary. It has no independent value. It’s whatever people want to assign to it. Ultimately, it’s just human beings making these decisions. Ultimately, for a currency to work you need to have confidence. I think the tie to fundamentals is less clear now than it used to be. You could always feel justified in your valuation by saying it’s tied to fundamental things, real estate, gold, whatever that I understand has value. With more complicated contracts it’s harder to say what the value of anything is and how that whole contingent valuation works.”
In October, Sugihara explained his eco-economic views to a private group of hedge fund and sovereign wealth directors in charge of some “one-three trillion dollars,” keynoting along with Dick Cheney; Paul Volker; Peter Orszag, President Barack Obama’s director of management and budget, and May — an unusual group.
He opens a graph. “This is market data. I can’t say what they are. I’m not allowed.” He points to 2006. “This is a really big indicator in 2006-2007. Absolutely clear. We’re there already in 2007, and we don’t actually see the crash until a little later. Clearly you can see it.”
“No, where’s the crash?”
“Right here.” He stabs softly at a break in the line. “What’s interesting here is everybody thought the downturn was over. Doesn’t look like it, does it? Which is why I wouldn’t say we were out. Nothing suggests that we are out.” He shakes his head, weighing the meaning of the different proprietary graphs. “These three indicators show ...” His voice trails off. He smiles softly: “Not good.”
Chaos takes many forms to Sugihara. He finds order in disorder, meaning in madness. Fascinated by complex systems, a self-described “kind of half-bank, half-ecologist guy,” he applies the underlying principles of advanced mathematics to the seemingly disparate worlds of biology and high finance.
In June, when the European debt crisis began in earnest and many very important people on both sides of the Atlantic were feeling the first tingling frisson of real fear, Sugihara, 61, jumped a plane from San Diego to Frankfurt and laid out some of his ideas to the heads of the European Central Bank. Simple stuff, you might say, to Sugihara, like the paradox of diversification, the homogenization of the global financial system, how connectivity whether in large banks or fish stocks holds the potential for systemic destabilization, how hyper- connectivity can crash a system, and has, and even how this can be charted.
Sugihara’s ideas, and those of Robert May, his co-author on several now-legendary papers concerning chaos theory and financial markets, have influenced the way the world’s banks and the U.S. Federal Reserve view risk, as well as infusing the Dodd-Frank bill with fresh thinking. Sugihara even has some calm and worrisome thoughts as to whether the world really is on its way out of the current downturn — or not.
Back in the day, the ’80s, Sugihara was a killer young mathematician from the University of Michigan with a yen for biological phenomena, studying lake cores in Africa.
He met up with a then-almost-famous mathematician named Bob May at the Institute for Advanced Studies at Princeton. (May eventually became Lord Robert May, Baron of Oxford, chief scientific adviser to the government of England, and president of the Royal Society.) After Sugihara became a professor at the Scripps Institution of Oceanography (he now holds the McQuown Chair in Natural Science) the two came up with an influential little paper called “Nonlinear Forecasting As a Way of Distinguishing Chaos From Measurement Error in Time Series.”
To this day, Sugihara is a little embarrassed by the title: “Too flashy.”
Even though the paper was the featured article in Nature, the gold standard of the scientific world, some scientists were a little, “I don’t know about this, I mean really.”
But people on Wall Street immediately understood the implications.
There’s a story that Sugihara was brought to a country estate in England, where a banker wrote him an offer on a napkin. The offer was so high that Sugihara was speechless, so the banker crossed out the figure and wrote in a higher one. Sugihara was even more dumbstruck and still couldn’t respond. The banker crossed out the number and wrote in a third amount. “Yeah!” Sugihara blurted out.
At any rate, in the 1990s, Deutsche Bank, then one of the two or three largest banks in the world, installed Sugihara on the 20th floor of Emerald Plaza, the downtown San Diego skyscraper that looks like a casino, with the heliport on top, made him a managing director, gave him a team of 20 bright assistants, the best computers in the world, and carte-blanche to “basically, model the fear and greed of mobs that trade.”
“What was that like, George?” I ask him, as we sit on a comfortable tan worn couch in his Del Mar home, surrounded by great art (Audubon, abstracts from Peter Mackie) and Japanese touches (tatami mats, Zen stone entranceway.)
“It was fantastic,” he smiles softly, wanly, like a child. “We had all this data. (Sugihara loves data.) We executed trades. We had a large amount of notional risk that we could take, billions.”
“Notional means?”
“Underlying value. So if you traded a future, then you wouldn’t need that much actual cash, but the notional value of the future contract is large.”
“And you developed a system, right, the Sugihara patent?”
“Yeah, STS, Sugihara Trading System. It’s not patented. But it is a trade secret.”
“Was that an attempt to use new ideas of modeling large data to predict trends?”
“Yeah, it was pretty effective. It was sort of a custom-built system for exploiting market inefficiencies, for finding what appeared to be imbalances and taking advantage of them.”
“Was it fun?”
“I loved it. It was high stress and fun. It’s great to have your profit/loss be your measure of success, and the quality of your work not be dependent on some arbitrary opinion. You can go, ‘Look, here are the numbers.’ That was nice.”
After four or five years, though, Sugihara gave it up. Money interested him, but he cared more about “the generic behaviors that seem to apply to all systems.” “Are there underlying principles in diverse phenomena, because at some level of abstraction they are all the same?” he asks.
“Everything should be made as simple as possible, but no simpler, Steve,” Sugihara quotes Einstein paraphrasing Occam.
Sugihara’s idea of a little joke.
“It ain’t what we don’t know that gives us trouble, it’s what we know that just ain’t so.”
“Mark Twain?”
“Josh Billings, actually, though Mark Twain is often credited.”
Where does Sugihara think the markets and economy will go next?
“I have no crystal ball. No one wants to hear this, but the economy is like a Ponzi scheme. It really is. It’s totally arbitrary. It has no independent value. It’s whatever people want to assign to it. Ultimately, it’s just human beings making these decisions. Ultimately, for a currency to work you need to have confidence. I think the tie to fundamentals is less clear now than it used to be. You could always feel justified in your valuation by saying it’s tied to fundamental things, real estate, gold, whatever that I understand has value. With more complicated contracts it’s harder to say what the value of anything is and how that whole contingent valuation works.”
In October, Sugihara explained his eco-economic views to a private group of hedge fund and sovereign wealth directors in charge of some “one-three trillion dollars,” keynoting along with Dick Cheney; Paul Volker; Peter Orszag, President Barack Obama’s director of management and budget, and May — an unusual group.
He opens a graph. “This is market data. I can’t say what they are. I’m not allowed.” He points to 2006. “This is a really big indicator in 2006-2007. Absolutely clear. We’re there already in 2007, and we don’t actually see the crash until a little later. Clearly you can see it.”
“No, where’s the crash?”
“Right here.” He stabs softly at a break in the line. “What’s interesting here is everybody thought the downturn was over. Doesn’t look like it, does it? Which is why I wouldn’t say we were out. Nothing suggests that we are out.” He shakes his head, weighing the meaning of the different proprietary graphs. “These three indicators show ...” His voice trails off. He smiles softly: “Not good.”
