Double Blind

When driving home from work today, I listened on the radio that the NHL was proposing to increase the size of the net by 2 inches, both horizontally and vertically. The reason for this change is to increase scoring in games. This is a terrible idea which doesn’t solve professional hockey’s fundamental problem which is the invention of the neutral zone trap. The neutral zone trap really became effective in the mid-1990′s when the NHL started cracking down on physical confrontation with heavy penalties for players involved. The coach to perfect the technique was Jacques Lemaire, which culminated to the New Jersey Devils winning the Stanley Cup in 1995 in what could arguably have been the most boring Stanley Cup playoff series ever for that time. Not surprisingly, when the New Jersey Devils won the Stanley Cup in 1999 and 2000, they managed to put legions of fans in the hockey world asleep with their iron-clad disciplined strategies.

So the NHL thinks that increasing the size of the net will increase offense – their thinking is that by increasing the net size, more goals will be scored, and this will lead to more offensive gameplay. While more goals will be scored, I will argue that they will only be scored due to a higher ratio of goals scored per shot. Scoring opportunities, not scoring itself, leads to excitement. If you increase the size of the net, such an action will have exactly the opposite effect of creating scoring chances – the correct strategy will be for teams to minimise the shots taken on their own goal. If you think this will be exciting, then you must like soccer, where the nets are even bigger.

The real solution to promote scoring chances is to eliminate the blue-line offside rule. Note that the two-line pass offside rule remains intact. This subtle modification completely nullifies the neutral zone trap, as you can send players in your opponent’s zone after you cross your own blue line. This will increase scoring chances, as the opposing team can no longer keep four people in centre ice without risking the possibility of getting caught out of position if you pass the puck to a teammate inside the opponent’s zone. Finally, more scoring chances will occur during the power play, as the team doing the penalty killing can no longer just dribble the puck across the blue line – they will have to clear the punk into their opponent’s zone in order to provide defensive relief. Penalties will be more expensive, as I would expect power play conversion to rise about 10%.

Increasing the size of the net is a band-aid solution for a more systemic problem – do I think that hockey will be more exciting with a larger net? Will expanding the net size do anything about the neutral zone trap? The answer to both questions is no. I think the NHL administration is trying to transform the NHL into the NBA. Instead, they should be looking at Lacrosse, where you have plenty of scoring chances and 20 goals a game despite the fact that their goal size is only two-thirds the width of the NHL’s.

I’m posting this article because liquidity is as dry as a rock, and it doesn’t look like that I will be able to make enough money using market making techniques, so I will illustrate how that method works here.

The market making technique involves be the person at all of the bid prices, or all of the ask prices and patiently waiting for people to sell or buy contracts from you. Ideally you want an even distribution of contracts bought or sold, and then you can sell or buy the unit bundle and skim the profit for a few pennies. It is a slow way of making money, but the advantage is that in a static market (i.e. no major scandals, polls, etc.) that it doesn’t require you to pick which party is going to improve in the rankings.

This may sound obvious, but the sum of all possible outcomes should equal 100%. So in the seats and popular vote market, the BC Liberals, NDP, Green and other parties should have their bids and asks equal 100% in a perfectly efficient market. Of course, in a real market you will typically have the sum of the bids at around 98% and the sum of the asks at 102%. What this means that if you’re making the market on the bid, if you manage to purchase all four contracts for a total of 98 cents, you will be able to profit 2 cents for your effort. According to my calculations, this is not an acceptable amount of reward for such an illiquid market.

On the seats market, the sum of all bids is 98.1%, while the sum of all asks is 101.7%. There is no way to profit from this market from making markets – you have to do directional betting.

On the popular vote market, the sum of all bids is 98%, while the sum of all asks is 104%. There is no way to make money from the bid side, but there is an opportunity to make a nominal amount of money by shorting all contracts (although one in particular I think is mis-valued by about 2%, and I won’t say which one that is because you’re probably going to see my money involved).

The majority government market is not worth trading with the Liberals at over 90% – these markets are very illiquid.

Finally, the referendum market is a binary market, and can’t be traded using this technique.

It appears to me that the best way to make money in the ESM will be through the seats and referendum market, but this is going to require making some directional bets. I have no problem with this, but I wasn’t anticipating going for my 1% of total capital of the market in this manner – I thought there would be more traders.

Right now the seats market is predicting 47 BC Liberal seats, 31.5 NDP seats and 0.5 “other” seats. I think this is accurate.

On Sunday February 13, 2005, I had the opportunity to explore the area of Arizona and New Mexico, and covered an insane amount of distance on my rental vehicle. When approaching the New Mexico border on US-60 from Arizona, it was already in the late afternoon and I realized I had long since run out of time to get back to Los Angeles in a reasonable time. I was also concerned about the temperatures – my GPS told me that I was over 7000 feet above sea level and the temperature was coming uncomfortably close to freezing. Having experienced snow driving around Barstow, California last December, the last thing I wanted to see was snow on my journey back to Los Angeles. However, I continued to speed eastward along the nearly deserted highways of New Mexico. In retrospect, I went way too far east, but at least I had 30 pictures to show for it.

After approaching Quemado, which is a nearly deserted town full of trailers, I turned into New Mexico Highway 36. After 20 miles of uneventful driving, I turned right onto Highway 117 and this developed into a lot of picturesque moments. Unfortunately, I didn’t have time to stop and take pictures, so I took them all out of my car while going excessively above the posted speed limit. Since there were only two cars of oncoming traffic throughout the entire 80 mile journey, I had the two lanes completely for myself. I took about 30 pictures, of which about 10 of them you couldn’t even tell that I was taking them from a vehicle without very close inspection. The pictures should give the viewer an impression of the desolation of the area – I certainly didn’t want my car breaking down at this location, otherwise I would be due for a very cold stay inside my vehicle that night. I particularly like the third photograph, which gives you the impression that you’re about to crash into the rock face, but it actually turns left at the last second once the road dips.

I eventually did merge on Interstate 40 and got back to Los Angeles around 3:00am after a very exhausting drive.

The pictures can be viewed by clicking the “Read More…” link.
Read more »

When investing in the markets, you have to know where your advantages lie, otherwise you’d probably be better off with a brain-dead technique. There are inefficiencies in the market to be exploited, but it’s a matter of knowing when and where to take advantage. As an individual, your primary advantage lies with being able to invest in stocks of small companies – institutions generally have difficulty doing the same thing since they can’t just log into E-Trade and buy a million shares of something at the price you see on Yahoo. They have to spend months to accumulate relevant positions in companies. By then, the reason for investing could have disappeared, or the price could have changed to something undesirable. As an individual, you can usually load up and sell with a single transaction.

Ironically, I’ve been experiencing this problem with the UBC Election Futures, where I see the last trade at a price that I like, but I am unable to accumulate substantial positions due to the lack of market activity. Try picking up $100 of ANY position in that market, and then you’ll know how it feels like to be a pension fund with a billion dollars to invest in a small-cap market.

The other advantage is that individuals have is the ability to concentrate investments in their portfolio. One should only invest when their ideas are really good, since you can always afford to wait (days, weeks, months, even years) for good ideas – your cash will just be earning the risk-free rate in the meantime. Since all ideas require a purchase at the right price, you can wait for the stock to crash (for an acceptable reason) before diving in with a large bet. Patience is another advantage that individuals have – they can choose to have their entire portfolio consist of cash while they wait for good ideas at the right prices. Institutions do not have that ability – they must keep invested at all times, so this is why they keep their portfolios invested in hundreds of stocks at any given moment.

While having your money invested in hundreds of stocks ensures that any individual blow-up will not materially affect the overall performance of the portfolio, it will also ensure that your performance will be whatever the market gives you.

Instead as an individual, if your ideas are superior to the marketplace, you will be better served by concentrating your portfolio with only your best ideas. One method is to split your portfolio into 10% chunks. When you end up investing in your 10 best ideas, you will have 10% of your portfolio in each position. Obviously you won’t invest all at once, it will be whenever the individual companies reach acceptable purchase prices, so getting your 10 ideas will probably take at least a year. In order for you to make 10% in your portfolio, you need one out of the 10 positions to double. Alternatively, if six of those positions drop by 50% (not very good ideas, were they?), then you will need the other four to double in order to make your 10%. Chances are if this happens, your ideas need refinement – the idea is not to have a high batting average, but just to make sure that when you do hit the ball you score a home run. If you’re particularly enthusiastic about an idea, then put 15% of your portfolio in it, but no more.

This might be obvious, but it’s worth repeating: Never invest 100% of your capital in any position unless if you feel like gambling. If any of your positions increase in value to the point where they consist of over 25% of your portfolio, that position should be sold off to 20% in order to take profits and avoiding the potential effect of a blow-up. As long as your ideas are good, and you have the patience to wait for right prices, then this sort of methodology is good at maximising the return on your ideas and providing sufficient diversification to mitigate against stocks that blow up on you (which is common in the biotechnology industry).

I’ve been looking for more opposition to STV, and the leading site appears to be knowstv.ca, which was opened by many ex-political and union hacks and two out of the seven members of the Citizens’ Assembly that voted against STV (compared to 146 that agreed with it). Declan has a very good and lengthy response to their frequently asked questions. Note this is exactly the type of people I expected to oppose STV – people closely connected to the parties.

My favourite NDP hack, David Schreck, has an article on why you should vote no to STV. I won’t go through it all, but will look at the last sentence:

---

That means voters will be asked to take another leap of blind faith since they cannot see the legislation that would be implemented if the recommendation is adopted and that legislation could contain some big surprises.

---

Since when did politicans ever give the electorate an advanced copy of the legislation they plan on legislating in their election campaigns? I can’t think of a single instance. We all take a leap of blind faith that the people we elect actually do what they say they will before the election. In some cases they do, in some cases they don’t. It’s also our responsibility as voters to have enough of a memory to kick their asses out of office if they don’t follow up on the balance of their platform.

If parties were forced to draft and publish ALL their legislation before they start an election campaign, it would be an interesting way to govern if they couldn’t introduce any more legislation throughout the rest of their term. It’s not going to happen, unfortunately. Most people don’t know how to read legislation, although it’s really simple. Anybody working in BC should read the Employment Standards Act, for example. It’s a really easy read and defines what employers and employees are obliged to do.

In my previous article, I received a comment from Max Anderson. I figured it was better replying here than in the comments section of the weblog. Max wrote:

---

Your support for BC-STV is appreciated. But your comment 02/28/2005 “The yes side should be advertising the best benefit of STV, which is that it reduces the power of political parties” is controversial. In some views, the larger, multi-member constituencies under BC-STV will make candidates more financially dependent on party support and more puppet-like, as in Ireland’s STV where party representatives never dare vote against the party line. That’s the opposite of what most British Columbians want, and would not help sell BC-STV. Perhaps you meant BC-STV would cut into the dictatorial power of the governing party vis-a-vis the premier’s office by keeping out artificial majority governments?

---

I stand by my original comments – the primary benefit of BC-STV is that if implemented, political parties will have less power than they do currently because of the capability of individual MLAs to vote against the party line if their voting district strongly disagrees on an issue. It won’t happen often, but it will happen when you have enough single-issue voters that will abandon you in the next election if you so happen to vote in the wrong direction. Federal examples include abortion, gun control, right-to-die, etc. Provincially, healthcare and drug access is a single-issue to many of the age 55+ population (who incidentally vote more per capita than any other age group).

With the existing system if you run as an independent, you will lose. Elayne Brenzinger (Surrey-Newton) and Paul Nettleton (Prince George-Mount Robson) will be 2005′s examples. In the 2001 election it was Rick Kasper (Malahat-Juan de Fuca), a former NDP candidate that bolted away from his party. John Nunziata was a federal textbook example (he actually managed to win as an independent on his first try, but lost in the next election when the Liberals brought in a star candidate to take him out). With BC-STV, the chances of getting elected as an independent candidate is significantly greater than with the existing system. This decreases the power of parties, as there is less punishment for not maintaining discipline.

The ability to rebel against party leadership is critical. This will happen more often with BC-STV. But just like in a game of chess, the threat is sufficient, not the actual act (e.g. voting against the budget). This is why you don’t see members of parties voting against confidence bills in any parliament around the world, including Ireland. With BC-STV, individual politicians cannot be further chained to their political parties than they are presently. This power may not be seen in the form of a vote in the Legislature, but individual members will certainly have more power in caucus even in a majority government.

About campaign financing, people should read the Chief Electoral Officer’s Report on the 2001 election, specifically starting on page 27, which describes how much money the parties spent. It is true that one reason why people associate with political parties is because of their ability to finance candidates. But the parties will not finance candidates if they don’t think they have a chance in the election (take a look at how much support the NDP gave their candidate in Richmond-Centre, $0!), nor will parties transfer money to candidates that are not in good standing with the party leader. If you secure your nomination by signing up 300 members and raiding the constituency association, you will receive the same financial support as an independent as you would by being in a party, which is none. Yes, it is true that the financial barrier to entering in such an election will be somewhat higher due to the expanded ridings, but this will be more than offset by the other factors I described. It is most likely that the independent candidates that do run in the election will be kicked out of the party for disagreeing with the party leader, which would give them sufficient notoriety to greatly increase their chance of being elected in the subsequent election. They won’t always get re-elected (Brenzinger would have little chance even if this election used STV), but guys like Gordon Wilson would be a safe bet.

There is another power of party leaders, and that is nominating candidates. Right now party leaders, not constituency associations, have the final say on nominations and will continue to do so – with STV, party leaders can still parachute candidates in, but the cost of bringing them in will be a lot more difficult as there is no longer the concept of a ‘safe seat’. For example, let’s take the recent nomination of Carole Taylor in Vancouver-Langara. With the existing system, Taylor has a 99% chance of getting elected. With BC-STV, the Liberals could have still nominated Carole Taylor to a consolidated riding (let’s call this “Vancouver West”, consisting of what we call today Vancouver-Burrard, Vancouver-Fairview, Vancouver-Langara, Vancouver-Point Grey, Vancouver-Quilchena), but they would have to ask themselves – will nominating Taylor cost Patrick Wong (MLA Vancouver Fairview) or Lorne Mayencourt (MLA Vancouver-Burrard) his seat? Or will the voters even give Taylor their first place votes? This is another example that demonstrates that BC-STV reduces the power of parties.

Finally, BC-STV will make it tougher (I would not say difficult) for governments to form majority governments. I do not believe that the way to reduce power of political parties with minority governments produces good governments; rather, promoting multiple individuals on the basis of merit within the parties is the most effective way. Ultimately if the voter wants a majority government, they will get one.

To conclude, I don’t see how implementing BC-STV could increase the power of political parties more than the existing first-past-the-post system, even when you account for the expanded riding sizes. I believe that decreasing the power of political parties (and empowering individuals within the party) will result in a better run political system. With BC-STV, increased riding sizes and campaign finance issues will not increase power of parties. I still maintain that the reduced power of political parties is the best selling point of BC-STV.

Looking at the 2005 Parliament Calendar, I’m going to guess that the Conservatives and the Bloc Quebecois will reject a confidence bill and force an election in October 2005. The Bloc has been itching for an election since the previous one (the Liberals are doing even worse in Quebec than last year which means the PQ could conceivably win 61 seats in the House from the 54 they have today, 7 of their seats were lost with 5% or less of the vote), while the Conservatives probably cannot afford to wait until the next Federal budget since Paul Martin will be given the opportunity to spend more federal money for votes.

The Bloc and Conservatives, with their 154 votes, can choose to bring down the government at any time. The conservatives could have brought down the government with the latest budget vote, but they decided not to (note the lack of conservative names on the division). On Monte Solberg’s weblog (MP for Medicine Hat), he gives a rather surprisingly honest reason why they didn’t bring down the government: they would have lost seats in the subsequent election.

Paul Martin probably realizes that the economy will slow down in the near future (as US interest rates are increasing at a measured pace), so he has to call the election before the next recession. Timing economic cycles is a difficult business, but my guess it will be sometime in 2006 – about 12 months after the interest rate hikes initially started. A recession means instant death for any minority government – if you’re the governing body, you have to call an election before the economic downturn. Paul Martin’s is stuck – in order to remain leader of the Liberal party, he has to pander to the left-wing element of his party even though he’s a centre-right kind of person. He cannot institute policies that would win the votes of people that voted Conservative the last election. The only thing he can do is go for Quebec voters, but it would take a miracle for the Bloc to lose support there.

The next Canadian election is going to be really interesting – 2005 will be an active year for politics.

Over the past two weeks, there has not been a lot to discuss politically with regards to the upcoming BC Election. After the legislature closed after the budget supply measures received royal assent, all parties have been working behind the scenes to manage nominations. The most significant of these announces was Gordon Campbell having Carole Taylor nominated in the safe seat of Vancouver-Langara. Taylor is virtually guaranteed to win this riding – the BC Liberals could have nominated a fresh 21-year old graduate from university and they would have still won the seat if he/she would have kept their mouth shut during the entire campaign.

Side note: For people that don’t like so-called “parachute” nominations – vote YES to the STV referendum, as it is less likely that party leaders will have the power to force constituency associations to accept their candidates. Indeed, if they do, the public has to effectively ‘confirm’ that nomination by directly voting for that candidate. It is less likely that such parachute candidates will actually receive first place votes.

Anyhow, the nomination of Carole Taylor is a counter-response to Christy Clark’s resignation three months ago – it also tries to attract the female voter, which has been significantly less supportive than men to the BC Liberals. It also serves a longer-term strategic advantage in that Christy Clark was clearly gunning for the Premier’s office for 2009, and Gordon Campbell has no plans of vacating the Premier’s office until 2011 – after the Olympics are over and after BC’s 140th anniversary in confederation. Campbell is on much better terms with Carole Taylor than Christy Clark. By then, you’re going to see either Colin Hansen or Kevin Falcon take over the BC Liberal leadership, not Christy Clark.

The provincial government has also been busy using their PR machine to release a flurry of pre-election spending announcements, which you can read in real-time on www.gov.bc.ca. The exact nature of the announcements is irrelevant (spend a bit on senior citizens, spend a bit on women, spend a bit on securing our streets… see a theme?), but what is relevant is that it keep the BC Liberals and Campbell in the news, while relegating the NDP to the usual role of bitter complainers, which makes them sound like the broken record they have been over the past 4 years. This is all textbook 1996 Glen Clark, and Campbell doesn’t want to be caught on the wrong side of the Legislature like he was back then. Glen Clark might have screwed up the province during his term in office, but the way he handled 1996 should be in the incumbent’s guide to re-election manual – a complete act of genius which Campbell isn’t going to forget in his lifetime.

I have already written about what the NDP strategy should look like. They should try to avoid sounding like “complainers” and suggest reasonable solutions to issues that appeal to the crowd aged 45 and above (as this age group consists of people that actually vote). To get a majority government in 2009, it is more important for the NDP to shut down the Green Party this election and win 25 seats in the Leglslature than it is to win 30 seats but have the Green Party remain a viable political entity (this is defined as the Green party winning at least ONE seat). I have not written a BC Liberal strategy primer yet (this will come), but suffice to say, supporting the Green Party is high on the list. Although he’s never publicly admit it, nothing would please Campbell more than to see 4 Green party MLAs in the Legislature.

The real mud slinging is going to start after the Easter holiday – this is when parties will have their platforms finalized and their trash talk prepared. This is when the storm will begin, and accordingly my writing will be more active on the BC Election.

Finally, the UBC BC Election Futures market has been rather illiquid – my trading has been minimal, but I have spotted some inefficiencies in the marketplace which I am not at liberty to discuss until I have corrected the inefficiency. My own election projection models contrast somewhat with existing trading prices, so I am trying to restore equilibrium with my own capital. It’s very frustrating not to be able to trade in size when you see such inefficiency, but with some patient bids and asks, I should be able to get enough of a position to skim my objective of 1% of the total market capital (currently $105, of which $4.75 I have so far claimed from the marketplace).

I forgot what website recommended it, but I went to the library and borrowed a copy of “Motel of the Mysteries“, written by David Macaulay. It’s an illustrated book which pokes fun at existing archaeologists and how they assumed people in the past lived based strictly on the ‘discovery’ of a motel room in America. If you can borrow it from the library, it makes for a very amusing read, but it also makes you think about how people come to conclusions with limited information.

What’s also funny is that the book was in the library’s “junior” section – but I definetly think adults can get the most out of it.

Richard recently wondered about one of my interests on my about page. Specifically, it was about having an interest of “Conversation with people in small groups (or one on one) in quiet places.“

The ‘small group’ issue is important because when you are dealing with a larger group, people tend to cluster within the people that they know, which makes a large group environment a terrible way of getting to know other people. At a restaurant, this is impossible because of the seating arrangements. In free-standing environments, you literally have to ‘isolate and conquer’ in order to make progress. Isolation involves wrenching a hapless victim out of their ‘comfort group’. After you’ve accomplished this, when you get to the ‘conquer’ stage, it appears to be contrived (“Hi, who are you, what do you do, etc.”) and goes nowhere since there is absolutely zero depth you can cover in the 30 second window of opportunity before social awkwardness kicks in. For an introvert, this is something that takes an exhausting amount of social effort to pull off successfully. It’s also impossible if both people involved are introverted. So it’s critical that the groups involved be small, or preferably one-on-one.

As for the ‘quiet places’, I absolutely hate loud music food establishments. My auditory senses are not good at separating voice and music, so when I try having conversations with people, I notice my acuity is less than those around me. The people around me open their mouths and I manage to catch 50% of what they are saying, but this means that I have a lot of error-prone linguistic interpolation to perform. What’s even more frustrating is that other people tend to have no difficulty hearing each other (maybe the listener isn’t hearing anything either, but is too polite to understand and just says ‘yes’ to everything the speaker says). I was really concerned at my relative hearing capabilities, and I tested my hearing, but I’m fine at least in terms of the frequency range I can listen to.

I did some more thinking and asked myself how people can actually listen to each other in such environments? They have to get closer to each other. My theory is that these establishments keep the music loud because for men to talk to women they have to get closer to each other’s faces. This increases the chances of attraction (pheromones and stuff like that in action), which is probably why these establishments exist in the first place.

Maybe there is some science at work with this. But as long as the music is going at 110 decibels, I don’t want to be there since I prefer hearing what the other party has to say, instead of pretending I do.