Archive for category Uncategorized

Date: February 13th, 2015
Cate: Uncategorized

Utilities at risk: Geological nuclear odds, 1:200 = 1:3,652,500

We respond to risk based on our perception of it. Geological nuclear risk is mis-perceived and could be costly for investors.  Thinking about risk using a technique called actionable systems thinking can help.

Systems thinking involves looking at risks or value creating processes as whole systems.  This technique simplifies and clarifies. Many risk managers get carried away with complex tools and piles of data.  These tools and data are used to as the basis for complicated models with costly and sometimes tragic consequences.

Events in Japan raise concerns about US nuclear risk. The NRC (Nuclear Regulatory Commission) released the risks associated with, “an earthquake that would cause damage to a reactor’s core releasing radiation”.  The information as released mis-represents the risks.

The flawed risk unit known as the year

Risk is often expressed as the likelihood of an event occurring within a period of time such as a year.  The time period is arbitrary.  Like the useless financial Value at Risk metrics used by banks, co-variances and other non-sense these misrepresentations lead to bad choices.

Natural event risk is usually represented as an event happening every X number of years.  This presentation of data is  misleading.  A more useful presentation is to use the unit of the system lifecycle.

Buying a house on a flood plain vulnerable to a once in a hundred year flood (1:100 years) may feel fairly safe.  If you plan on owning the house for 33 years (its functional system life period), you have a 33% chance of disaster.  People think differently when risk is expressed in system lifecycles.

The Indian Point nuclear facility near New York city is reported to have a one in 10,000 year risk of geological activity that could breach the core leading to radioactive material escape.  This sounds safe until one considers the plant as a system.  Systems have functional lives.  Many nuclear reactors are re-licensed for 10 or more year increments. A 50 year functional life isn’t extraordinary.

Systems thinking risk applied to the Indian Point reactor puts failure odds at 1:200

When viewed as a 50 year system the Indian Point nuclear facility has a 1:200 chance of earthquake risk breaching the core and spilling radiation during its life.  50×1:10,000= 1:200  If during the design and permitting phase someone presented such a low probability high impact risk with that figure it would most likely be un-acceptable.

On the other side of the coin using the 1:10,000 year figure means on any given day the odds are 1:3,652,000 which many may say is acceptable.  In the actionable systems risk framework, the correct metric to use is the systems life indicating The nuclear system has a 1:200 chance of geologically induced failure.

Each of the 104 reactors in the US operates independently, but combined can be considered as the US nuclear system.  Using NRC data aggregating the US nuclear geological system risk one gets annual odds of 1:480 for a failure in the system.  If one assumes each reactor is licensed and operational for 50 years, the risk horizon for a geological event in the US nuclear system is 10.42% or roughly 1:10 over a 50 year lifetime. 50×1:480 =50:480

This seems high for just one dimension of risk, namely geological.  I am a fan of nuclear as a “clean” energy but only when risk is designed and priced correctly.  Most likely some reactors should be shut down or moved if geographic and other risk vectors were presented using a systems risk perspective.

Nuclear operator’s liabilities are capped under the Price act at $560 million but the potential national cost for such an incident could exceed $500 billion. (see article link below).

The nuclear and finance industries needs to measure risk using systems thinking and systems frameworks to better engineer in safety.  The higher risk operators in the Spreadsheet attached to this article may face material cost impacts from shut-down or redesigns of reactors.

Even NASA gets it wrong

NASA got risk wrong with the space Shuttle. NASA estimated the space shuttle system to be over 99.9999% safe.  Nobel prize wining physicist Richard Feynman brilliantly described his role on the Challenger Blue ribbon panel in his book “What do you care what other people think?”. Feynman calculated probability of shuttle failure as 1:96.  NASA organizationally saw risk and reported it the way it wanted to, not the way it was.  Bankers and Utility companies may have the same behavioral risk drives.

The utility companies listed below may have margins shrink or costs increase if risks are correctly interpreted using a systems thinking perspective.  This could be short term expensive for a few, but better for society in the long run.

In my day job I help banks, family offices and hedge funds understand risk and opportunity. This task often starts by getting rid of all price based models like VaR, volatility, beta, BIS standards and Modern Portfolio Theory.  Losing these frames of belief  causes distress at first until the Systems Thinking approach is brought in.  Letting go of familiar but wrong metrics to replace them unfamiliar metrics that may bear bad news is rarely easy or popular.

Systems thinking mostly ignores price

Price reflects two opposing opinions expressed at a single point in time. 99% of investors can’t beat a buy and hold index. It stands to reason 99% of the opinions creating price are probably wrong when considering the correct measurement of value and risk.

participants symbol list: GE (General Electric), HIT (Hitachi), EXC (Excelon), AEE (Ameren), CEP (Constellation energy), DUK (Duke energy), D (Dominion Energy), private (Energy Northwest), FE (First Energy), FPL (Florida Light and Power), private (Nebraska Public Power District), NU (Northeast Utilities), NMC (Nuclear Management Company), NA (Omaha Public Power District), PCG (Pacific Gas and Electric), PGN (Progress Energy), SO (Southern Company), TVE (Tennessee Valley Authority), TXU (TXU energy), XCL (Xcel Energy)

Spreadsheet risk Data: from NRC, Thoughtful Capital Group. Geological nuclear risk.XLS

Date: August 31st, 2012
Cate: Uncategorized

inventing by principals with intent.

This is a subtle and fascinating discussion about creativity and developing solutions to make things better.  A rare and interesting discussion on changing the world of creation by seeing “wrongs”.  The approach uses design, electrical engineering and coding examples to explore the principal of getting things right. An amazing video and lesson.

Bret Victor – Inventing on Principle from CUSEC on Vimeo.

Date: November 22nd, 2011
Cate: Uncategorized

On leadership.

“If you want to build a ship, don’t drum up people together to collect wood and don’t assign them to tasks and work, but rather teach them to long for the endless immensity of the sea.” 

Antoine de Saint-Exupery (1900-1944)

Date: June 22nd, 2011
Cate: Finance, Risk & Stability, Uncategorized
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Banking & Insurance critical instability by design

I am wrapping up my book “The Long Game: Mental models for better investing and capital allocation”.  Along the way I am finishing some graphics which highlight the processes and systems that lead to success and failure.  Capitalism isn’t good or bad, it is a powerful process that is harnessed in different ways.

Understanding who survives and thrives in capitalism means understanding process. The Long Game looks at competition, investing and capital allocation systems through the eyes of a systems thinking approach. Most of the models and analogies are borrowed from biology, ecology and psychology to express why some win, some lose and it always keeps changing.  Here are some graphics I am building.  Let me know if you have any critiques on how to show the story in a more simple or engaging way.

Oh and if there are any publishers out there…I really need a great editor.

Date: June 3rd, 2011
Cate: Systems, Uncategorized
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Thinking in biological systems with help from Ed

My brilliant polymath friend Ed Rietman sent me a fun paper to read the other day.  He used to head up our Nanotechnology and optics research at Starlab. He works on cancer research, phononic crystals and a host of other deeply interesting fields.  He is working on a bench set-up in his basement that will test a low energy desalinization method using acoustic waves as well as an optical analog to the event horizon of a black hole.  Pretty cool stuff, I always learn a lot listening to Ed.

Tree of eukaryota

Learning new mental models of how things works allows one to synthesize models as analogs for other areas.  Combining investing, finance, risk, behavior, science and biological processes into functional tools and ways of thinking can be very powerful. My book project (The Long Game: mental models for better investing and capital allocation) uses biological, ecological, statistical and social processes to explain how to invest and allocate capital.

Ed sent me a cool paper the other day which I read on the train for fun.  It is titled: Cancer tumors as Metazoa 1.0: tapping genes of ancient ancestors. The general idea is that cancer is a process derived from older cellular functions that exist inactive in the genome and only being expressed under environmental stresses.  The cool idea is that legacy genomic functions are carried forward and cause cancer.  The reason this is so interesting as a field of research is that it would mean that cancer has a finite set of expression types instead of unlimited types. One of the interesting points in the paper is that most plants don’t get cancer and how tumors can often express themselves with hundreds of cell types.

The paper is thankfully simply written so a hobbyist like me can follow along. The mental model of an evolved system still retaining legacy functions which may express themselves detrimentally to the organism is quite interesting.  It is a trade off between functional learning, reproductive progress, climbing a complexity fitness hill and embedded risk. Collecting and synthesizing models of how things work is a hobby of mine, with a friend like Ed, you never know what you can learn that lets you think about the world in a whole new way.

Date: May 4th, 2011
Cate: Finance, Risk & Stability, Uncategorized

Gold and Forex ETF sensitivity to Presidential decree?

The cheapest lessons are provided by history, sadly they are often ignored as irrelevant or untimely. In 1971, Nixon took the US off the gold standard and also put an immediate 10% tax on import goods including the use of price and wage freezes. He blamed speculators and wrapped the message up in “worker support” speak and anti-elitist tones.

Many Americans would now believe these types of actions to be the sole activity of banana republics. Things can change in an instant. This post isn’t about a party, policy or president, merely a pointer to a past that isn’t really that far past. If you are young read more history, if you are old, don’t forget.

Here is a transcript of the video I had produced for $1 on Mechanical turk:

The third indispensable element in building the new prosperity is closely related to creating new jobs and halting inflation. We must protect the position of the American dollar as a pillar of monetary stability around the world. In the past seven years there has been an average of one international monetary crisis every year.

Now who gains from these crises? Not the working man, not the investor, not the real producers of wealth. The gainers are the international money speculators. Because they thrive on crises, they help to create them. In recent weeks the speculators have been waging an all out war on the American dollar.

The strength of a nation’s currency is based on the strength of that nation’s economy, and the American economy is by far the strongest in the world. Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators. I directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets except in amounts and conditions determined to be in the interest of monetary stability and in the best interest of the United States.

Now what does this action, which is very technical, what does it mean for you? Let me lay to rest the bugaboo of what is called devaluation. If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today. The effect of this action in other words will be to stabilize the dollar. Now this action will not win us any friends among the international money traders, but our primary concern is with the American workers and with fair competition around the world.

To our friends abroad including the many responsible members of the international banking community who are dedicated to stability in the flow of trade, I give this assurance: The United States has always been, and will continue to be, a forward-looking and trustworthy trading partner. In full cooperation with the International Monetary Fund and those who trade with us we will press for the necessary reforms to set up an urgently needed new international monetary system.

Stability and equal treatment is in everybody’s best interest. I am determined that the American dollar must never again be a hostage in the hands of international speculators. I am taking one further step to protect the dollar, to improve our balance of payments, and to increase jobs for Americans.

As a temporary measure I am today imposing an additional tax of ten percent on goods imported into the United States. This is a better solution for international trade than direct controls on the amount of imports. This import tax is a temporary action. It isn’t directed against any other country. It’s an action to make certain that American products will not be at a disadvantage because of unfair exchange rates.

When the unfair treatment is ended, the import tax will end as well. As a result of these actions the product of American labor will be more competitive and the unfair edge that some of our foreign competition has will be removed. This is a major reason why our trade balance has eroded over the past 15 years.