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Monday: Billionaire Biologists

It is by will alone I set my mind in motion.

The NYTimes has an article about the world of D. E. Shaw quants and an Larry Summers.  Louise Story, who wrote the piece, doesn’t go into details about what it is that Shaw’s group does exactly and, to be honest, this is really a job for someone like David Kestenbaum, the Harvard trained physicist turned financial guru at Planet Money (Hint, hint).  But I do know a smidgeon about what Shaw’s group does in the pharma field and at least one of my former colleagues was approached by someone in finance like Shaw more than a decade ago.  She was a physical chemist working on a program that did sensitivity analysis.  The math would make your eyes glaze over because it’s all eigen this and Green’s functions that and stuff I’ve forgotten long ago.  Basically, her program would be able to track an amino acid in a protein and determine how sensitive it is to its environment.

Now, in the pharma industry, this stuff belongs to a type of computation called molecular dynamics.  We start with a 3D representation of a protein in a solvent, usually water.  The model is really just a set of coordinates for each atom in the protein.  There are parameters for each atom that account for bond length between atoms and springiness and intermittant bonds between atoms called hydrogen bonds.   A simulation can be run in several ways.  One of the most common is something called simulated annealing.  That is, heat is added to the system, the protein absorbs this heat and starts to move.  The system is allowed to equilibrate and a trajectory is calculated for a series of time steps.  After the simulation is run, you can concatenate all of the time steps together and run them like a movie.  What you get is something like this (actual simulation starts at about 30 seconds in):

In the animation, the purple and red springs are called α-helices and the yellow ribbons make up a β-sheet.  These are relatively stable secondary structures of the protein that come together to form the tertiary structure of the protein.  They wiggle and shimmy but don’t move much.  The most interesting part of the dynamics run was at the right of the screen where there is a “loop” that has the greatest movement.  It is the action of the loop that is of primary interest to the researcher.  What does it do?  What amino acids around it does it impact and can we tell from its movement what its function is in the protein?

Now, these are all cool and groovy models but there are some things about them that make them tricky.  First, the system is only as good as the parameters you give it.  Some simulations run in cellular membranes that add an additional level of complexity.  If you don’t account for absolutely everything, the result can be waaaaay off.  Second, the simulations suck up a lot of memory and I/O and, up til now, it’s been hard to find systems that will let you do more than a very short span of time.  Luckily for D. E. Shaw, Moore’s law has allowed the area to grow a lot lately.  Also, in the bio end of his business, he has contracted with one of the chip makers for ASICs, or custom made processors, that he is using to build a massive cluster with more than 1000 nodes.  Molecular dynamics has been around for a long time but until Shaw’s latest programs came out, it was a pain in the ass to set up and run more than a few time steps.  His latest molecular dynamics code is called DESMOND and it is commercially available. My site is just beginning to use it, albeit without the fancy cluster.

So, what does all of this have to do with financial markets?  Well, I *guess* you could think of the financial world as a giant protein and if you can figure out what the parameters are and how much heat (money?) you are putting into the system, you could calculate which parts of it are most sensitive to change and then place some bets on that portion of the system.  For instance, you might be able to predict what effect the stimulus package is going to make on the economy and which industries will be most sensitive to that stimulus.  Or, maybe you could calculate the TED spread or LIBOR or a zillion other indicators.   As I said, this is really a job for David Kestenbaum so let’s hope he has a Planet Money segment on it soon.

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75 Responses

  1. Good morning all. I have to rush to work, and came across this, and it’s toooo good to wait (though it’s off-topic, apologies RD). Give this guy some love!

    Barack Obama really does go on a bit

    Isn’t it time for him to go home yet? It is good, in theory, that the new President of the United States is taking so much time to tour Europe. He arrived in London last Tuesday, has been to Strasbourg, Prague yesterday and now he’s off to Turkey. It shows, I suppose, that he cares about the outside world and that is ‘A Good Thing’. But his long stay means that we are hearing rather a lot from him, way too much in fact.

    His speeches have long under-delivered, usually leaving a faintly empty sensation in this listener even though I welcomed, moderately, his victory last year as offering the possibility of a fresh start and a boost to confidence.

    Yet, we are told that he is a great orator and in one way he certainly is. He does have a preternatural calm in the spotlight and a mastery of the cadences we associate with the notable speakers in US history – such as JFK and MLK. But beyond that, am I alone in finding him increasingly to be something of a bore?

    But Obama was only warming up. “When I was born,” (Everything usually leads back to him, you’ll notice)…

    But I’ll wager that within a year or so he’ll be marked down as a wind-bag.


    • Oh, lord, it’s hard to be humble
      When you’re perfect in every way

    • Hopefully some are catching on that Obama is still campaigning, because it’s really all he knows how to do – and what sounded fresh and exciting at first wears thin over time when you’ve heard it again and again, yet he does nothing productive.

    • That is a hilarious piece. Thanks, fif!

      • Be sure to read the comments on the Iain Martin piece, too. They are a riot.

    • http://pajamasmedia.com/victordavishanson/president-5050/

      Our Philosopher Organizer

      “The most successful practitioner of community organizing looks around for what he thinks is a problem, chastises both sides and allots absolutely equal blame, gives exalted moral lectures about compromise and understanding, and then waltzes away well paid, praised for his moderation, but having accomplished nothing.”


      Okay, this is from a right wing source, but I must say the above paragraph seems to nail Obama. He does tend to chastise everyone and waltz off without having accomplished anything (just like with his race speech, all that speech really did was to cover his but). He is, I fear, a self righteous (and self centered) wind bag.

      • when my friends and family were having orgasms over the best speech about race EVAH, I said it was old, pedestrian, so ordinary any one of us could have given it and that it was defensive and self serving… they accused me of being unable to get over Hillary.

  2. OT– big earthquake in Italy. It looks really bad.


  3. Whoa I was not ready for a close up view of the mentat Timmy Geithner so early in the a.m.

  4. maybe it is the tylenol pm I took last night, but I think this diary is way too intelligent for early morning reading. I don’t usually feel dumb, but smarter people than I are going to have to discuss this with you.

    • My eyes crossed and my head started spinning after about one paragraph. I think the gist of it is that RD would like Planet Money to find out WTF D.E. Shaw is doing in the hedge fund markets and what it has to do with Larry Summers, and then explain it to the rest of us.

      • I had only had one coffee when I read this, so blamed it on that. Now I’ve had 3 coffees, and still go, “huh?”

        I do get the gist of it, but eigens and Green functions…uh, whu? Is a Green function a fundraiser for McKinney?

      • They’re using the laws of physics to determine the behavior of derivatives. When you take that course in my program every one saves their C up for it except the Chinese and Indians who came to the program with physics degrees.

        • Interesting concept, and probably a fascinating area for research.

          However, I would prefer they get it funded, and do the research with someone’s money besides MINE.

        • Here’s my feeling about using the laws of physics to determine the behavior of derivatives: scrying; alchemy; chiromancy; geomancy; augury.

          Oh just see http://en.wikipedia.org/wiki/Fortune_telling

        • I never got less than a “B” in college (and only a handful of those)

          But then again I only took 3 units of numberology and an Econ for Dummies class that didn’t involve numbers or theories (we read F.A. Hayek and “1984”)

          Social Science/Humanities majors rule!

          • economics is considered a social science still, that’s why they don’t pay us as well as the other business profs, that’s why I got one masters in econ, one in Finance, and the phd will be techically more finance than econ. Worth about twice as much money, but frankly finance barely qualifies as a discipline imho

      • I wish her lots of luck since as I understand it hedge funds usually require you not to disclose its activities.

  5. Nothing like discovering so early in the morning just how “dumb” I am! OMG!

    • I’m with you, Pat. No amount of coffee in the world will make my brain sharp enough for this post.

      • I feel like Homer Simpson!

        • I spent a considerable amount of time in college trying to avoid stuff like this. To fulfill part of my liberal arts degree science requirement, I took an “ethnobotany” course. For our final, we went on a picnic! That I could understand.

          • Too funny!

          • LOL, that sound like my ecology class. I actually like Science, but I was good in stuff like Astronomy and geology. Physics and biology were like greek to me. When you can’t tell a human bone cell from a plant cell, you can pretty much determine that a medical degree is not in your future.

  6. OT — Good morning all.

    Please send a postcard to the U.S. Treasury, reminding Secretary Geithner that the deadline for paying his taxes is April 15.


  7. What they really like RD, is the physicists. Most of the models these days use time derivatives and brownian motion. Also, sensitivity analysis is big in the derivatives market. Ah, for the day when a simple times series regression model said it all!

    • I’ll admit that all of this math is way above my pay grade, but my first instinct is to distrust the application of complex analytical programs like DESMOND to the world of finance and economics. Didn’t we get into this gigantic economic mess in the first place through the misapplication of mathematical models to create the market for CDS and other complex derivatives? I similarly suspect that hedonic regressions and other mathematical analyses used by economists are used to hide the true inflation rate and other bad news from the public.

      But obviously, I don’t actually know jack about any of this.

      • Every time i sit in a seminar with one of these guys, I’m the sarcastic bitch because I don’t think the laws of physics apply well to human behavior. This models only work well when the market is behaving rationally, which frequently, it doesn’t. But all the finance folks worship at the alter of Eugene Fama, who, imho, will NEVER get that Nobel prize’s he’s after because markets usually aren’t friggin random and rational!

        • and on that note, i’ve really never missed forecasting a down turn and it’s always when this little voice in my head says, wtf have theses folks been smoking? I’d trust my intuition ANY day over their models. I used to be great at ‘forecasting’ interest rates that way in the 80s too.

          • Thank you for being the sarcastic bitch that you are! I’m so glad that people like you exist in academia. I’ve often thought going back to grad school and studying economics just so that I could be that sarcastic bitch in the seminar. It’s kind of a relief to know that I don’t have to.

            See there, Mr. Summers, not only can women handle math and hard sciences, but they can also apply “female intuition” to smell out b.s. in ways that you seemingly cannot!

  8. I hope the American puma in Italy is OK!

  9. So, Lewis Thomas (The Lives of a Cell, The Youngest Science), one of my favorite writers and thinkers, was right on about comparing the earth, and all the actions therein, to organisms.

    The wonderful medical school dean certainly was predictive about so many developments we see today. And he explained them was such beautiful, clear prose. T’will be interesting to see the mathematical proofs from a computer that is able to show such infinite biologic clarity — and provide us with analogies to other complex systems.

    And then there is The Dancing Wu Li Masters (Zukav) in the realm of physics….but that is sort of taking math out of physics…

  10. In other news, our youngest daughter’s high school team just took 2nd place in the state Certamen (Latin Knowledge Bowl) championship. She also took first place in mythology.

    She now will go to UCDavis in San Francisco this summer to compete in the national tournament with the National Junior Classics League. She’s smart as hell, and sneers at anyone who wants to call her geeky because of it. Walks around with her green striped hair and her “Bad Brains” teeshirt, and dares anyone to ask why she’s not cheerleading like a “normal” young girl.

    Okay, just had to brag. 😉 Carry on.

    • very very kewl!!! Congrats!

      • She’s a cool kid, and also a very talented artist as well as smart. She’s planning on a double major, in both art and business, because as she says, “If I am ever going to do anything with my art, I will be the one in control, not at the mercy of accountants and managers.”

    • Congrats to your daughter who is clearly an apple fallen not far from the tree!

    • You keep on bragging! She is a walking testament to you as well. Congratulations!!

    • Excellent! Congrats to your brilliant daughter!

  11. Thank you for illustrating this so well RD. It makes a perfect companion piece to the NYT article on Summers/Shaw.

    Big question- was it this kind of model which failed in the derivatives markets? Or was Shaw a success because of his sensitivity model, or because of his contacts.

  12. Dakini-have you seen this Top Gear video on Ford Mustangs?


  13. Can somebody translate RD’s post for me?

    I don’t speak geek

  14. BTW – I was looking at that graphic and I don’t think Obama has any Mentats on his staff.

    He does have a few Harkonnens though.

  15. Most of the models these days use time derivatives and brownian motion. Also, sensitivity analysis is big in the derivatives market. Ah, for the day when a simple times series regression model said it all!

    No fair DK! I said I don’t speak geek (but I’m guessing “brownian motion” refers to our economy going to shit, right?)

    It oughta be right anyway

  16. http://www.usatoday.com/news/nation/2009-04-05-homeless_N.htm

    “By Wendy Koch, USA TODAY
    Cities and counties are reporting a sharp increase in homeless families as the economic crisis leads to job loss and makes housing unaffordable.

    In Seattle, 40% more people are living on suburban streets. In Miami, calls from people with eviction notices have quadrupled.

    “The demand from families with children has increased dramatically,” says Robert Hess of New York City’s Department of Homeless Services. Each month since September, shelter requests have been at least 20% higher than they were a year ago.”

  17. I thought brownian motion was when Obama side swipes a “heck of a job Brownie” moment of his very own.

  18. Okay, I was a little intimidated about clicking on RD’s first link, but it’s a great read. I’m not sure exactly what to think about Summers, for some reason, I fear he may place the interest of the elite investment class over that of the common taxpayer.

  19. This is my favorite video of Brownian Motion

  20. http://www.npr.org/blogs/money/

    “April 6 (Bloomberg) — Mike Mayo, who left Deutsche Bank AG last month and joined CLSA, assigned an “underweight” rating to U.S. banks and predicted loan losses will exceed levels from the Great Depression.

    U.S. stocks dropped after Mayo gave “sell” ratings to banks including Winston-Salem, North Carolina-based BB&T Corp. and Cincinnati’s Fifth Third Bancorp. Bank of America Corp. and JPMorgan Chase & Co., the two biggest U.S. banks by assets, were assigned “underperform” ratings, Mayo said in a report today.

    “While certain mortgage problems are farther along, other areas are likely to accelerate, reflecting a rolling recession by asset class,” Mayo wrote. “New government actions might not help as much as expected, especially given that loans have been marked down to only 98 cents on the dollar, on average.” “

  21. http://www.bloomberg.com/apps/news?pid=20601213&sid=awjJmRaGgwSI&refer=home

    “April 6 (Bloomberg) — Laura Hecox was baffled when an officer from the San Diego County sheriff’s department came to her home in February and said she was being evicted. She hadn’t missed a rent payment on her four-bedroom house since moving there a year-and-a-half earlier.

    “They told me to leave, to get a few things together,” said Hecox, 37, who lives with and supports her four kids and mother. “I got booted out just like that.”

    Hecox didn’t know the home she was renting in Chula Vista, California, about 10 miles north of the Mexican border, was in foreclosure because her landlord was a year behind on mortgage payments. The new owner was a group of investors led by JPMorgan Chase & Co., the third-biggest U.S. home lender.”

  22. I’m having flashbacks to when they were attempting to teach us pharmacokinetics at NMCSD and how to determine peaks and troughs for gentamycin.

  23. is economy a social science or a quantitative science?? good luck with getting biology models to help in finance, since they dont work much in biology itself

    if they did maybe pharma would get the blockbuster drug they are looking for. if you look the great majority of blockbuster drugs were found by chance not by rational design

  24. Oh, my! I was so rattled by the intensity of this post I totally forgot to add the social links (running off)

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