There's going to be a lot of talk about what happened at Worldcom, what went wrong, and what can be done to prevent it from happening again in the future. But I am sure of two things:1) This problem didn't crawl up out of the ocean, rather it is a product of specific past errors and our own conceit, and2) Any "solutions" seized upon will only perpetuate a future stream of errors for evolution to navigate around.The fatal flaw in all of it will be, to put it bluntly, the presumption of consciousness. For even if human consciousness operates at some rudimentary level in local interpersonal relationships, its laws certainly cease to have any effect whatsoever when you get to something as big, and involving as many people, as this Worldcom thing.Really, the only way to make sense of it, and to deliver a prognosis, is to picture the perp as a furry little animal who had no idea what he was doing. And you picture the investors in WCOM stock and bonds as dumb, furry little animals. And you picture the whole thing not as a product of human reason, but as an ecosystem.Many so-called "solutions," which seem to make sense, will at once be recognized as absurd when you consider that nothing more can be expected of the participants in the solution than can be expected of swarming lemmings. Rather, the only "solution" that can work is one where no one need be aware of what is going on.Because nobody is aware what is going on, and no one ever will be. So, let's stop kidding ourselves. There is no "reasonable" way to address this problem. Rather, the problem itself is largely a byproduct of the presumption of reason in the past. The best that can be expected of people is simply to exhibit moral habits.I think there is such an instinct to push behavior changes through the system by speech, and enforcements grounded in reason - just as you would have done in the small tribe or troop of primitive man. But just remember, rats and amoebas don't have speech. You cannot propagate change, rather it wells up from within the environment.Yeah, okay, I've been awake for two nights, you know MP

MobPsycho >> Yeah, okay, I've been awake for two nights, you know. I thought it was pretty lucid. I agree with you 100%; there is indeed in current legislation and practice the idea that the corporate body is a thinking being, which it largely is not. Certainly the only real solution is to acknowledge that the corporation is an ecosystem and try to apply rules which will cause the system to evolve to satisfy the desired constraints. However this cannot be a simple task, and our success in handling ecosystems is even more embarrassing than our success in handling corporate governance.

The corporation is not exactly like an ecosystem, it's more like an ecosystem with god thrown in. There are people who have the power to create the incentive structure within any given corporation. If those people put some thought into their jobs, they would avoid a whole host of problems that plague almost every large company. Humans are very predictable, especially in aggregate. When a company fails in the manner that Worldcom has, it is almost always a matter of a screwed up incentive structure that encourages people to do things that are bad for the company.As for the people who invested in WCOM, I know people who had lots of the bonds, and rode them down. They weren't stupid as much as they were blinded by the gambler's lust. It's the same mentality that has people lining up at slot machines and lottery vendors. Now, some of those people will undoubtedly lobby to be protected from themselves.

When Bernie Ebbers gets to court, he can call MobPsycho as an expert witness for the "it was the ecosystem made me do it" defense.Get real. Bernie became a multi-billionaire and made dozens of cronies multi-millionaires. There was no oversight. Bernie ran the corporation down to employee coffee decisions (when he discovered fewer filters than bags of coffeee were being used, he decided employees were stealing coffee and discontinued free coffee). He was CEO and chairman of the board. His buddies made up the board and senior executives. The auditor was well-paid. Company employees visiting headquarters stayed at a hotel he owned. He lived off of $408 million borrowed from the Company at 1.25% per year.With this kind of potential payoff for people of average ability and only moderately above-average luck, people are going to try for it. By whatever means necessary. You can't call it greed, 99% of people would jump at the chance. The government won't stop them, nor will auditors or Wall Street analysts. In fact, all these groups will be cheering them on, and pocketing fees in one form or another.The problem is governance. Shareholders are legally prevented from controlling the Company, or even learning much about it. Owners are the only people who will devote the time and attention necessary to ensure the employees aren't looting the place. Take away the legal restrictions on shareholders and the problem will go away. Nothing else will work.

"The corporation is not exactly like an ecosystem,"No, I wasn't talking about the corporation, but rather about the capital-allocation system."They weren't stupid as much as they were blinded by the gambler's lust."Yeah, and you were blinded by gambler's fear.I don't much go for these psychological explanations. Why did I sell at the bottom? I panicked. That's ridiculous. The reason I sold at the bottom was because I had know way of knowing, I could not possibly have detected, that there were buyers, and it was the bottom."Smart," "stupid," this is all still an excessively animistic explanation, in my opinion. The marketplace is just a perpetual Bayesian fishing expedition, what you call a filter I think. Do you think, St...MP

"Shareholders are legally prevented from controlling the Company, or even learning much about it. Take away the legal restrictions on shareholders and the problem will go away. Nothing else will work."Please elaborate, Aaron!Like, you know how much I would like to do more research on trading operations, and how bearish I was on NITE. But if I had driven down to Jersey City, and tried to come through the front door to look at their books, I suspect I would have come up against trespassing laws.But somehow I suspect those aren't the exact laws you're talking about.MP

"When Bernie Ebbers gets to court, he can call MobPsycho as an expert witness for the "it was the ecosystem made me do it" defense."Well, the court system certainly didn't prevent him from doing it.People of my parents' generation think morals are arbitrary, and God is imaginary, so morals aren't likely to bail us out.So, if the ecosystem isn't going to stop Bernie Ebbers from running a company, and if the ecosystem isn't going to install you in his place, Aaron, then who is?Aaron, you seem a moral man. Me, I actually believe 1) that the ecosystem makes criminals, and 2) that the way the ecosystem cures itself is with the death penalty:-)MP

This goes back to the question of why prices change. I posit that it is not, as the "bayesian fishing expedition" analogy would imply, because of the constant diffusion of new information through the market. The underlying drivers of security valuation seldom change very quickly, and yet prices often make large, rapid movements. People change their minds, or re-evaluate their utility for returns, risk, etc. People can and do change their preferences all the time. Why do you think the "market price of risk" is such an elusive (and illusory?) beast?If investors had complete (or close to complete) information, change in price would be dominated by expected change in the relevant factors affecting the security value. But given that such a state of complete information is impossible in this world, price changes are the result of speculation and guesswork about things that have a huge degree of uncertainty surrounding them. Which essentially moves the game away from actual forecasting and makes it an issue of how much risk to take. And measuring risk, let alone assessing one's appetite for it, is notoriously difficult and pretty well beyond the scope of mankind's current abilities, except in the most rudimentary sense.And allowing investors greater access to information wouldn't necessarily help because the cost of gathering that information would still be prohibitively high for most investors. Big asset managers and investors with large stakes in a company can get management and bankers on the phone whenever they want. They can visit the physical site. And yet, they still rely primarily on S&P or Moody's or some other intermediary to assess credit-worthiness.

"This goes back to the question of why prices change. I posit that it is not, as the bayesian fishing expedition analogy would imply, because of the constant diffusion of new information through the market."You have misunderstood my analogy.I remember many years ago, I read Remisicences of a Stock Operator, and about Keane's successful bull manipulation of US Steel, or something. I considered whether stock-price manipulation - using the ticker alone - was possible today, even though it may be illegal.It occurred to me that a either a certain sequence of prints could trigger behaviors, or a longer pattern of prints could actually grow participants who behaved a certain way. It would be illegal for a conscious individual, but not for a randomly evolved mechanism, to cause these prints.A few years later I started giving my money away at the poker table, but to all the most improbable people. What was going on, was that so many more people who were individually unlikely to succeed, were being sifted through to discover the surviving pool of pros.If you're a normal person, you're more susceptible to a sales call. Nobody could conceivably predict what would cause a normal person to buy something he didn't want or need. But, by the time your phone rings, you will get the one-in-a-million pitch that survived the last million people.Suppose, for the sake of compactness, the part of the genetic code that hardwires the brain to recognize desirable breeding characteristics is of a minimal resolution. Creatures will evolve cheap, superficial markers which are no longer correlated to the trait they once reflected.So, when you look at ordinary statistics, you might say that if 1 in 100 people is dishonest, then 1 in 100 CEO's will be dishonest. But the real world generates endless random permutations, until the illusion of free money is discovered, and the feedback loop created, or something.Thing is, I can picture this much more easily than I can describe it. Every move in the stock market is growing and killing participants. Every price change is triggering participant behaviors. The supply of various instruments is constantly changing, though with a lag...Blah.MP

This may sound shallow or trite, but it always amazes me that the numbers of buyers and sellers in the e-mini S&P future on a given day are always equal. Okay, there may be some arbitrage, but there isn't always, and there doesn't need to be.But suppose, at the beginning of the day, 10 people set out with the intention of selling no matter what, and 5 people set out with the intention of buying, no matter what. By the end of the day, there will either be 5 prints or 10 prints, but certainly not 10 sells and 5 buys.At the beginning of the day, it is not known what will trigger 5 sellers to postpone, or 5 buyers to accelerate. So, in my opinion, the number of buyers and sellers is not so much discovered, as it is manufactured. The number of buyers and sellers must be made equal.The way I see it, there is not so much actual flexibility in the underlying demand for, or supply of stock in different timeframes. Therefore, the job of the ticker, is simply to keep painting pictures until the number of buyers and sellers is equal. See what I mean?I guess what I am saying, is that the position you hold, will not be dictated by the information you know. Rather, the number of sellers necessary to balance buyers, will select who should hold stock, among people who know or believe different things, or something.See, your information is constant, but your position must be flexible. Therefore, your information cannot dictate your position. It's like conservation of entropy, or something. The marketplace must select people to be wrong, or something. Ugh, I just about give up!It's like suppose there are 10 buyers and 20 sellers at 50. The market dips down to 45 for one second, which shakes out 10 sellers below 50, who sell to 10 buyers at 45. The market can immediately bounce back to 50, and be at equilibrium again.Maybe I am overblowing the significance of this, but it seems interesting that you may be a buyer at 45 no matter what. But whether you actually get to buy at 45 is the market's choice. So the market has this endless supply of people waiting to be wrong.And I know this is just a rehash of the old trader's lesson that it doesn't matter whether you're right, it matters whether you're right the subset of times you actually get filled. But the point is, the marketplace must manufacture ideas at random to reward and penalize.It's like, if the market needs a seller, the chances it will do the unique thing that cause you to sell are not 10%, they are 100%. I guess I am just saying the market churns out ideas to manufacture counterparties, the number of counterparties doesn't move the market.Okay, now I almost completely give up. MP

It's kind of like Goldbach's Conjecture.Starting at an even number and counting backwards to zero, the sequence of prime numbers is an invincible, indefatigable algorithm for discovering a minimal series of primes running in the other direction.And I can picture why. I've run through the algorithm a thousand times, and I can picture it but, for the life of me, I cannot articulate it.Point is, it would defy the laws of physics for this procedure to not uncover primes, based on the level of entropy reflected in the sequence.Similarly, you do not have the full freedom in your ideas and actions which you appear to, the freedom to not hit a prime pair.Aaaargh!MP

Maybe what I am saying is that, just like the prime sequence is a prime sniffer in the opposite direction, so is the marketplace an error sniffer.It begins with the requirement that it must create a certain number of errors, and then selects people at random to participate.Moreover, you cannot yourself calculate your own probability of being selected, because your calculation will be a pawn to this process!With this type of nonsense at the very root of my thinking, it is no wonder people have no idea what I am talking about.Much easier to just thank Jesus for the whole pile of events, and move on, don't you think?MPP.S. Ever wonder why work sucks? I did. I mean, if hard work, and hard thought offer such a survival advantage, you would think people would be born to lust for work! But in reality, unregulated thinking is as devastating as unregulated physical activity - like ignoring feedback and running long after you are exhausted, until all your ligaments disintegrate. Amusingly enough, abstract Bayesian concepts are the one thing my brain would not mind staying awake and thinking about without food or sleep for 1,000 days and nights, until I simply died. I could literally sit there like a zombie and starve to death. Anybody else have unregulated free reign in a particular area of intellectual pursuit?