
The size of the shadow banking system estimated according to power law - 666_howitzer
https://medium.com/the-physics-arxiv-blog/5e1dd9d1642
======
crntaylor
The approach seems to be along the following lines:

1\. Fit a model (in the case Zipf's law) to a semi-related field (the size of
non-financial companies).

2\. Find that the model doesn't fit reality in the field you're interested in
(financial companies).

3\. Posit that your model is correct and reality is wrong, and invent over $30
trillion worth of invisible activity to account for the difference.

Alternatively... your model is just wrong?

~~~
jasonwatkinspdx
This is an obvious and accurate criticism. But it's also worth considering
that large financial firms are both the best equiped and most motivated to
obscure their transaction activity, so I don't think it should be dismissed
trivially.

The question is: how could one find evidence that justifies or refutes the
idea that the scale of firms does in fact fit zipf and that measure is being
obscured at the tail?

Also, I'd point out that the original post did not differentiate between
financial and non financial companies in the way you do between points 1 and
2, so your characterization of what fields are related or "semi-related" is
your own creation and not part of the original claim.

~~~
gee_totes
> The question is: how could one find evidence that justifies or refutes the
> idea that the scale of firms does in fact fit zipf and that measure is being
> obscured at the tail?

Well, I think to find that evidence, you would have to take a measurement of
the amount of _shadow banking_ from one of these firms. Objectively, you can't
do that, since there is no agreed upon definition of what the term shadow
banking means.

------
junto
This is off topic, but does anyone else have a "This Week’s Top 5 Posts"
section smack in the middle of the article?

Is that something new Medium are automatically injecting? If so, I don't like
it. I do like the idea of being pushed to more content _after_ I've finished
reading, not _during_ the middle.

~~~
dredmorbius
In my increasingly reflexive editing of website CSS:

\- I disable _ALL_ nags. If there's a modal, slider, fixed bar, or fixed
social element, I nuke it.

\- If it moves, I nuke it.

\- If anything is labled "viral", "tease", "nag", or "social" there's really
good odds it's getting nuked. Really, stuff like that just makes it too easy,
and I may add some wildcards to my default CSS.

\- Unless it's a premier site (e.g., NY Times, the Guardian), I'll nuke the
"Recommended", "Trending", "Most Viral", etc., columns.

\- I'll strip any 3-column (or otherwise multi-column) format into a single
column of body text, generally about 40-50 ems (about 850-1000px) wide. The LH
column generally becomes a full-width header, the RH column a full-width
footer. If they survive at all.

\- Bump all fonts to 15pt (body text), 14pt (usually for overview pages),
10-12pt for most navigation elements.

\- Backgrounds to to white or very close to it, text to black or very close.
#fffff4 background, #222 foreground, is about as much as I'll push either.

I've noticed that the result is _much_ more soothing reading experiences, with
far fewer distractions. It literally affects my ability to focus and peace of
mind. Had my stylesheet manager (Stylebot) blow up on me a week or so back,
having to deal with The Web As Published ... just drove me nuts. Most site's
design simply sucks.

I've got over 500 sites styled to my preferences (many are just very quick and
light changes, a few more involved). The results are ... mostly pretty nice.

Among my favorites:

Buzzfeed:
[https://plus.google.com/photos/104092656004159577193/albums/...](https://plus.google.com/photos/104092656004159577193/albums/posts/5890225669560306434?pid=5890225669560306434&oid=104092656004159577193)

Unbuzzed:
[https://plus.google.com/photos/104092656004159577193/albums/...](https://plus.google.com/photos/104092656004159577193/albums/posts/5890225669560306434?pid=5890225669560306434&oid=104092656004159577193)

A 3-column to 1-column design:

3 cols:
[https://plus.google.com/photos/104092656004159577193/albums/...](https://plus.google.com/photos/104092656004159577193/albums/5896495055961929169/5896495071944854994?pid=5896495071944854994&oid=104092656004159577193)

1 col:
[https://plus.google.com/photos/104092656004159577193/albums/...](https://plus.google.com/photos/104092656004159577193/albums/5896495055961929169/5896495062245958898?pid=5896495062245958898&oid=104092656004159577193)

And this seems to kill the "Top 5 posts" bits:

blockquote.pullquote, blockquote.pullquote + p, blockquote.pullquote + p + p,
blockquote.pullquote + p + p + p, blockquote.pullquote + p + p + p + p,
blockquote.pullquote + p + p + p + p + p, blockquote.pullquote + p + p + p + p
+ p + hr { display: none; }

~~~
d4nt
Have you considered maintaining a [paid] chrome add-in with all this stuff in?

~~~
dredmorbius
Hrm.

Some of my edits are pretty rough. Most aim to please one key customer: me.
And I do virtually no compatibility testing for devices, browsers, or even
display settings.

Still ... could be useful. If only because exporting and uploading the
stylesheets would give me a backup.

What would you pay for this?

~~~
d4nt
It would have to be an ongoing service, a sort of "Clean Web Subscription"
that got updates. Believing that there's a human curating it is what makes it
valuable I think. I'd pay an annual fee of $30 for that. I may be an outlier
though.

------
diziet
One thing about Power Law distributions -- they work really great except at
the outliers (ie, top 10). You can't always say that because incumbent #10 is
x, #1 is 10x, especially when dealing with organizations that are huge
conglomerates of different services, branches and sub-companies.

Look at Market Caps of companies (something that we have public signals
about):
[https://en.wikipedia.org/wiki/List_of_corporations_by_market...](https://en.wikipedia.org/wiki/List_of_corporations_by_market_capitalization#2013)

The difference between #1 and #10 is <2x, and #3-#10 all vary by just a few
percent. Power Law distributions are great, but they tend to fail at the top
end.

~~~
diziet
I just wanted to present a counter argument to my reasoning: What if the list
of companies (which is publicly traded companies) is missing the real head --
the non public companies that are either government owned or are governments
themselves? If we look at the list of companies by revenue:
[https://en.wikipedia.org/wiki/List_of_largest_companies_by_r...](https://en.wikipedia.org/wiki/List_of_largest_companies_by_revenue)
it does look like the real head of the Power Law distribution is missing.

~~~
arethuza
The original paper seems to take the Global 2000 and then re-orders them by
asset size, not revenue:

"we find that financial firms dominate the top tail of the firm distribution
by asset size"

[http://arxiv.org/pdf/1309.2130v2.pdf](http://arxiv.org/pdf/1309.2130v2.pdf)

------
lucozade
The study takes on-balancesheet assets as a proxy for company size and fits a
model to it that largely works. Fine so far.

But the implication that this works at the top end is either that the
companies are hugely mis-stating their on-balancesheet assets or that there
are other companies, much bigger than FNMA, that have balancesheets with
multiples of the GDP of the States.

Neither of these explanations are plausible even if you believe that they're
all lying, thieving scumbags. The numbers are just too big.

However, there is another explanation. That on-balancesheet assets isn't a
good proxy for size for big financial institutions. And all of a sudden the
problem is solved because on-balancesheet assets isn't a good proxy for size
for big financial institutions.

Apart from anything else many of them run huge assets and liabilities off-
balancesheet. BTW that doesn't make them secret, they hit the accounts just
the same, it just means that the proxy in the study won't work.

And for what it's worth, this is wholly orthogonal to the size of Shadow
Banking, how much stuff is hidden in the Caymans etc etc. Fascinating and
worrying subjects in themselves.

------
chernevik
I've got a fun mathematical model supporting controversial assertions about
banks. Yes, I could test those assertions against fact by reading the
contingent liabilities sections of large banks' financial reports. But
accounting is boring. And, let's face it, we all know that I'd just deal with
negating evidence by arguing "accounting trickery" is just hiding Truth.

------
andyjohnson0
_" The shadow banking system is vastly bigger than regulators had thought, say
econophysicists who have developed a powerful new way to measure its hidden
impact"_

I had to read this a couple of times before I realised what was wrong, but
apparently "Econophysics" really is a thing:

 _" Econophysics is an interdisciplinary research field, applying theories and
methods originally developed by physicists in order to solve problems in
economics, usually those including uncertainty or stochastic processes and
nonlinear dynamics. Its application to the study of financial markets has also
been termed statistical finance referring to its roots in statistical
physics."_ [1]

[1]
[http://en.wikipedia.org/wiki/Econophysics](http://en.wikipedia.org/wiki/Econophysics)

~~~
contingencies
George Soros knows a lot about financial systems. Strong evidence is the fact
that he's rich and shares his perspectives, which are better than mainstream
perspectives at interpreting market behavior particularly during major crises.
My favourite quote of his is the oft-repeated notion that _Classical economics
is based on a false analogy with Newtonian physics_. He generally spends some
time either side of that comment making it really clear: there is no mystical
market equilibrium of supply and demand, only the behavior of individuals.

------
scotch_drinker
"On the Forbes Global 2000 list of the world’s largest companies, the first
non-financial firm is General Electric, which ranks 44th."

This is even scarier than the apparent fact that econophysics is a real thing.
I'd like to know the history of the Forbes Global 2000 to get an idea over
time of how dominant financial companies have been. I have a hunch they have
always had a part (JP Morgan Chase anyone?) but surely this is a new
phenomenon to be so dominated by companies that don't actually produce much.

~~~
effn
If something seems scary/spectacular/surprising it's usually a good idea to do
some fact checking. In this case it's very easy, since the authoritative
source (Forbes) is available online.

GE is 4th, not 44th. It seems to be a typo.

[http://www.forbes.com/global2000/](http://www.forbes.com/global2000/)

~~~
puzzlingcaptcha
If you sort by Assets it is 44th alright.

~~~
mebassett
sorting by assets is a weird way to look at things. Given that banks manage
people's money, you would expect them to dominate in assets.

market value, profits, number of employees all sound like better metrics to
get the "size" of a company. if by "size" you mean the influence it has over
the world.

~~~
ddebernardy
Err...

Banks manage other people's money, meaning they ought to lead in
_liabilities_.

Bank assets primarily are the loans they extend to customers, such as
mortgages and car loans -- in theory anyway, since they paper it nowadays to
avoid carrying part or all of the risks. They extend these loans by leveraging
the money in your CDs and savings accounts. In a sense, they borrow against
the money they owe you.

~~~
rayiner
They lead in both, because after all to be solvent their assets have to be at
least as large as their liabilities.

------
userulluipeste
See the "Inside Job" (2010) documentary movie - (at least in USA) there were
attempts to regulate the now unregulated banking activities. The banks' lobby
was just too powerful and in result not only the banks remained unregulated,
but the regulation system was reduced in staff and weakened.

~~~
onebaddude
Or, people could read about how and what the shadow banking system is instead
of watching a popular, slanted - albeit good, documentary. The "shadow banking
system" aren't banks, that's the point.

People underestimate just how regulated the banking system is, despite all the
talk about more regulation.

~~~
userulluipeste
"People underestimate just how regulated the banking system is, despite all
the talk about more regulation."

I agree with you about underestimation, but I think that the surplus of the
regulations that we're talking about here is more to keep the member circle
small, therefore it is in the benefit of the incumbent banks. So there is: 1.
strong regulation if you want to get in and 2. weak regulation (at least for
some banking activities) for keeping you in check afterwards.

------
phryk
What happened to labeled axes? Is it not cool anymore to tell people what BOTH
axes are supposed to be?

------
ChristianMarks
It may be that the scale-free preferential attachment model doesn't hold in
the generality claimed. The modeling technique of Doyle and Willinger may be
more relevant [1].

1\. Walter Willinger , David Alderson , John C. Doyle. Mathematics and the
Internet: A Source of Enormous Confusion and Great Potential. Notices of the
AMS. Volume 56, Number 5. May 2009.
[http://www.ams.org/notices/200905/rtx090500586p.pdf](http://www.ams.org/notices/200905/rtx090500586p.pdf)

------
acro
Banks are generally regulated, they have to have certain amount of assets to
work. They cannot have the same distribution as normal companies do.

------
lotsofcows
econophysicists? Wtf?

If you want to avoid the term "economics" because most people associate it
with "made up financial bollocks based on applying completely inappropriate
models from unrelated disciplines", then why include the "econo" part.

Also, you appear to be trying to be modelling a financial phenomenon by
applying a completely inappropriate model from an unrelated discipline.

~~~
jasonwatkinspdx
Derivatives trading is now dominated by quants with a background in the
methods of computational physics. Aspects of gauge theory, etc are clearly and
directly relevant. Don't reject this idea out of hand because it is unfamiliar
to you. It may be proven a fad eventually, but that's not at all obvious now.

As a concrete example: the Higgs result depends both on machine learning in
the form of decision trees to minimize the data, as well as monte carlo
simulation to generate theoretical data for comparison to what is measured.
Experimental particle physics is very much now an exercise in machine learning
and probabilistic simulation.

~~~
andyjohnson0
Physical laws _exist_. Objects in the real world _have_ to follow those laws.
I accept (I think) your point that ML and simulation can be used to "discover"
those laws in some inductive sense.

What I'm having a hard time with is the idea that markets necessarily _have_
"laws" that are "discoverable" in the same way (which is what I think you're
saying). They might do, and clearly some smarter people than me believe that
they do, but where is the justification for this?

@contingencies mentioned [1] a George Soros quote about classical economics
being based on a false analogy with Newtonian physics and markets are just the
behaviour of individuals. Observations of particles tell you the behaviour of
the particles, but the behaviour is fully determined by underlying physical
laws. I don't see how this is true of behaviour of actors in economics, except
in the obvious respect that the bodies of traders and the hardware of trading
systems are subject to the laws of physics. What am I missing here?

I also wonder if there is a danger of building automated trading systems that
are based on ideas from econophysics, and using their resulting behaviour are
proof that the ideas were correct in the first place.

[1]
[https://news.ycombinator.com/item?id=6481663](https://news.ycombinator.com/item?id=6481663)

~~~
jasonwatkinspdx
> I accept (I think) your point that ML and simulation can be used to
> "discover" those laws in some inductive sense.

Yes, we use these methods to confirm that reality matches some candidate law.

I personally don't think it's very meaningful to talk about physical laws
existing in some independent platonic sense, but the debate over the principle
of induction and the epistemology of science is a side story here IMHO.

Ultimately what we care about is that a model successfully predicts reality in
the future. I think a useful conceptual division is: with some models, the
internal structure of the model gives us understanding of the physical
behavior. Most of what we call "laws of physics" are in this category. We can
look at the algebraic expression and understand symmetries, constants,
conserved quantities, etc. A second type of model is purely algorithmic and
utilitarian: it gets the right answer, but the internal structure of the model
doesn't provide any comprehensible information or understanding. Most ML
algorithms fall in the latter camp.

What muddies the issue is that experimental physics tries to validate models
of the first kind, but now generally requires methods of the second kind.
We're forced into these methods because of the complexity of what we're
studying (particle physics can involve thousands of Feynman diagrams), the
noisiness of our measuring equipment, and the rareness of the events we're
searching for.

When I say physics methods are very relevant to wall street, I'm talking about
the latter methods more than any attempt to find fundamental theorems.

------
polskibus
Under the broad meaning of Shadow Banking System, everyone speculating in any
of the securities market would be a member of it. In my opinion this is very
misleading and not really targeting the core feature, which is being a
borrower and a lender of higher forms of money (reserves or deposits, not
securities).

~~~
polskibus
Why has this been downvoted? Can anyone share their view on Shadow Banking
System definition?

------
quarterto
TIL: econophysics is an actual thing.

