Tag: utility functions

The utility of utility functions

That is the title of a webinar I delivered this morning on behalf of Kristal.AI, a company that I’ve been working with for a while now. I spoke about utility functions, and how they can be used in portfolio optimisation.

This is related to the work that I’ve been doing for Kristal, and lies at the boundaries between quantitative finance and behavioural finance, and in fact I spoke about utility functions (combined with Monte Carlo methods) as being a great method to unify quantitative and behavioural finance.

Interactive Brokers (who organised the webinar) recorded the thing, and you can find the recording here. 

I think the webinar went well, though I’m not very sure since there was no feedback. This was by design – the webinar was a speaker-only broadcast, and audience weren’t allowed to participate except in terms of questions that were directly sent to me.

In the first place, webinars are hard to do since it feels like talking to an empty room – there is no feedback, not even nods or smiles, and you don’t know if people are listening. In most “normal” webinars, the audience can interject by raising their hands, and you can try make it interactive. The format used here didn’t permit such interaction which made it seem like I was talking into thin air.

Also, the Mac app of the webinar tool used didn’t seem particularly well optimised. I couldn’t share a particular screen from my laptop (like I couldn’t say “share only my PDF, nothing else” which is normal in most online chat tools), and there are times where I’ve inadvertently exposed my desktop to the full audience (you can see it on the recording).

Anyways, I think I’ve spoken about something remotely interesting, so give it a listen. My “main speech” only takes around 20-25 minutes. And if you want to know more about utility functions and behavioural economics, i recommend this piece by John Cochrane to you.

Two States stealing ideas from my life

Don’t ask my why I’m reading a Chetan Bhagat book. Anyway a while back I was reading the first few pages of “Two States” when I started screaming and my eyes nearly popped out. Here in these pages was an incident that was straight out of my life at IIMB (the book is set in IIMA, btw). The first thing I did, after I screamed of course, was to check the date of publication. 2009. 5 years after that incident had taken place in my life. There is a small chance it might have actually been based on me.

So in the book, the microeconomics professor is explaining utility functions and indifference curves. And he calls upon an economics graduate from Delhi University to explain the concept to the class. The student tries to give a qualitative explanation but no one understands. That is where the similarity ends. In the book, the professor ends up writing some greek alphabets on the board while the student (female) bursts into tears at the end of the class, humiliated. And the hero goes on to console her and all such.

So as I mentioned, this event closely mirrors something that happened to me. First term of B-school, check. Microeconomics, check. Indifference curves, check. Economics grad from DU asked to explain, check. Student giving qualitative explanation, check. Class not understanding head or tail of it, check.

In our class, though, something different happened. The hero had no intentions of waiting till the end of the class and consoling the DU Eco-grad (in this case, male). Up pops his arm, and he screams  “saar, saar, saar”. When the saar doesn’t respond he shouts “saar I can explain this in English”. The DU Eco-grad is at the blackboard repeating his line, which he had probably mugged up, which enabled him to top university.

Saar finally gives hero a chance to go to the blackboard. Hero puts on collar mic. Looks at the curves on the blackboard and carefully marks off points, which he decides to professorially name as A, A’ (pronounced A prime) and A” (A double prime). Class starts giving up. Hero adds more points. B and B prime. Class gives up further. Then A and A’ move to B and B’. Something probably makes sense. Soon the proof is obvious to most of the class (mostly engineers). Hero hasn’t completed the proof yet when he hears a loud thumping of desks. Math wins. It is unknown if the DU Eco-grad cried at the end of class.

My apologies if I’ve told this story earlier on this blog, but I’m not one to let go of a bragging opportunity. And I still think it was that incident in my class, Section C of IIMB, on the twenty second of July 2004 that inspired the similar scene in Bhagat’s book. No, that’s not the part I’m bragging about.