So it is now common knowledge that Ocean Infinity has made a "reward" based offer to the Malaysian government to find 9M-MRO. A reward based offer means that they (Ocean Infinity) are not requesting payment of any kind unless and until the aircraft is found. The terms of the offer and the amount of the reward specified have not been made public.
As a general observation, reward based terms have not been common practice since the days of Jesse James, and it is indeed a strange way to do business, especially with a government entity who likes to have some periodic say in how the work is being conducted. That would, in my opinion, have a trickle down effect on a nation's taxpayers. I would be annoyed with the US for doing business on that basis. Even the US IRS, one of the most immoral and unscrupulous of US agencies, does not offer rewards to whistle blowers (maybe they do and I am not aware of it).
Actually, I checked into it, and the IRS does offer rewards to whistle blowers. Why am I not surprised - bastards.
A short while ago I took a pass at quantifying (on Victor's site) what the terms of the offer would be if I were running Ocean Infinity. I assigned a 70% probability of finding the aircraft in a search of 25,000 square kilometers (km^2). This choice was nothing but arbitrary, but it felt good and is conveniently close to a one sigma probability of 68% i.e. there would be a corresponding probability of ~95% of finding the aircraft in a search of 50,000 km^2. Based again on pure assumptions, I estimated Ocean Infinity's cost to search 25,000 km^2 to be USD 15M. The assumptions were Fugro's reported costs (~$30M for 25,000 km^2), and an arbitrary assignment of a twice as efficient search technology to the Ocean Infinity effort. Including a profit, startup cost, and the 70% probability the reward offer was estimated to be a minimum of USD 30M. The corresponding value for 50,000 km^2 with the same fee and startup cost would be USD 45M. In round terms the offer is likely to be in the $30M to $50M range which is what I posted on Victor's site.
So while you might well disagree with the numbers in the paragraph above, the methodology I believe is sound. The difference would be scale - search cost and probability estimation.
In the meantime, the press has reported that CSIRO and Geoscience have had a eureka moment relative to reducing the likely area of the terminus. Whether Ocean Infinity would sign up for these conclusions is not known, but I would not, and in my model I am running the company. Still, the Malays and the Aussies might endorse the new "findings", and if so it would certainly influence their decision making relative to signing up to the Ocean Infinity offer. They would reason that the new findings could create an opportunity for an Ocean Infinity "windfall" that could make them look foolish to the electorate (taxpayers). Not looking foolish is a high priority for all of us, but an even higher priority for an elected official.
Based on the above, the tripartite group might well conclude that they could fund Fugro to search a 10,000 km^2 area for about a $12M time and material cost with a very high probability of finding the aircraft. This is the path I believe the tripartite group will take. It is less expensive without the possibility of embarrassment. Whether a 10,000 km^2 search will find the aircraft is anyone's guess (my personal opinion is that it is ill advised), but it is a "safer" bet than the reward based contract.
It should be mentioned that Ocean Infinity's benefit in securing a search contract would include the underwater imagery which has a value they could realize, and a marketing value associated with a very high profile search. I have no way of assigning an estimated value to either of these entities, but it should slightly lower the cost estimate above.
more August 19, 2017
It can also be seen that a plausible reason for Malaysia canceling the notion of a reward in January of this year is the evolving nature of the terminal location information. Framing a fair reward amount in January/17 could become a windfall in August/17 due to new information. A reward based contract seems to not make sense in the context of finding 9M-MRO.
Friday, August 18, 2017
Thursday, August 10, 2017
Rant for the Month
So, I am mostly done with the book below.
It details the formation and subsequent demise of Long Term Capital Management, LTCM.
It details the formation and subsequent demise of Long Term Capital Management, LTCM.
An interesting read that underscores my long held belief that economists are poor mathematicians, and generally don’t know jack shit.
The basic problem is similar to the recurring problem I have with various very well educated and intelligent people relative to MH370.
Both the movement of stock value and the frequency of the MH370 oscillator strongly resemble a random walk. A random walk has the property that it is neither stationary nor ergodic. You cannot apply conventional log normal analytics to a random walk.
Stationary means that if I take statistics from any two random walks that they will converge. Not true.
Ergodicity means that if I take statistics from 20 one hour random walks they will be similar to statistics taken from one 20 hour random walk. Also not true.
We are conditioned to believe that given a set of numbers that we can compute a mean and variance that are meaningful. This is only true for stationary and ergodic processes (please Wiki stationarity and ergodicity). It would seem that people fall asleep in math class when the properties of data sets are discussed or maybe they are not discussed at all. We can take a mean and variance for any set of data. The math is trivial and well-defined. The problem is that it is often completely meaningless to do so.
The link below summarizes a post I made on this subject relative to MH370. I sent it to the ATSB (Australian search authority) and Dr. Holland readily admitted that the oscillator behavior is neither stationary nor ergodic. He did not explain why he went on to compute the mean and variance of oscillator data logged on previous flights.
So it goes with Black-Scholes. It is deeply flawed for the same reason. The process it is trying to model, stock price movement, is neither stationary nor ergodic. It simply cannot be done using log normal statistics which are the basis for the Black-Scholes model. LTCM found this out the hard way - by losing billions of dollars of other people’s money.
End of rant. I feel better now.
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