Friday, December 31, 2021

Chokeholds Reconsidered - 2021 New Year's Resolution Fulfillment

I fulfilled my perpetual, annual New Year's Resolution in 2021 by changing my mind on the desirability of banning police chokeholds. 

The list of improvements we could make to reduce police state abuses is long. However, one specific policy that I no longer endorse is to ban police chokeholds in all circumstances. It is my view that banning chokeholds for police is a net negative as that leads to more violence including more deadly violence but also the use of batons and other instruments that can inflict long-term damage. 

Forbidding chokeholds negates the ability for a single even well-trained officer to subdue a violent noncompliant subject without using deadly violence. I came to this conclusion after listening to this Sam Harris interview with Rener Gracie, master of Brazilian Jiu-Jitsu whose grandfather invented it and who has trained police officers around the country. 

This is not to say that chokeholds should be used often or without extreme reservation. It also is not to say that chokeholds are in any way a non-violent police tactic. Yet completely taking this tool away seems likely to cause more harm than good.

This does reinforce and speak to my bias that banning things is a bad, blunt-force instrument. The world is more complicated than that. And unintended consequences almost always result from such actions.


BONUS: Additionally I changed my mind on my reaction to treating kids with Adderall, et al.  I still think we over prescribe drugs to kids in these circumstances for selfish reasons and we don’t have nearly enough tolerance for deviations from a desired norm—quiet, obedient children. But the dose makes the poison and there are very legitimate uses of dangerous things including of course many drugs. I thank Scott Alexander and his post on how much drugs problematic drug users actually use for changing my mind.

Thursday, November 4, 2021

You're Allowed Cynical Beliefs But Not Cynical Reactions

Society rewards cynical beliefs and optimistic reactions while at the same time it punishes optimistic beliefs and cynical reactions. 

Consider that a politician is given wide latitude to sow distrust in the system and the powers that be but would be viewed as naïve for believing things work by and large pretty well and our default position should be charitable benefit of the doubt. Similarly a politician would be expected to embrace a development as beneficial to his side while being seen as a sour puss or exhibiting sour grapes to downplay a successful event.

This is not just a political phenomenon. CEOs must be grounded realists who only crack a smile when championing an outcome. Otherwise, they should be on the lookout for the next problem. Yet if a problem arises, they get no credit for being dismissive.

Perhaps the biggest exemplification can be found in everyday life where nobody wants to hear about the downside after a positive moment and at the same time nobody wants to hear how it will probably all be okay in the face of fear. Rather one should doubt the future and champion any moment of progress while rejecting hope and brushing aside any consideration that ulterior motives may be at play.

Social media amplifies these truths orders of magnitude due to the network and feedback-amplification effects. 

I am a bit ambivalent on this in general. I both fight and embrace my personal tendency toward cynicism. It can negatively bias one's thought process like a disease, but it can also provide healthy critical analysis. A good journalist has a proper balance in regard to cynicism. They are not a cheerleader for their beat nor a pure curmudgeon. 

We are all and always have been journalists in one way or another to greatly varying degrees of quality. Today's technology makes this more apparent, but it has always been the case. We gather facts, analyze data, and relate stories. Some are better than others and some do it for pay while others do it for pleasure (or shear necessity of living in a society). 

--------
2021-11-11 Addendum: As a personal example of this, I offer how as a fan of OU football any optimistic outlook I hold is seen as being a “homer”, a derisive label. At the same time a cynical take on the team’s prospects is seen as wise and level-headed. Further, if the team does well, it is widely viewed as uncouth to not give them credit for their success. Even more so, if they do poorly, one is not allowed to point out ways the opponent got lucky, etc.

I do not find these social norms to be desirable, tbs.

Wednesday, November 3, 2021

What You Think Versus How You Think

What is more important: what you think or how you think? 

To what degree is it fair to hold people accountable for what they think. Cognitive dissonance should be relative to rational ignorance. It seems unfair to hold people highly accountable for beliefs and other thoughts they shouldn't have legitimately thought much about or simply haven't had much exposure to. Further, what you think is subject to social desirability bias and group identity--factors that are so ingrained as to be a bit out of our immediate control. I think of that not as a pure get-out-of-jail card for bad thoughts (or thinking--see below) but rather as a relaxation of culpability.

How someone thinks implies an examination of reasoning, and that seems to be a much more legitimate way to evaluate thinking. What someone thinks should ultimately be governed by how they think not the other way around. Unfortunately we tend to give a very shallow evaluation of others including leaders especially politicians by getting hung up on what they think.

Consider this 2x2 analysis:


In this framework there should be high stakes if the thinking that went into an eventual thought was thorough (deep/rich), but low stakes if the thinking was not. We are rewarding good thoughts and punishing bad thoughts, but the degree to which we do so is dependent on the thinking (process) that created and supported the thought (conclusion). One implication is that more intelligent people should bear a greater burden for their thoughts. 

Another is that a bad conclusion from a thorough process should carry higher blame than would a bad conclusion from a shallow process--the bigger the inconsistency, the bigger the crime. Don't confuse that with allowing a thinker to get off easy for a bad thought when they should have thought more deeply before forming a conclusion. For that we have to change the framework.

To wit: the framework is transposed a bit when we switch from considering thought accuracy (is the thought right, correct, good, moral, etc.) to considering thought significance.


Now the framework assigns greater scrutiny to the interaction of the level of thinking and the meaningfulness of the thought rather than the level of thinking given the ultimate outcome. One obvious implication is that thoughts of trivial/minor significance deserve low stakes regardless of the reasoning level that goes into forming them. 

It is easy but false to assume all thinking should be deep/rich. That is simply not possible. It is out of our grip most of the time. We either don't have the time or the mental faculty or both. Therefore, one implication is don't hold confidently to high-significance thoughts if you did not employ deep/rich thinking in deriving them. Another implication is don't put deep/rich thinking into trivial/minor thoughts. 

How does this compare to the real world experience? I think level of reasoning is generally a non factor in most people's framework most of the time. Rather it all comes down to does it feel good and is it me or like me:


My claim is that reasoning is given very little credit for most people most of the time. Perhaps this is defensible to a degree given the vast ulterior motives we all possess. While that is an apt explanation, it is not a reasonable justification. 


Related: See Arnold Kling's review of The Mind Club.  

Saturday, August 7, 2021

Justifying Bitcoin (and Crypto) Prices

Steve Landsburg recently asked on his blog for anyone to offer plausible reasons for why cryptocurrency should have any value at all beyond just being in a speculative bubble. (Aside, you can tell how behind I am in my reading, etc. by the date of this reply.) 

Here is what I left as a comment serving as my attempts.

Attempt #1: Suppose Steve decides he wants to retire and move to Paradise Island. He plans to liquidate his assets including current real estate to purchase a dream place on the beach. He is not alone as many are contemplating and acting toward just such a move. At the same time current real estate owners on Paradise Island are looking to cash in on the land run by selling existing places including raw land. Unfortunately, many scamsters abound looking to take advantage of a key information asymmetry--namely, that it is extremely difficult to determine who actually holds title to actual land. Fortunately, there is one source (a cryptocurrency ledger) that can validate with complete certainty which of these are legitimate sellers and therefore legitimate potential transactions giving Steve (and all others) good title to any purchase. [Note: While this is an extreme case, adjusting for real-world frictions and the availability of alternative solutions simply lowers rather than extinguishes the value of the ledger.]

Attempt #2: Octan Corporation is a multinational firm with extensive interests throughout the globe. As such it has continual needs to transfer liquid assets (call it money) between subsidiary accounts and with arms-length third-parties all of which can be domiciled in different states and nations with custody at various third-party firms. In the current/old world this is costly in a number of respects: It has limited availability since banking systems are open only at certain times and days of the week, it is slow since the clearing process is built on old architecture with a cumbersome and time-intensive trust/verification procedure, and it is explicitly expense in fees as a result of these prior two reasons as well as the regulatorily-driven limited competition for these services. In the world of cryptocurrency these costs are substantially reduced. Literally Octan can send $1,000,000,000 across the world at 11:59 PM on a Saturday completing the transaction in 10 minutes for <1/100th of current wire costs in fees.

Attempt #3: Steve has many opinions and predictions about the world. Unfortunately, talk is cheap. Many dispute his contentions with vigor. However, Steve is actually very often correct. To his frustration Steve's detractors seem to vanish once the reality plays out in Steve's favor. And even if they are around for Steve to claim victory, they usually move the goalposts rarely admitting defeat. This among so many other facts like lack of liquid collateral or basic counterparty risk means ex ante bets are rarely able to be made. Fortunately, cryptocurrency allows trustless contracts to be written between these parties creating vast potential markets and submarkets for predictions and hedging. 

Attempt #4: Steve loves using his credit and debit cards. He is a "points guy" who has the obsessive hobby of finding and exploiting all the various opportunities including arbitrages that exist for non-cash transaction rewards programs (e.g., frequent flyer miles bonuses, cash-back rewards, etc.). Steve is like all consumers, though, in that he doesn't like transactions fees. Fortunately for Steve, many of these fees for him are being cross-subsidized by naïve customers who are not maximizing their points if using credit/debit cards at all. The fees are transactions costs representing the true costs of validating and facilitating financial transactions. These add up to hundreds of billions of dollars annually. Fortunately, cryptocurrency offers the potential to cut these costs dramatically by creating "trustless" alternative clearing options. It is trustless in that the two or more parties to the transaction do not have to know each other as the network ledger validates the funds going from A to B are both good and compete (irreversible). [Note: While today transactions on various crypto networks like Bitcoin seem painfully slow (minutes or longer), there are options of subnetworks that can reduce these to seconds. Also in anticipation of a common objection, the price volatility risk can be eliminated by adding entry/exit transactions for both parties on both ends of the crypto exchange (e.g., dollars for Bitcoin for customer A, Bitcoin transfer from A to B, Bitcoin for dollars (or other) for seller B.).]

Saturday, July 31, 2021

The Reopening - The View from Hawaii



Earlier this month my family and I spent a week in Maui. In case you haven't heard, it is really, really beautiful--a great vacation spot. Hot take, I know. Here are some observations:

  • Two underappreciated qualities that give Hawaii its magical appeal are the remoteness in distance and time. You can go to lots of amazing islands in this world, but almost none are as physically remote as Hawaii. Related to this but not necessarily following except for the particular way our world is populated is the fact that it is very temporally remote. The rest of the world is asleep or done with their day when yours on the island is starting. This forces one to shrink their world down to a few mountains in the vast ocean abyss.
  • The reopening from the perspective of Hawaii is perhaps unsurprisingly behind what I've otherwise experienced. Anecdotally this was supported by other travelers who came from places more locked down than Oklahoma such as New York and California. They too were surprised by the policy phase Hawaii was still in.
  • Related to this was the part that both caused anxiety for me in preparing for the trip and frustration for me in navigating the travel. This is the Hawaiistan aspects whereby it was as if I were travelling to a third-world country. At the time when we were there (this policy was recently relaxed) the only vaccinations that were meaningful were those given on the island. The same shot from Pfizer, et al. given in another U.S. state gave no privilege--every entrant had to get the same COVID test done before arriving and not more than 72 hours before arrival. Testing in a pandemic is critical, but the various rules laid out for Hawaii, which I won't bother to fully go into here as others have covered this, and the way they were implemented had more to do with health theater and signaling than they did with science.
  • This should probably not be a surprise given that the Maui mayor thought it helpful/necessary to beg airlines to bring fewer tourists to the island. I guess that's how they solve for the equilibria in banana republics.
  • Speaking of banana republics and their policies, Hawaii generally and Maui specifically suffers from two self-imposed penalties--development restrictions and the Jones Act. 
    • On development - I understand that there is a bootleggers (resorts, others in the tourist industry, and current homeowners/developers) and Baptists (current residents who in many cases are self-described natives and who don't want things to change) story going on. I'm not sure everyone close to this issue does understand that. I am sensitive to the good, bad, and sometimes ugly history of how Hawaii is now a U.S. state. Blanket restrictions on and impediments to development imposed by government are not the solution. They are economically harmful making Hawaii poorer than it would otherwise be, which of course harms the poor the most. They are also culturally destructive creating a hostile environment of us versus them as opposed to a constructive environment of negotiated compromise and agreement. Finally they are morally repugnant when they allow the politically powerful to violate property rights.
    • On the Jones Act - this is "self-imposed" in that Hawaii is a U.S. state and this is a U.S. federal government policy. Hawaii itself is not responsible for it. However, why isn't the Hawaiian delegation to Washington and Hawaiians as a politically lobby effort not storming the Capitol on this one (figuratively speaking, of course)? 
  • Enough griping. Hawaii is awesome. The people I encountered (Hawaiians and tourists alike) were delightful. Aloha is not just a slogan. It is a warm and wonderful way of life that is embraced and practiced everywhere you go. I felt welcomed and appreciated in Hawaii by virtually every person I had the pleasure of engaging with.
A few recommendations:
  • Do some homework before travelling to decide how much of an activity vacation you want (there is plenty to do) and how much of a relaxation vacation you want (it is easy to not have enough as it takes time to drive, boat, walk to various destinations, everyone moves a bit slower than you might expect, and at every turn there is a siren call to spend more time).
  • Because of the odd time zone Hawaii has been placed in (it "should" be a hour or two earlier there when compared to most places) and because of the typical jetlag for U.S. travelers, Hawaii wakes up early and you will too. So it follows that it turns in for the evening before you probably expect. Just chalk it up to following Ben Franklin's advice and hope that it adds some wisdom to your life.
  • We stayed in Wailea on the southwestern shore. You can't probably go wrong between this area and the rival northwestern shore, but I do think it is easier to traverse from the SW part of the island. 
  • We stayed at The Fairmont, which is highly recommended provided you want a resort experience and a resort bill at the end.
  • The Road to Hana is highly demanding but can be highly rewarding. Planning here is key. There are good apps to guide your journey. You won't get it all in--the more you stop, the less distance you'll get. We actually went the entire loop around the "dangerous" undeveloped part of the island. It was truly treacherous at times but still doable for a minivan. Not sure if I'd recommend it as opposed to reversing course to head back home. But doing so wouldn't have saved us any time since I wanted to make it to the half-way point of The Pools at 'Ohe'o
  • From a prior trip, I can highly recommend biking down Haleakalā. 
  • Maui Pineapple Tour was very interesting and fun. I've never seen Dole's operation, but I image it to be on the other end of the production frontier--Maui Gold is charmingly but surprisingly a trip back to farming circa 1950.
  • Iao Needle state park is underappreciated. For the intrepid, consider disobeying the signs and hiking the prohibited trails. It is an awesome scenic adventure. 
  • Unfortunately I didn't get to try the many famous and/or recommended dining spots that are still on my Want To Go list. The two at the hotel,  and Nick's Fishmarket, were very good but . . . did I mention resort prices? The labor shortages were most acutely seen here as perhaps only 1/3rd of Ko was open and service in general throughout the island was poor.
  • For the price of airfare (explicit cost, time in the air, and jetlag effects) plan to stay in Hawaii for as long as possible--at least one week. There is always more to do including doing nothing.

Aloha!


Saturday, July 10, 2021

What Does NIL Imply for Parity in College Football?

The evil empire known as the NCAA has now finally relaxed its rules on amateurism allowing college athletes to earn compensation off of their name, image, and likeness rights (henceforth, NIL). How sweet of them. It only took a rare 9-0 shutout loss at the Supreme Court to get them to change their ways. 

Cue the pearl clutching as the latest moral fear becomes a moral panic--God forbid someone in America would make money off of their talent.

Yes, times they are a changin', and for the better. There will be losers, though. Eventually, it is likely the ones losing advantage will be all of those who have been profiting off of players not being compensated. This list somewhat in order includes: coaches, administrators, athletes in all sports other than football and men's basketball (mixed bag here as there will be lots of NIL opportunities for many of them), fans, and the universities in general.

For this post I'd like to briefly discuss how this might affect competitive balance (aka, "parity") in college football and men's basketball. 

If by parity we mean anybody can beat anybody (i.e., "any given Sunday"), then the initial and perhaps enduring apparent result will be increased parity.*

If by parity we mean league continuity, then the apparent result will be decreased parity.

Let me explain. Allowing NIL compensation adds a dimension along which teams can compete. A classic analogy is when the CAB under the Carter administration ended price controls allowing airlines to compete on price. This was very good for consumers in the long run and very disruptive to airlines in the short run. 

In this same way NIL comp will add a competitive dimension to the competition for college athletes and thereby increase variance in those athletes' sports. An increase in variance means instability. That instability will have two features:
  1. It will give new and added opportunities for lesser, secondary teams to challenge incumbent blue bloods. Potentially Oklahoma State now has more opportunity to challenge Oklahoma in football.
  2. It will open up more risk of failure especially for lesser, secondary teams. This failure can be in the more obvious form of shutdown but also in the harder-to-perceive version of loss of status. Hypothetically the difference is Temple dropping football altogether or going down to a lower, true-amateur level versus Penn State falling from prominence. 
The first case will look like more parity. The second case will look like less to the causal observer. This is why I referred above to these being the "apparent result". I would guess that the second will come to dominate the narrative as many will long for the good old days when anybody could compete in college football and men's basketball. You know, back when Alabama always played Clemson for the national title . . .



*If you think complete parity is in any way desirable in sports, you don't understand sports in the least. Nobody gathers around to watch guys flip coins.




Saturday, June 12, 2021

The Reopening - The View from Las Vegas


As a reward to myself for blogging every day in May, I travelled to the place that is at the same time the most and the least American city, Las Vegas. It had been over two years since my last trip there, Super Bowl 2019. Some observations:
  • It is largely unchanged at first appearance. The casinos are packed. Restaurants are hard to get into. Crowds are abundant.
  • A studious observer will notice that even though casino open tables are full with high minimums, there are numerous ones, banks in fact, that are unopened. My guess as to the primary cause for this would be the labor shortage with depressed actual or forecasted demand as a secondary contributor. 
  • Speaking of the labor shortage, the struggle is real. I can support Scott Sumner's prediction and observation that labor supply is low and as a result service is poor. Let's be clear, everyone I encountered from a service perspective (waitstaff, front desk, concierge, retail clerks, etc.) did a great, friendly job. But service is SLOW. Restaurant wait times are crazy (more on this in the business thought below) and reservations are required--we almost had to slum it one night at Shake Shack but fortunately got into Din Tai Fung (more on where I ate far below). There are empty tables at "full" restaurants--not a strategically spaced COVID thing. Some have yet to open. Calls to concierge and guest services had very long waits on hold. And note this: those enormous signs out front on the strip, very valuable advertising real estate, had in their rotation help wanted ads among show previews, featured restaurants, and "...the loosest slots on the strip...". 
  • One of the reasons I went and took the whole family (more on this in the culture thought below) was to see the shows. Sadly, I was a bit early in my winter planning for this trip as the primary show draw for us, Cirque du Soleil, is not ready to open yet. This makes sense as it takes time to get the band back together so to speak. 
  • Masks were sparsely seen among the patrons. Probably 10% wearing them at most. Various staff is more like 75%. This was different at the poker tables as only about 20% of dealers wore them, but also about 20% of players. For the players I think this was a combination of a desire to use masks strategically as well as California CDS (just anecdotal but supported by several examples--young poker players from California and elsewhere were masking even though they admitted they were vaccinated). 
Feel free to file several of the above under either or both 'lockdowns have long-term consequences' or 'pandemics have long-term consequences'.

Two more thoughts: one on culture and one on business.
  1. People have always asked me when I tell them I'm taking my kids to Vegas "What is there for kids?". The answer is lots, but it is deeper than that for me. The world is for all of us. I don't subscribe to the idea that we should shelter kids in incubation chambers until they are ready for the real world. The real world gets them ready for the real world. Yes there are obvious limits. Yet this isn't simply a disagreement about a matter of degree. I think there are hard and soft lines between what a kid should and shouldn't be exposed to. People including if not especially kids are antifragile. We walked in the heat (108) as well as in the air conditioned resorts. We saw the beautiful people among the beautiful gardens of Bellagio as well as the desperately troubled on the decidedly rough sidewalks. Of course we did not attend a strip club. At the same time I did not hide their eyes at the scantily clad girls (and guys) selling groupie photo ops. Piff the Magic Dragon's show was excellent with the adult language that is not generally my 9-year-old daughter's vocabulary. I think my kids saw repeated great examples from me and my group and many others we encountered that a Las Vegas experience can be great fun while still being responsibly and reasonably behaved and coexisting with bad, excessive, undesired behavior all with the attendant consequences.
  2. As mentioned above, there were long wait times for restaurants among other things. Some of this is a temporary phenomenon that will abate as the reopening completes. Yet some of it is an enduring problem. First some history: In the mid 1970s William Bennett and William Pennington began transforming Las Vegas by developing a more family-friendly environment and a more expanded idea on what the Vegas bundle should include. Add to this the innovations Steve Wynn developed. Gradually the idea that Vegas should be stingy rooms, cheap food, limited shows, and free drinks all with the desire to get gamblers gambling gave way to the idea that these other areas could be profit centers themselves and of greatly higher quality and variety. Then came the metric revolution advanced greatly by Harrah's so that the casinos could understand their customers better tailoring the experience more individually (profit maximizing price discrimination). For a long time I yearned for the casinos to recognize and reward me for not just my gaming but also for all the other revenue I was bringing with me (hotel room, restaurant spending, show attendance, etc.). Slowly this has finally been happening to where on this past trip almost all my high-end food spending is credited to my value as a customer. But there are still unclaimed chips laying on the casino floor. The OG business model dies hard. Our room at Aria was very nice, but still lacked some basic desires. I would have liked and used a minifridge that was not stocked with high-priced items with a hair-trigger system ready to charge me for an inadvertent nudging. Keep that there, but give me another one that is empty--maybe at an upcharge. How about a coffee maker or Nespresso in the room? Presumably the casino is thinking they want me out of that room on the casino floor or at the pool ordering drinks or in a restaurant. However, keep in mind they definitely do offer room service. More to the point think about the tradeoff. Instead of popping a K-cup right out of bed, I went downstairs to Starbucks in the Promenade waiting over 30 minutes in line. The wait outside the popular Salt & Ivy for brunch was >1 hour. This is not productive time for the hotel/casino. People who were not waiting right outside the restaurant looking at their phones instead were walking away to find another place probably in another property. Waiting on queue is a dead-weight loss in need of a creative, profitable solution.
Finally, here are the places where we ate with all being recommendable:

Wednesday, June 9, 2021

The Rules of Investing Club


  1. Stay invested - Don’t time the market. Timing the market is not just impossible. It is multiplicatively destructive in two ways: bad decisions compound mathematically and the likelihood of mistake compounds with attempts.
    • Sub-rule - Know what this means. It applies when the market is “down” and when it is “up”. What makes you think you can define these? What makes you think you’ll both get it right on the exit/entry (at least twice) and have the nerve to make the proper moves at that time. Also, wouldn’t timing imply buying low? So why are you bailing after a crash?... oh, because even though you didn’t see the downturn coming up until this point, you now can see definitively that a further decline lies ahead.
  2. Keep a cash reserve equal to X months expenses - X is up to you. A typical rule is 6 months, but mileage will vary. Be sure to include access to credit as a buffer as long as you also take into account that the event that causes you to tap into this safety reserve might also be damaging your credit access. Notice how this rule helps with adhering to the first rule.
  3. Diversify - The only "free lunch" in investing as it allows for (some) risk reduction without return reduction (up to a point) when done properly.
  4. Outsource - SPIVA. You ain’t special and just about no one else is either. Therefore, use well-run, low-cost, TRUE index funds. (Besides Vanguard, Fidelity and Schwab are also typically good providers.)
  5. Do what it takes to stay on plan - Employ dollar-cost averaging (DCA) or enroll in forced (passive) contribution increases or use a professional as a commitment partner.
    • Sub-rule - Make sure the pro has incentives that are congruent with your own, has the right credentials (CFA and CFP being the gold standards but experience matters a lot too), and is cost competitive. 

Monday, May 31, 2021

I've Got Bad News For You

Your house is going to catch fire and burn down completely in about 10 years from today give or take a month. The good news is that no one will be injured in this accident and nothing substantially bad will happen to your house between now and then. No fire, no flood, no tornado, no termites. 

The further bad news is that you are now positively uninsurable. The further good news is you no longer need insurance. Insurance is about transferring risk; not transferring expense. What you now need is a redirection of resources to prudently prepare for the coming loss. 

Similarly, worries about a collapse in health insurance markets because of genetic information breakthroughs are firstly fairly unrealistic in their assumption of complete elimination of uncertainty and secondly seriously misguided because of our misguided understanding of the purpose of insurance. 

We are confusing the mechanical result of insurance being used (compensation goes to harmed parties from unharmed parties via an insurer middleman) and the conceptual purpose for insurance existence (the transfer of a risk from those sensitive to it those better equipped to handle it including across time). 

Suppose we were in a world where health risks were as predictable as fire "risk" was in the analogy. Would this mean those with pre-existing conditions would be left to suffer? Of course not. As John Cochrane has been saying for a long time, this problem is solved by health-status insurance. 

Basically, give those with known high risks money equal to the expected value (cost) of future expenses. If the future costs are a sum certain, then there is no role for insurance (a known liability implies buying a bond). A strict parallel between the house fire and pre-existing conditions would mean no doubt about the cost ("...nothing substantially bad will happen to your house between now and then."). That is not realistic even if we have near perfect information about what pre-existing conditions foretold. 

The world we will live in even if we get really, really good at matching pre-existing conditions to future health problems will be one with some variance and uncertainty. There will still be a risk of accidental death before the predicted health problems develop along with hopefully great medical and economic advances that make treatments better and less expensive.

If we feel we should help the future victim of house fire (pre-existing conditions), we through government and private charity can give them funds to compensate for the loss. We cannot give them insurance unless and only to the degree there is uncertainty.

P.S. Perhaps doctors and patients should just secede from the broken insurance market? Count me in.

P.P.S. If you want to test your understanding, think about how a typical pregnancy is not a good candidate for insurance while a rattlesnake bite is.

P.P.P.S. I just renewed my personal homeowners policies on Casa Shazam, which gave me reason to post this thought experiment.



Sunday, May 30, 2021

WWCF: First Contact

Which will come first?


Aliens Contact Us

or

We Contact Aliens


How quickly you dismiss this question on its very premises is interesting in itself. Let's start with the basic assumption that there have been, are, or will be aliens (intelligent life with origins beyond Earth). Now that we have that out of the way . . .

Where are you on the Fermi Paradox and The Great Filter? For this question to have meaning we have to additionally assume it is actionable because there will be a determination of contact made. So . . . 

Here are the terms:

Aliens contacting us would include the obvious spaceship lands on the White House lawn, but also signals deliberately sent that we detect/decipher even if they are not aimed directly for us. Add to this discoveries of artifacts here on Earth of past alien civilizations if those were exploratory or communicative in nature. So a deliberate message sent by aliens and received by us through passive discovery or active looking by us is the first condition met.

The second condition, that we make first contact, seemingly has a lot of hurdle to it. We have to discover aliens keeping to themselves to the extent they don't find us and make contact or we see one of their signals sent out prospectively, and then we make the first engaging move. Yet there is another way. If our signals we have been sending out unintentionally/sloppily since the time we have been aware that we've been transmitting to the cosmos or sending out deliberately to "is there anybody out there?" are received by aliens, then we have made first contact. Another feather in the cap of us first is what qualifies as "intelligent" life. While I am open to revision, right now I would allow anything at or above the minimum threshold of animal cognition. So Martian mice count, but Martian bacteria do not. As impressive as space monkeys would be, there is no chance they contact us first.

Robin Hanson has already been putting in the heavy lifting on this one. And don't tell me that it is already settled--dis ain't ova

My prediction: Perhaps I allow the Fermi Paradox to overly influence me or perhaps I'm too optimistic in regards to The Great Filter. Nevertheless, I come down on the side of the second case, we contact aliens first. To this I will assign a respectable but still negotiable 65% probability.



Saturday, May 29, 2021

Trust Is a Fragile Fabric

https://en.wikipedia.org/wiki/Bayeux_Tapestry


Of the many, many lessons to be learned from the COVID-19 Pandemic, one that stands out to me is how important honest communication is. Honesty is a bedrock of trust. Trust is an essential quality for a thriving society.

While fear can enable a society to survive, it takes trust to allow it to flourish. Largely we are only surviving the most recent pandemic. There are many reasons for this from poor understanding and application of science to isolationist responses regarding testing and vaccination driven by nationalist pride (distrust!) to blatant failure to test to failure to properly quarantine to failure to experiment and on and on. Granted that many of these failures came about because we were starting from a poor state of trust, we did not do much to improve the arrangement. In fact we set it back meaningfully along the way.

Suppose we get another pandemic (we will, just wait). Suppose further that it is similar to COVID in terms of virulence and contagion. Perhaps it is dissimilar enough that we have a caught-off-guard type of reaction thus making it even more similar to COVID. But we do remember COVID, so we actually do have some improvements in societal and government response. For example, some communities, large business firms, perhaps the federal government wants to conduct wipe-spread, rapid testing. What might stand in the way of that policy being well received and complied with?

The people that would need to be getting tested would need strong assurance that a positive test would be met with reasonable consequences. What about our response to COVID would give them that assurance? Although people would definitely want to know if they were infected all else equal, pushing back against this desire would be multiple, reasonable concerns. Namely, that they would be subject to harsh treatment if positive (social stigma, rough or indefinite or otherwise undesirable detention, etc.) and perhaps more reasonably that they would be subject to involuntary quarantine, lockdown, social stigma, etc. even if they tested negative. 

Compounding this would be a distrust that they were getting the full story. Vaccination acceptance still suffers from the horrible Tuskegee Study crime. To a lesser degree dismissive elite responses to those with concerns about vaccination, as unfounded as those may be, also deters people from trusting authorities on vaccines. Being told masks are worthless and then that masks were essential sent a clear message--don't trust the authorities. This was one of many noble lies, a short-sighted concept that completely fails to ask the essential question: And then what?

The Chinese government lied to the world at the early stages of the pandemic. They have characteristically been very deceptive as the pandemic has unfolded including apparently not cooperating with the investigation of a lab leak cause. We should expect and demand better from our authorities. In the long run people respect the concept of 'we don't know' especially when coupled with transparent, honest, and updating 'here is what we are thinking'. The 'And then what?' from this approach is productive responsibility and fruitful experimentation. 

Friday, May 28, 2021

Elaborate Investing versus Adaptive Investing

When investing, be careful not to confuse complicated with complex. 

My inspiration for this post came from reading this essay by Arnold Kling a few years back where he elaborates on a longer essay by Jordan Hall that draws a distinction between complicated and complex. Hall sets the terms:
...[I]n brief the distinction is that a complicated system is defined by a finite and bounded (unchanging) set of possible dynamic states, while a complex system is defined by an infinite and unbounded (growing, evolving) set of possible dynamic states.
Kling's treatment is very helpful as he extends the concept to economics and climate:
When I was a graduate student in economics in the late 1970s, we were trained as if the economy is complicated, but not complex. We were told that if we learned enough mathematics and statistics and applied these tools, then eventually we could predict and control economic outcomes. 
In fact, economic behavior is complex. There are too many causal factors, feedback loops, non-linear effects, and unprecedented phenomena involved to enable economists to control the economy precisely and reliably.
....
Climate scientists use computer models, because the problems with which they deal are complicated. But there are multiple models, and they do not agree with one another. That tells me that the climate, like the economy, is complex. There are too many causal factors, feedback loops, non-linear processes, and unprecedented phenomena involved to enable precise and reliable prediction and control.
In contrast, landing a spacecraft on the moon is merely complicated. It is a very difficult problem, but we can arrive at a determinate solution.
I would like to extend this model to the investing world especially from the standpoint of the typical buy-side* investor (AKA, you and me and most all of us). 

The money management world loves to overcomplicate things. This is because overcomplication gives a mystique or air of superiority to the wise, benevolent (expensive) investment professional. It also conveniently provides a nice cover for when things don't go so well. As an aside I believe this is a very big part of the investment world's embrace of ESG--perhaps to be expanded upon in a future post.

At the same time that they are embracing overcomplication, they are riding in like valiant knights to save the day. This is not to say that investing is simple. Investing is complicated, but that complication and solutions designed to solve it are not the full story. 

If it were just complicated, Wall Street would have solved investing long ago. And it wouldn't have needed a retail investor's money to do so. Investing is complex. This follows naturally from economic behavior including the economic actors and forces within it being complex. Consider a single stock.

We can attempt to value a stock based on a number of different, widely used, credible models (e.g., dividend discounting, free cash flow to equity, multiple of price to book, multiple of price to sales, etc.). These formulations are complicated to a certain degree and can be made more complicated with arguable improvement to the output. What should give us immediate pause is that each of these will almost always yield a meaningfully different answer. 

Each model will rely on assumptions, and those assumptions will have their own underlying complications. No matter how hard we try, all the king's computers and all the king's CFAs cannot definitively (precisely and accurately) value a single stock let alone the market as a whole. The best one could hope to do is be right more often than not to a slight but still meaningful degree. Very few highly incentivized, very well funded pros can actually do this. And even they fade with time. 

The nature of investing being complex is not simply complication layered upon complication. It is of another dimension entirely. Economic value is ultimately subjective value. It is subject to preferences, tastes that change in unpredictable ways. It is also subject to random events that spawn new, unforeseen paths of development. There are future technologies of which we have not even dreamed and for which all of the physical ingredients are currently before us. 

Those in money management on the sell-side* offer the comfortable refuge of 'solving' the complicated. This is dangerous even if unintentionally deceptive. Investing is never solved. It is constantly evolving both from the standpoint of the market external to the investor as well as the investor's own financial goals and risk preferences. Consider the latter an additional layer of complexity with its own complications. 

The solution to complex challenges is flexibility. A good financial plan must be adaptive. Elaborate schemes alone will not save it from peril. If anything, they may give a false sense of security along with crippling high costs. Start with straightforward guiding principles, and follow with constant reassessment: What are you trying to achieve? What is at risk? What is the current probability of success/failure? What are the magnitudes of those potential outcomes? How confident should you be in these estimates? What if you're wrong?

Appreciation for the complexity of investing means looking beyond solutions for the merely complicated. 





*In traditional industry parlance the buy-side refers to those purchasing investments especially investment products. This could include buying a mutual fund or investing money with a more involved manager. The sell-side is of course those on the other side of the trade selling the investment fund or services. The ultimate buy-side investor is the principal owner of the account--the one who's money is being invested. She may hire a money manager to act as agent for her. It would be his job to take on the role of buy-side investor facing those looking to sell investments to him (ultimately her). So for him it can be confusing since he is selling to his client his services to buy on her behalf. In the industry he is always considered buy-side. The firms he invests his clients' money with are the sell-side. Many a principal-agent problem develops when the buy-side doesn't stay prudently arms length from the sell-side. Think of it as the financial world equivalent of the McD.L.T. 

Thursday, May 27, 2021

Disagreeing to Agree

We mostly all agree on the premises:
  1. Progress comes through experimentation.
  2. Most experiments fail.
We mostly all disagree on the conclusion:
  • For progressives the answer is "Therefore, we should pursue large experimentation conducted by the state on the basis of arbitrarily determined noble objectives."
  • For conservatives the answer is "Therefore, we should pursue limited experimentation constrained by the state on the basis of arbitrarily determined morality."
  • For libertarians the answer is "Therefore, we should pursue a great many small experiments conducted by entities on the basis of their own arbitrarily determined desirability, feasibility, and expected profitability."
One desirable feature of any of these processes would be for those involved to have strong stakes in the outcomes (good and bad) constrained by the rights of third-parties not to be harmed in the process. I leave it to the reader to decide which of these most easily aligns with that desired incentive structure.

Wednesday, May 26, 2021

Ethics Versus a Moral Code

Ethics are rules and standards that we can reasonably hold others accountable to and that follow from first principles that are themselves self-evidently consistent--ethical intuitionism (a la, Huemer). 

Moral codes are rules and standards some group agrees to abide by. 

For a moral code to be ethically enforced the parties to the code must be adults of sound mind giving free, willful consent and where exit is always an option (a la, Nozick). Yet that does not make the moral code ethical per se. We have no right to expect others not party to the agreement to abide by our moral code unless it is itself ethical. 

We can belong to G.R.O.S.S., but we cannot force anyone to join. However, members and non-members of G.R.O.S.S. are all subject to a higher moral code that is ethical. So G.R.O.S.S. itself and our behavior as a member may not be ethical. 

I believe a common failing is mistakenly assuming a moral code is ethical with religion playing a leading role. One way to test for this is if a godless society would be able to derive the standard naturally. Therefore, for a rule, law, norm, mores, et al. to be ethical, it must be able to survive on its own in the wild so to speak. 

"This is truth because Calvin (or Hobbes) said so," is not valid outside of the treehouse.



Tuesday, May 25, 2021

Don't Let the Crazies Write the Story

How should we think about global warming? 

The video below came to mind as I read this great post from Michael Huemer. From the post:
The insane extremists are winning the debate about global warming. Whatever your view of global warming, you probably agree with me about that. You probably also think the crazy extremists are the people on the opposite side from yourself – the people on the left if you’re on the right, or the people on the right if you’re on the left. 
What I’ve realized is that both the left and the right are dominated by crazy extremists who ignore facts and evidence so they can believe what they want to believe.

He goes on to list four very reasonable points about what to think about global warming. Be sure to read his post.


https://youtu.be/vE8mFDabqD0 

Using the video as a metaphor, I think people of either extreme position think of themselves as the boy, Atreyu, and their opponents as the horse, Artax. They on the left (right) are desperately trying to pull the climate-change deniers (climate alarmists) out of the swamp of sadness and certain global death (economic poverty).


P.S. Interestingly the climate alarmists should have a higher hurdle to overcome in getting support for their extreme view. This is because if they are right, they still have to be right that their extreme measures will actually solve the problem. If they are wrong about climate catastrophe, they will bring about something nearly as bad for humanity. On the other hand if climate-change deniers are right, everything is fine. If they are wrong, they have to also be wrong about there being time to change their minds. I think that is part of the impetus behind the artificial urgency that has recently developed in the environmentalist religion. They need to change the terms so that failing to act now is impending doom.

P.P.S. The horse in the swamp scene very much bothered me as a child—terrified and crushed might be the more accurate terms. The still below is from the movie's ending which was also bothersome in a 'what is infinity?' type of way.



Monday, May 24, 2021

The Debits, The Credits, The . . . People We Exploit


Imagine being a fly on the wall overhearing various nefarious conversations at a major corporation's board of directors meeting. 

Imagine them trying to save money by paying women less, trying to please customers by not hiring racial minorities, contemplating intellectual-property theft, discussing a newfound way they can literally defraud customers, etc. 

These would all obviously be wrong (morally and ethically not to mention in many cases criminally), and these ideas would not be within the scope of fiduciary duty. The board of directors of a public company does owe a fiduciary duty to shareholders. That duty requires it to put the interest of shareholders first including doing their best to maximize shareholder value. Yet that duty does not extend to wrongdoing on behalf of shareholders or the firm nor does it excuse them morally or ethically from guilt. 

I think these examples above are the easy cases. At least they should be easy for you. Let's consider something a bit more challenging.

Should we put cronyism in the same unethical category? Is pursuing special favor from the government at the expense of the public unethical? Are benefits to a firm and its shareholders legitimate when they are derived through socially destructive means? Undoubtedly there are meaningful differences in degree and type. 

At what point does activity like developing and utilizing business relationships, networking, and advocacy cross over to be unethical--cronyism if you will? I believe one clear marker would be when that behavior would be reasonably expected to violate the rights of a third-party either actually or potentially with good likelihood. That is a clumsy test, I know. While it leaves lot left for interpretation, I do think it gets to the essence of the problematic case.

In one realm we have competitive behavior in the pursuit of success. In the other we have coercive behavior in the pursuit of unearned gain.

It is difficult to disentangle behavior and results between these two worlds. In fact people participating in an activity during or after the fact would find it quite challenging even if they could put their natural bias to the side--the bias to believe they were acting in good faith and to good ends using good information and sound logic. It is hard to see when the world generally and the business world in particular is as political as ours has become.

As a result cronyism is perhaps a natural cancer within capitalism that requires active resistance. It extends beyond simply lobbying for advantageous contracts. It includes businesses supporting expensive regulations such as safety standards and minimum wages. When the railroad industry supports limits on truck size and trucker hours or when Facebook asks for the government for Internet regulation or when Amazon lobbies for a $15 minimum wage, they are all doing so for competitive advantage. If those policies would also result in a social benefit, it would be rather coincidental and not at all self-evident. 

Cronyism is endemic and pervasive. The cure is neither obvious nor likely easy. Just identifying the responsible parties is quite hard. As Michael Huemer says, blame everybody and nobody.



P.P.S. This post's title is taken from a line in this Jake Johannsen comedy special from the 1990s.