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.

Sunday, May 23, 2021

Where to Eat When Traveling

Summer travel season is quickly approaching. And this one promises to be crazy. On the supply side places are figuring out reopening on the fly in a rapidly changing environment and dealing with temporary shortages (in the common rather than economic sense). It may develop into an economic shortage if prices are not allowed to adjust, which I suspect will happen in many instances.

On the demand side personal balance sheets have never been so flush with cash. Combine that with the pent-up demand from a year without travel, and you have a recipe for a surge in customers. 

The list below is not time sensitive to this upcoming season. I want it to be evergreen, but hopefully it is additionally helpful for the vacation chaos of 2021.

Subject to revision, here is my advice list:
  1. Eat the local cuisine - Back in grad school I was on a summer study abroad in the south of France--I learned a lot and 90% was not in the classroom. There were several lessons learned in food. One was Pizza Hut and McDonald's (royale with cheese aside) is the same the world over. Another was Tex-Mex in Toulouse is about as silly as that sounds--I don't think this would have been different had I not been from Tex-Mex country. 
  2. Eat where locals (not tourists) are lining up - This helps you avoid the "world famous" place that is resting on its laurels. 
  3. Dine where you will be comfortable - There is a lot to be said for challenging one's comfort zone. However, don't get so far out of your comfort zone that you can't relax and enjoy it. This includes go where your attire will fit in reasonably well and where your group will fit in. Got your kids with you? Then you're skipping passed Chez Paul. And keep in mind that truly kid-friendly places don't have to advertise that they are kid friendly.
  4. Choose quantity of places over quantity of servings - When possible, choose two places over one for dinner and breakfast, perhaps three places over two or one for lunch.  Order smaller portions to accommodate. Diversification is a good strategy in more things than investing. For example, pick up coffee and a pastry early and then have or share an egg dish or waffles in an hour at another place. Don't worry about clearing your plate. That is a bad policy in general any way. 
  5. Allow spontaneity / don't over plan - Reservations are necessary sometimes, and a rough outline plan is usually rewarding. Still many mistakes are made when adherence to a plan is strictly enforced. In battle no plan survives first contact with the enemy. In travel no dinner reservation survives the next bend in the road. Many a meal has been thwarted because of an unexpected photo op, "five more minutes at the craps table", a "quick last ride" on It's A Small, Small World, a shortcut through the park, etc. Also, that celebrity who is imminently about to leave the Plaza snuck out through the back door an hour ago. Go meet your friends for dinner.
  6. Know your budget, allow some excess, stick to it - You're on vacation, dammit! And you want to take another sometime soon as well. Indulgence does not imply bankruptcy (read that both ways--an excuse and a warning). 
  7. Use the small/medium/large/small ratio (related to #6) - You can only eat so much the same as you can only spend so much. The law of diminishing returns applies. Don't follow a calorie indulgence with another one. Space it out and pace yourself. You cannot see all of Europe in one trip. Likewise you cannot eat all of Europe in one trip.
  8. [updated to add] Choose off hours - Places don't typically loose their magic when they aren't at peak capacity. Often they gain. This is not the case for places where the ambiance or surrounding entertainment is part of the experience, but that is about the show and not just the food. The last time I was in Vegas our group wisely choose not to go to Hash House A Go Go during the brunch rush (two-hour wait!) and instead went there around 6 pm getting right in. People are right to flock to that place. They are foolish to be so conventional thinking pancakes only work between 8-11 in the morning.

I'm not sure how much, but Tyler Cowen deserves a hat tip for certainly some of the above list.

This picture both supports and contradicts some of my list:



Saturday, May 22, 2021

Most Charity is a Failure


I know you want to do good, and I know you want to think that wanting to do good combined with doing something results in doing good. Unfortunately, you are very likely and in most cases completely wrong. 

I suspect that most people will either reflexively disagree with and disregard my position on this or accept it at face value as a necessary consequence of human social failure. I also suspect that most people who have extensively studied this area as well as most people deeply involved in this realm will either strongly agree or disagree with me. 

For this post I imagine each of these four constituencies as potential audiences. 

First of all understand that charity isn’t always about doing good as Robin Hanson would tell us. Often it is a bundled good which combines a desire to dream altruistically and be recognized as altruistic with little connection to outcomes.

Second of all note that government action (i.e., forced collective action) is usually worse in all regards. At the very least with a failed charity we can more easily delude ourselves that what we are doing is on net beneficial and not resource or happiness destructive. And then there is the side benefit that we did it basically through voluntary agreement and persuasion rather than the threat of ultimately deadly force. 

Third of all let us distinguish between charity and other not-for-profits.* A charity is looking to benefit an underserved beneficiary. There are other not-for-profits that are actually just tax-favored gifts to one's own hobbies and personal enjoyments. The focus of this post is charities as commonly understood.

The problem with not-for-profits in general is that they are responsive to donors rather than customers as Arnold Kling elaborates

Donors and customers both have desires they want met. To understand if they are satisfied the donor is presented the answer while the customer largely gets to judge for himself. The marketing to donors strongly tends to be aspirational and promise-based whereas customers have to consider the actual outcome and experience. Additionally, donors have two biases at play further constraining their willingness and ability to be critical: selection bias (they already are supportive of the cause ex ante) and confirmation/endowment bias (they want to believe they made good choices).

Sam Harris makes great points in this podcast like how charities don’t stop existing often enough—they can be failing or have completely succeeded but they still are in operation, which implies they are wasting resources.

Just like in the fine art market where no participant has a strong reason to discover much less publicize a forgery and does have powerful incentives to suppress such information, participants in the not-for-profit sector are incentivized to self-promote and cross-promote the whole edifice as being successful. 

The challenge for charities are the classic problems of the seen versus the unseen, moral hazard, conflicts of interest, and the law of unintended consequences. 

This TED talk on African orphanages has elements of all four problems. 

ProPublica has been reporting for years on the failings of the American Red Cross.

TOMS Shoes has faced forceful criticism about its charitable program of donating a pair of shoes to a poor child for each pair of shoes purchased. In a rare case of reversal TOMS now donates 1/3 of its profits directly to "grassroots" efforts. This may be much better than their prior famous-cum-infamous program that had the unintended consequence of displacing development in poor countries. 

New York not-for-profit hospitals asking their patients for donations makes one wonder just how not-for-profit they really are. 

There are unintended consequences for heartwarming charities like Make-A-Wish, et al. When resources are directed to one thing, they cannot also be used in any other area. There are always tradeoffs.

Add to the classic problems listed above the simple element that good intentions are not sufficient for successful solutions. Case in point would be food drives where the obvious need is not the obvious solution.

It is possible to bring strong doubt to the ultimate value of any charitable organization. The fact is most do not stand up to scrutiny.

Yet we want to do good; so what is a good doer to do?

I am a weak proponent of effective altruism. It is a way to distinguish between what works and what does not. To quote admirable, strong effective altruism advocate Peter Singer, "Effective altruism is based on a very simple idea: we should do the most good we can." He goes on to explain:
Effective altruism is notable from several perspectives. First, and most important, it is making a difference to the world. Philanthropy is a very large industry. In the United States alone there are almost one million charities, receiving a total of approximately $200 billion a year, with an additional $100 billion going to religious congregations. A small number of these charities are outright frauds, but a much bigger problem is that very few of them are sufficiently transparent to allow donors to judge whether they are really doing good. Most of that $200 billion is given on the basis of emotional responses to images of the people, animals, or forests that the charity is helping. Effective altruism seeks to change that by providing incentives for charities to demonstrate their effectiveness. Already the movement is directing tens of millions of dollars to charities that are effectively reducing the suffering and death caused by extreme poverty.
Second, effective altruism is a way of giving meaning to our own lives and finding fulfillment in what we do. Many effective altruists say that in doing good, they feel good. Effective altruists directly benefit others, but indirectly they often benefit themselves.
Third, effective altruism sheds new light on an old philosophical and psychological question: Are we fundamentally driven by our innate needs and emotional responses, with our rational capacities doing little more than laying a justificatory veneer over actions that were already determined before we even started reasoning about what to do? Or can reason play a crucial role in determining how we live? What is it that drives some of us to look beyond our own interests and the interests of those we love to the interests of strangers, future generations, and animals?
Finally, the emergence of effective altruism and the evident enthusiasm and intelligence with which many millennials at the outset of their careers are embracing it offer grounds for optimism about our future.
It would be nice to have a roadmap and a good introductory guide. Given all of this, effective altruism seems like the way to go. So, why am I only a weak proponent?

Well, it turns out the world and its problems aren't quite so simple. Consider Peter Singer's famous thought experiment on the drowning child from his book The Life You Can Save (taken here from a Vox interview):
Imagine you’re walking across a park. Somewhere in that park there’s a pond. You know the pond is quite shallow, but you see something splashing in the pond. When you look closer, you’re shocked to find that it’s a small child who seems to have fallen into the pond and is flailing around because it’s too deep for this small child to stand. So, you look around for the parents or the babysitter, but there’s nobody. There seems to be only you and the child. Your next thought is, I better run down to the pond, jump into the pond, and grab the child. Not hard to do. No risk to me because the pond is shallow.
But then it does occur to you that [saving the child] is going to ruin your most expensive shoes. You’ll be up for some hundreds of dollars to replace them and other clothes you might ruin. So, you think, why shouldn’t I just walk away and not have to go to the expense of replacing my shoes? Now the question for everybody is: If somebody did that, would you think that was really the wrong thing to do? Would you think that you had done something seriously wrong in leaving the child very probably to drown? Most of the people who I ask this of say that would be an awful thing to do — it would be terrible to allow a child to drown because you didn’t want to go to the expense of buying new shoes, even if they were expensive ones.
The point of the thought experiment is to then switch to the situation that we really are in. We live in an affluent society where we often have considerably more than we need to meet all our basic needs, enjoy life, and make reasonable provision for the future. We also are living in a world in which there are millions of children who die each year from preventable causes and there are effective organizations that would gladly accept a donation from you that would increase their ability to save some of these children. So, if you’re not helping to save some of these children, then are you really all that different from the person who walks past the child in the pond?
This is a compelling story and a powerful argument in an of itself. However, there is something bigger going on here. Why is this child drowning? As an analogy for children suffering, dying in fact, on a daily basis, where are the parents? Why are these children dying when they could so easily be saved? Why are they repeatedly falling into the pond to drown? The deeper question becomes what is the institutional, societal, cultural failure that has brought this about. 

Effective altruism has a blind spot. It does not do much more to seek to correct the underlying causes of problems than do all the other naïve approaches to charity. It may have a better rate of attaching bandages to wounds, but they are still just bandages. 

Perhaps that is too uncharitable. I don't mean it to be so harsh. Yet the fact remains too often organizations that pass the effective altruism test are not addressing underlying causes of problems. 

It is an illusion that lives can be bought like cars. For a start, the evidence is nearly always in dispute. The alleged effectiveness of the Deworm the World Initiative—which, at the time of this writing, ranked fourth in GiveWell’s list of top charities—runs contrary to the latest extensive review of the evidence by the Cochrane Collaboration, an organization that compiles medical research data. Maybe Cochrane is wrong, but it is more likely that the effectiveness of deworming varies from place to place depending, among many other things, on climate and on local arrangements for disposing of human waste.
More broadly, the evidence for development effectiveness, for “what works,” mostly comes from the recent wave of randomized experiments, usually done by rich people from the rich world on poor people in the poor world, from which the price lists for children’s lives are constructed. How can those experiments be wrong? Because they consider only the immediate effects of the interventions, not the contexts in which they are set. Nor, most importantly, can they say anything about the wide-ranging unintended consequences.
However counterintuitive it may seem, children are not dying for the lack of a few thousand dollars to keep them alive. If it were so simple, the world would already be a much better place. Development is neither a financial nor a technical problem but a political problem, and the aid industry often makes the politics worse. The dedicated people who risked their lives to help in the recent Ebola epidemic discovered what had been long known: lack of money is not killing people. The true villains are the chronically disorganized and underfunded health care systems about which governments care little, along with well-founded distrust of those governments and foreigners, even when their advice is correct.
I consider effective altruism as a second-best solution. What would the first best be? Something as unpalatable to most as it is highly effective: economic growth through a pro-business environment that embraces free trade of all kinds and open borders in all places. 

Production vastly outworks charity. That is the way to escape poverty of all dimensions. 

It is a big world with complex and complicated problems. There is a role and a need for charity. Part of that is the moral and spiritual benefit bestowed upon the giver. Part of that is the actual good delivered to the beneficiary. 

We should strive for charity that is effective and efficient--that accomplishes the goal and does so without an unnecessary use of resources. A very big part of that is properly defining the goals long before and continually as we evaluate the options, analyze the progress, and retire the accomplished. 

The natural state of man is abject poverty. Charity does not and cannot solve that. Charity is funded from production to smooth out that which production illuminates as a temporary and undesirable shortcoming. Put another way: Charity fills the gaps we can at least hope to fill by virtue of production until production can eliminate them altogether. 


P.S. Alternatively, perhaps you're interested in ineffective altruism?


*In the debate between the terms 'not-for-profit' and 'nonprofit' I think I believe nonprofit (or non-profit) is the worse term as all entities earn profits, or at least they should. The critical distinction is what the entity can do with the profits earned and if profit is the ultimate goal.  A for-profit firm is and should be ultimately concerned with maximizing profit (we can litigate another day how Milton Friedman was completely right on this). A not-for-profit is not primarily driven to generate or maximize profit. It is driven to achieve outcomes but do so in an efficient manner (not destroy more resources than it creates). Being nonprofitable is prima facie bad since that organization is more explicitly in the pursuit of achieving particular outcomes without doing so profitably.