Showing posts with label armchair theorizing. Show all posts
Showing posts with label armchair theorizing. Show all posts

Saturday, April 30, 2022

Choose: Stocks and Bonds or Bitcoin and Cash

Over lunch this past week an interesting hypothetical was posed. Suppose you were offered one of the following, which would you choose: 
  • One million dollars in some initial combination of your choosing between stocks and bonds (fully-indexed, total market coverage), or
  • One million dollars in some initial combination of your choosing between Bitcoin and cash (U.S. dollars).
You will be forced to lock it in for 10 years with no changes to it or any ability to borrow against it. After the 10-year period is up, it is yours free and clear (no taxes either at that point).

Without too much thinking or much hesitation, I chose Bitcoin and cash in a 50/50 combination. My wiser colleagues said with as much or more conviction stocks and bonds--I don't recall their combinations if they stated them. Since I am the investment guy, this raised eyebrows. Maybe I'm just also the gambler. To be sure I caveated my decision with the disclaimer that I might change my mind (my guess was low conviction). To be fair the others did similarly but with perhaps a bit less hesitation (somewhat higher conviction).

In general I would assume that all four of us in this conversation are of very similar financial standing adjusted for our ages (there is about a 30-year spread from youngest to oldest). There is not a right or wrong answer on this question--at least not without a lot more information about each chooser including several underlying assumptions (risk tolerance, liquidity needs, expectations about each person's future goals and paths of life, etc.). I don't wish to get into speculation about that here nor try to evaluate the soundness of any starting position. 

What I am interested in is exploring further how we might frame such a tradeoff. One additional outcome from this exercise is thinking about what assumptions one would make about critical variables and the implications of those assumptions. 

Some people would very appropriately, for themselves, choose an allocation of 100% cash. We could argue about that, but again only by digging deeper into their goals and risk tolerance among other things. "Hey, I'll take free money and I want to know it will be basically there for me at the end of the rainbow (inflation be dammed!)." That is potentially a sensible position, but we could write a book (many books have been written) about what extreme conditions must be in place for that to be rational. Geez, I better stop now or that will be this post . . .

So let's just assume we are debating only the question of which outcome has the best highest expected value after 10 years. I strike "best" because that implies more than just the math problem I want to explore.

We need just a few inputs: 
  • expected returns of stocks, bonds, Bitcoin, and cash (I am assuming we can get some yield on cash rather than thinking of it as money under the mattress.)
  • expected inflation (We are going to look at values in real terms so we don't let the cash option appear better than it actually is--a likely net loser to inflation.)
  • probability of various outcomes (Using a range of expected returns we need to know how likely we think those are. The range is really only important for Bitcoin given its unknown future.)
I am going to use Vanguard's capital market assumptions (CMA) for expected returns of stocks, bonds, and cash as well as inflation. To make these always updating predictions evergreen in this post and because these are publicly available information as linked above, I will also post a picture of these below. Please do see Vanguard's website for more information including appropriate disclaimers. 

I am going to totally make up the expected returns for Bitcoin because 1) my guess is as good as yours and 2) the devil is in the probability and the relative outcome versus the others--my accuracy is nearly immaterial if I am in the ballpark. 

Before you dismiss any of this upon glancing at the inflation prediction (range 1.6% - 2.6%), understand that these are 10-year predictions. I hope they are right given what this implies going forward given currently very high inflation rates, but it can easily be the case even with some persistence of current inflation (8% for a year (not that bad yet) plus 5% for a year plus 8 years at 1.6% would land us at the high range).

Note that I am looking at true total market coverage in stocks (U.S. and all international), thus I will combine the growth rates below in the proportion 55/45 U.S./Int'l. Note also that I am only using U.S. bonds in the model. I generally like some international bonds, but I will make this limiting assumption. Regardless, U.S. versus Int'l bond returns are pretty close as you can see in the details below and at the link.

Enough of that already, let's model this thing.

Here is version 1:


I am putting my thumb on the scale to be optimistic about traditional asset returns (stocks and bonds)  making the low case 25% likely and the high case 75% likely, which serves to put my initial Bitcoin/cash choice at a disadvantage. For Bitcoin I am assuming total collapse in the low-end prediction versus only 25% annual growth in the high-end version. I say only as this isn't "to the moon" although it is very strong growth indeed. Keep in mind that Bitcoin has averaged about 94% annual growth over the past 5 years through to today's price of about $38,300. While being conservative? on the high-end growth rate, perhaps I am not appropriately discounting the likelihood of the high side putting it at a 20% chance. I will change that assumption in the next model. 

But just before that, let me explain why I don't think we need to worry about the mixing and matching between individual high and low estimates (e.g., stocks grow at 6.1% while bonds only grow at 1.9% or stocks and bonds are high but Bitcoin and cash are low, etc.). Assets tend to be positively correlated over longer and longer timeframes. Even though stocks and bonds enjoy some degree of poor correlation, these fade away over time as what is good for stocks (a productive, growing economy) is also good for bonds. Likewise, a world that has Bitcoin doing well probably has stocks doing well, and a world where inflation is low, stock and bond returns are also probably low. Regardless, the heart of the debate isn't going to be impacted by these details. 

Here is version 2:


Ouch! Even though I made the low-high range for stocks and bonds 50/50, the move to make low to high outcomes 95/5 for Bitcoin destroys that option. But if that is really more like the future likelihood of the outcome range for Bitcoin, perhaps stronger return possibilities on the high end are as well. So . . .

Here is version 3: 


I greatly increased the growth rate for Bitcoin using 38.6% annual growth. This isn't a randomly chosen number. This would correspond to a Bitcoin price of approximately $1,000,000, which some roughly project as a possible destination (who knows?). Regardless, stocks and bonds still look better. So let's do just two more for the sake of good order . . .

Here is version 4:


The only change here is to make the Bitcoin high possibility a little more likely moving it from 5% to 10%. And wow! Look how sensitive the difference result is to this change. Obviously this should come as no surprise as this whole thing is about Bitcoin's high end. I guess we could run just one more taking a look at a more moderate Bitcoin but also a less than total bust low-end for it.

Finally, here is version 5:


So, allowing for a Bitcoin future in any future (low end is 10% annual decline in value) gives us a fairly strong case for my gamble on some combination of Bitcoin and cash. 

Having gone through this process would I now change my mind? I will stick with 50/50 Bitcoin and cash. But that strongly suggests a question: how can I justify that choice given that I don't have an existing portfolio that looks anything like that. I am personally overwhelmingly "boring" with an almost all-stock portfolio with just a bit of crypto sprinkled in. 

At the risk of a slight digression into the post I keep promising this will not be, allow me to defend my rationality. This hypothetical is a forced gamble. My retirement investments are different in that regard. Those I can and do change periodically including both allocation as well as contribution. I get to guide those and adjust them. The hypothetical gift invested is a Ron Popeil "set it and forget it". Part of why I cannot invest more in Bitcoin (aside from it wisely not being a 401(k) option (looking right at you, Fidelity)) is that I likely cannot tolerate the variance. If I can get in and get out of it, I am as more likely to make the wrong in/out moves as the right ones. And that is before the tax-drag effect. 

Besides that, my investment reality is the retirement assets I actually do have. This hypothetical is a lottery ticket idea. If I win the lottery, my reality materially would change. I could afford more and different risk. In this sense and surprisingly, if the hypothetical was $10,000 in stocks and bonds versus Bitcoin and cash, the rational decision for me might have been stocks and bonds! Whereas the typical person would say, "that is too little to worry about the risk, let it ride!", I would counter, "I can't afford to take the the riskiness of Bitcoin at that magnitude ($10,000)." Along this one dimension, I would be right. 

I want exposure to big upsides. Unfortunately, these are difficult to find and doubly difficult to stick with. In a sense this thought experiment has revealed some of my own limitations on putting my money where my mind and heart and mouth are. 



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Wednesday, April 20, 2022

Only Tax Unprofitable Businesses

It is income tax time again. Instead of the usual rant, I have a creative alternative for you to ponder: Only taxing unprofitable businesses. That is if we are stuck on the illogical notion of taxing income per se at all. 

Loyal readers know that we shouldn't tax corporations' profits and that we should not tax incomes in general. Corporations are just fictional middlemen between owners/workers and customers. Taxing their profits or income is just an indirect (inefficient) way to tax those owners, workers, and customers without properly changing their behavior. It would be much, much better to tax businesses as they add value to the production of final goods and services through the use of capital and labor. All of this as being part of a larger scheme to tax resource use rather than resource creation. But I digress.

Let's assume we are going to tax businesses' incomes. How should we do this? 

I propose we reverse the concept and instead of taxing a share of the revenues minus expenses (when R > E) we tax a share of the expenses minus the revenues (when E > R). In other words we only tax unprofitable businesses. 

Here is the reason for the proposal. Revenues are a measure of the benefits that a business has provided. It is an estimate of what value they have brought to the world. Expenses are a measure of the costs they have taken. It is an estimate of what value they have destroyed in an attempt to add value through their business activity. If their expenses exceed their revenues in a given year, for that year at least they have detracted from society by virtue of their activity. 

Perhaps we would need a 3-year average profitability test or carryover provision of 50% of profits from year 1 to year 2 and 25% of profits from year 1 to year 3. I'm open to ideas here. That way we smooth out business cycle and idiosyncratic effects that might otherwise undesirably punish a business in a given year for circumstances beyond its control or for investments made that have long-run payoffs. But let's not lose sight of the goal: taxing firms that cannot turn a profit (i.e., don't add value to the world).

An instant objection is that this would make a startup business unduly expensive potentially stifling economic growth. Just a little understanding of how markets work invalidates this worry. Under this arrangement a tax on an annual net loss simply adds to the cost of capital. If the expected payback is sufficient, the investment will be made. Look at it this way: Is it better that resources are used with tax encouragement (deductibility) on the prospect of future economic value creation (future profitability that would then be taxed) or that resources are used while being taxed (a discouragement to frivolous investment)? The expected return is likely the same in either case*--it is just a matter of when taxes are collected and on whom the burden falls (taxing failure or taxing success). Given that taxes discourage that which is taxed, I know in principle which one I want bearing the burden.

Thus, this method has two key attributes to admire:
  1. It punishes bad investments by taxing failure.
  2. It creates an economic environment that increases the returns to good investments by not taxing success.
A side benefit is that it potentially cleans up accounting--a lot. A great deal of effort (resources) is put into doctoring the books so that a firm looks less profitable than they actually are. This leads to an additional benefit of disincentivizing expenditure that is not actually net profitable. Executive perks, luxury offices, unnecessary equipment, etc. now all carry a burden where once they earned a subsidy. 

Does this have a chance in the hell that is our tax code of coming to fruition? Of course not. And if it did, the later temptation to reverse course would be too great to assume future profits would be tax free. But it is a fun thought experiment that yields a new way to see the economic error in our current taxing ways.







*This is kind of a reverse Ricardian Equivalence whereby known taxes on losses have to be justified by expected profits in the future. As long as the tax rate on losses is not devastatingly high, in which case it would prevent any method of transferring future expected profits to the current day to finance a current tax burden, the tax that would be applied to future profits is instead realized before those profits are themselves realized. This assumption is no different than assuming current tax rates on profits are not so high as to devastate the ability for businesses to earn a profit in our current system. 

Thursday, March 31, 2022

The Meaning of Opposite

Opposite is a loaded term. The meaning of it grows more ambiguous as the dimensions of the object to which it refers grow. 

A no-dimensional object (a point) has no opposite aside from absence (not a point). A one-dimensional object (the line A—B) has its pure reversal (B—A) as its opposite. 

Consider a higher order "object" such as driving in America. What is the opposite? It could be said that driving in England is the opposite of driving in America since Americans drive on the right while the English drive on the left. This would be true in the limited sense from the perspective of the perpendicular plane relative to the driver’s general direction, forward, through time—also forward. 

But one could also say that driving sideways is the opposite of driving as we know it. How about rather than driving through scenery that the car passes through that the car stands still and the scenery moves passing by the car was the opposite? Still another could be driving whereby you leave from your destination and arrive at your departure point. There certainly are more.

What is the point of this thought process? It is a hint at how difficult and convoluted and simply fraught any attempt to draw sharp distinctions can be. This is especially true in the realms of human action. Counterfactuals are not only challenging to find. They are nearly impossible to properly define.

Saturday, March 19, 2022

Sports Handicapping - The Next Iteration

For over 100 years we have created divisions and categories for athletic competition. The original segregation for purposes of ability matching was by sex. Obviously there were other ones based on prejudices like racial divisions and socioeconomic status. While there were likely strong confounders like desire to keep out of competition from superior athletes who happened to be of a different race, etc., this was not a purely ability-based separation. 

Beyond sex-based categories, there have been many more separations to better group like-to-like competitors. For example, there are designations with the most distinct being professional versus amateur. High schools and colleges normally compete in certain divisions. Within sports there are weight classes (boxing, wrestling, etc.) and tours and qualifiers (golf, tennis, etc.).

It seems to me the next step in this process is to fully segregate sports by proven and expected talent regardless of sex. 

The recent case of swimmer Lia Thomas brings this to the forefront, but it is something that has been around for a long time. It would come as no surprise that many historic female athletes we know of were somewhere on a spectrum of male-female that did not cut neatly between the traditional sex categories. It would further come as no surprise that there are a much larger number we never were given a chance to know of because they were not allowed/encouraged to compete. 

Two recent pieces on the topic of Lia Thomas are instructive: The first by Megan McArdle asks the question whether women’s sports should exist at all. The second by Suzy Weiss prods the awkward juxtaposition that this situation has created whereby those who would/"should" be expected to support a trans athlete are now those arguably harmed by it.

These are undoubtedly rare cases, but we cannot dismiss them unless we are willing to blatantly exclude a meaningful group of potential competitors from participation for sake of forcing clear, hard lines where shades of grey actually prevail. Keep in mind that these edge cases are critical because those in question are generally vying for first place in the female category. If we want a world where we have two definitions of greatness, the actual fastest, strongest, best (almost always males) and the next group excluding the first, then we need to figure out where and how to draw that line between the two. 

Trying to draw the line on the basis of a single metric like testosterone won't get us there as this is multi-causal--there is no more a single athlete gene as there is an intelligence gene. Hence, sex phenotype works almost always until it doesn't either because of genetic edge cases or the more controversial transition cases. The latter is the news of the day and the very interesting dilemma we now face where reconciling two forms of inclusionary fairness have come into conflict. The former is how we know this isn't so easy as to say you can be a member of the club if you have always been a member of the club.

So I propose the thought experiment of self determination (set and test and rethink rules and norms at the most local level practicable) and separation by capability regardless of sex/gender (consider eligibility based purely on ability in the specific sport or event). 

Obviously this is change, which to sports fans specifically like humans in general is bad, very, very bad. But before you reject the proposal out of hand consider two points: For one, are we sure we want to have female-only competitions? Keep in mind this excludes a lot of males from enjoying a competitive forum with status. For another, are we sure males will want to compete with females? The stronger you think the answer to the first question is or should be "yes", the weaker is the concern implied by the second.  

Would there be complications as well as manipulations including out-right fraud? In sports?!? Of course there will be. This is nothing new. But while it creates an opportunity for scheming, it forces a harder look at the processes we use to sort and match competitions. This should result in better outcomes in the long term. Letting a hundred flowers bloom via open-minded exploration is the key to figuring out a new, stable equilibrium. If you doubt we can be open-minded about this exploration, you are totally ignoring why this is now an issue in the first place.

Beyond the risk of bad actors poisoning the pool of competition, the much bigger potential downside is that the disruptions will end women’s sports and perhaps even some men's divisions as we know them. This could be an outcome that means many kids and even adults don’t have a forum in which to play the sport they love and otherwise excel at even as it grants new opportunities to others in those forums (a point raised above). 

Yet again we are faced with the tough reality of tradeoffs. 


Tuesday, February 8, 2022

How To Succeed In Business Trying Really Hard

I just stumbled upon something I wrote about 15 years ago--at least that was when it was saved last. I thought I would share it here. Many of these were things I learned and many of them the hard way in my first job as a financial analyst at the Oklahoma Publishing Company (OPUBCO) where The Oklahoman newspaper was the flagship product.

Some of these have a touch of Grayson Moorhead Securities to them, but you don't have to be that cynical. I have witnessed many times people roll their eyes at advice like this only to then make the very mistakes these are addressing.

How to Succeed in Business Trying Really Hard

  1. Be a solution provider. While it is important to have the intellect and experience to identify problems, the ability to create and the courage to suggest solutions is a higher skill.
  2. Make conscious efforts to avoid digressions into the minutia. Keep communications only at the greatest level of detail necessary for meaningful ideas.
  3. On the other hand, don’t hesitate to consider the depth of an issue. Neglecting the full implications of the subject can easily lead to poor decisions.
  4. Balance work and rest in the following manner. If you find yourself looking for excuses to take breaks often or find yourself taking long breaks and feel that you can’t focus on the work at hand, make strides to commit yourself to the work. In this case you are resisting the desire to avoid the work. However, if you find yourself unable to break away from the endeavor despite having toiled for a considerable period, force yourself to step away. In this case you are resisting the desire to trade quality for completion. The result could be an eventual disappointment and may require more work to correct. A well-placed retreat can pay dividends in the form of a new perspective and fresh ideas.
  5. Don’t burn undeveloped bridges. It is easy to see existent relationships you would like to preserve. It is much harder yet still vital to long-term success that you develop and nurture relationships that you cannot yet foresee.
  6. Don’t build a house in which no one will live. Don’t expend resources toward a goal with high theoretical promise but little practical use.
  7. Don’t confuse clichés with sound arguments.
  8. Don’t be a Monday-morning quarterback on Sunday afternoon. The time for second guessing is after the fact not during the game. Corollary: Save your nostalgia for Sunday morning brunch. Make today the good old days.
  9. Take on the mentality of a librarian rather than a firefighter. Where a fireman does a heroic task in a place he has probably never been before doing the work of saving what he can only to leave once the need is extinguished, a librarian begins work everyday doing the same thing as the day before. A fireman eliminates the need for his services. The librarian creates and enables those needs. Business success is built with librarians not firefighters.
  10. Idolize the objective not the process.
  11. Continually work to find the right price. Consider the two major risks a salesperson runs. Both involve leaving money on the table. The first is the risk of selling too few for too much—a price point that is excessively high results in unnecessarily low sales volume and hence revenue. The second is the risk of selling too many for too little—a price point that is unnecessarily low results as well and obviously in unnecessarily low sales revenue. This all seems and is (or should be) obvious. Yet time and again businesses opportunities fail on the basic matter of getting price right including adjusting to new realities.
  12. Don’t try to live in fantasy land. Good business decisions are bounded by practicality. However, don’t let this go so far as to stop trying things that will fail. Just put practical limits on the extent of the possible failures. Success is built on a thousand small failures. Complete failure comes from one or two unbearable risks that go bad.
  13. Understand the Law of Categorical Gravity: Firms within the same industry or complementary industries tend to locate near one another in time and space. And as they get closer and closer they are attracted to one another with greater and greater force. In this way they act as immediate substitutes but long-term complements.
  14. Don’t continue to bear burdens after they have been lifted: the analogue here is carry-over heat. When you cook a large rib roast, you might want to hit a target internal temperature of 140 degrees. If you wait for a probing thermometer to register 140 degrees before removing the rib roast from the heat, you will end up way past your target temperature. The reason is carry-over heat. After you remove the roast from the oven, radiation from heat stored in the outer layers of mass as well as from the cooking vessel will continue to cook the roast and can drive the core temperature up another 10-15 degrees. Similarly, we can let stress build in our systems even after the stress-causing burden has been removed or corrected. This is as much about internal morale as it is marketing.
  15. Don’t bear burdens by proxy. Is this issue your burden, or is it a colleague’s?
  16. You can’t live at the end of a one-way street: you must be consistent in your principles and actions. It is the only way to earn and keep the respect of your peers, followers, leaders, and rivals.
  17. Learn to ask hard questions and to accept hard answers.
  18. In business writing conclusions and recommendations should be reasonably obvious. A good test is: if removed entirely, could a reasonable reader surmise and write themselves in essence the same conclusion section that you yourself have written albeit hopefully more fluently.
  19. Set aside time to meditate on the big picture. For any major project or decision, take some time to contemplate how the possible alternatives and the potential outcomes fit together with your overall goals. Consider the situation from a strategic viewpoint as many good tactical decisions have poor strategic results.
  20. At the time when an issue arises, speak up sooner rather than later, and if not then, then later rather than never at all. Corollary: Speak in a measured manner and to the correct audience.
  21. In an important respect problems and strengths have quite opposite characteristics. While it is easy to create problems, properly identifying them is a much finer skill. Conversely, the ability to create and foster strengths is always dear, but the knack for recognizing them is a common trait. The highest talent is the combined skill of determining the true problem and calling upon the proper strength as a solution.
  22. A poor reaction to a mistake makes for a worse mistake.
  23. The necessity of scrutinizing one’s own work is directly proportional to the work’s exposure and purpose.
  24. Update! Don’t hesitate to reevaluate your position by modifying or even reversing if new information truly warrants that new appraisal.
  25. Manage your image. No one else will manage it for you. In fact, others will create a caricature of your image—sometimes intentionally, sometimes unintentionally.
  26. Try to distinguish yourself through your work (not your self-promotion) so as to be seen as an irreplaceable talent rather than a commodity.
  27. Know how to argue, when to argue, and when to agree. Effective, successful teams argue thoroughly, critically, intelligently, passionately, and professionally, but they also know when and how to present a unified front.
  28. Do not solve problems before they are problems. You cannot be a hypothetical firefighter.
  29. You get what you measure. Corollary: Your value to the firm is how you are measured.
  30. Don’t get married to inconsequential ideas. Don’t fight for worthless victories. You only get so much combat equity.
  31. Consider if a fantastic goal deemed too impractical if not “impossible” is because you cannot imagine living there or cannot yet see getting there. Fortunes are made solving the latter problem while fortunes are lost chasing the former.
  32. Completion is possible. Perfection is not.
  33. Employers can mitigate ineptitude much easier than carelessness.
  34. In business you are either surfing or drowning.
  35. Know the source of your competitive threat. In the races we run sometimes we are overtaken from behind; other times the path we have chosen simply runs out with us left exasperated staring at a dead end.
  36. The two fundamental questions in business are: What does the customer demand? How can my firm be the supplier? (i.e., What do you want? How can I deliver it?)
  37. Don’t be afraid to be skeptical of a business practice, but don’t be surprised if there is a rational explanation for it.
  38. It isn’t about where you have been; it’s about where you are going.
  39. If you don’t know the cost of the marginal unit, you’re better off not “knowing” anything about cost at all. Knowing other bits of data like total cost, average cost, an example of cost, will lead to very poor decision making quite often. Those figures will deceive as much as enlighten—they anchor us to irrelevant comparisons.
  40. Strategy is not the sum of tactics; strategy must be a whole unto itself; you cannot back your way into a good vision.
  41. The four essentials of negotiation are: know what you want, understand what you can give, determine what you can take, be willing to walk away.
  42. Just because you need more doesn’t mean you can get more: a revenue shortfall of goal or forecast/budget does not create a selling opportunity. Remember: Update!
  43. Beware following “Best Practices”. Sometimes you are following a leader; sometimes you are following the proverbial lemming who happens to be in front of you.
  44. A business decision’s probability of success is only partly dependent upon the ability of the decision maker. The best business leader in the world couldn’t have saved the buggy whip industry from the approaching avalanche that was the automobile.

Sunday, February 6, 2022

Should Tipping Be My Only Charity?

I'm considering going a year where my only form of charity will be excess tipping--an amount well over and above what I would otherwise give. Before you dismiss this out of hand, consider the problem of charity  My ability to connect with truly effective altruism is very limited even if I religiously adhere to the formal EA movement or even if I completely reject the EA network. What I can do is reward good work and people working in general through gratuity. 

In truth I really probably can't make it my only form of charity from a practical standpoint. There are just too many obligations I have to traditional charity (e.g., my church donations, the United Way contributions I make through work, et al.). One could certainly argue the merits of these including how much is charity on my part versus quid pro quo where the quo is social desirability bias, virtue signaling, tax benefits (really just a subsidy for giving), and non-pecuniary benefits (e.g., two days of extra vacation for a continued minimum United Way donation). Nevertheless, I could substantially reduce all traditional and otherwise forms of charitable giving including donations of my time with excess tipping as the substitute. 

Let's consider some rough math on what this might mean. Hypothetically assume my desired annual charitable giving through this experiment to be $10,000. A point of consideration would be if the tipping would be limited to very traditional tipping situations, namely dining, valet, room service, doorman, etc., or if I would extend this to areas like occasional household services, namely plumbers, electricians, furniture movers, etc. One might argue that everyone should be tipped. However, to keep the math easy, I'll limit it to waitstaff in dining. 

Let's further suppose I dine out an average of 7 times a week at a moderate expense, 2 times a week at high expense, and 1 time per four weeks at a very high expense. The kids are with me for the moderate and high expense meals while it is just the wife and I for the very high expense meal, which are the following on average (with just the standard tip of 15%): $50, $100, $300. Per week that becomes $250 ($50x5) + $100 ($100x1) + $75 ($300x1/4) = $425/week or $22,100/year. Of this about $2,883 would be standard 15% tipping ($22,100 - $22,100/1.15)). To "donate" an extra $10,000 through excess tipping through the year, I would be making an implied 52% excess tip ($10,000/$19,217 [the amount spent before standard tip]). Stated another way, the increase is about 45% above the old levels ($10,000/22,100-1).*

Breaking this down by meal type we have a $50 meal becoming about $73, a $100 becoming about $145, and a $300 becoming about $436. Weekly expenses here have gone up $192 ($425 becoming $617). And the annual checks out where $22,100 is now $32,100. 

These would just be averages. I would hold out the ability to vary the amount to zero excess tip to a lot more excess tip based on maybe quality of service or perceived need. Also, I would do this for at least all traditional for-tip service providers. The fact that this would demand a continually updated Excel spreadsheet lending itself to trend and projection analysis along with graphs is indeed a very nice quid pro quo for me.

Some of the pros to this approach are:
  1. I have a lot of relevant information close at hand since I witnessed directly the service provided.
  2. I know pretty well exactly who it is going to even if there is tip sharing.
  3. Related to the two points above, I can weight the charitable gift commensurate with the perceived level of deservedness provided I measure that directly proportional to the service performed. If I want to base it on need, this becomes a con (see below).
  4. I am rewarding those who are doing something to improve their own situation as well as my life and others.
The cons are:
  1. I am not able to see much into the level of need so as to increase my giving as a result.
  2. Related to the first con, I would not be benefiting those who cannot work--very likely a group in much more acute need. However, this is a con of almost all charity as figuring this out is very difficult. My method here at least minimizes the problem of enablement--whereby charitable giving subsidizes and insulates people from the cost of bad decisions and rewards poor work ethic. Moreover, it is actually likely many of the people I would be excess tipping would be closer to people in need so as to aid them. No guarantee they will, but there is no guarantee some other method would be much better.
  3. I would most likely be subject to bias in my excess tipping whether it be a subconscious prejudice (e.g., tipping attractive waitstaff or those who somehow connect to me in a way that is probably frivolous like having an interesting accent) or outright mistaken heuristics (e.g., thinking that someone working at an expensive restaurant is less deserving that someone working at a cheap diner).
  4. If I am not meticulous about tracking the excess tip, I easily could fall so far behind so as to not meet the donation goal--I would be hesitant to tip someone $2,000 at an end-of-year meal. 
  5. I might reduce my exposure to tipping even if inadvertently as the pain of seeing the substantially increased cost could weigh on my decision making. 
  6. It might greatly disrupt my social group or the dynamic between me and the places I frequent. This is a big break with norms subject to misunderstanding and bad/unintended signaling. 
  7. I may be underappreciating how it will affect me given that this attempt at more direct action on my part will not likely have noticeable results. I might become jaded for bad reasons.
  8. I could have a net negative effect on the recipients subsidizing less optimal outcomes for them or hampering their natural progression to bigger and better things. The out of work actor working as a waiter might be cliché, but there is something to it. What if I unintentionally convince a young person to turn down an internship for mistaken hope that there are enough tippers like me out there making waiting tables their highest and best outcome? Did I say enough about how charity is hard?
Countering this longer list of cons, there are added benefits potentially. One is that this might become habit forming long term--when I return to charitable giving, I might continue excess tipping to some degree. Another is that it could be contagious as it would be as public as any giving I typically would engage in. One virtue of it is that it is a more generous act all things equal since I would not be getting a tax benefit. So rather than having other taxpayers subsidize my charitable choices, I would fully internalize them by going it alone.

If I end up doing this, I'll report back on how it worked in the wild.


*Notice I am ignoring the fact that this tipping is calculated on top of the sales tax--I gave up the ghost on that argument long ago for practicality sake. I don't like it, but the norm seems to be and the easier calculation certainly is to tip on the total after tax.

Sunday, January 23, 2022

Ranking College Football Programs - Discounted Win Percentage

[tl;dr - It is Ohio State, Alabama, and Oklahoma in the top 3 just about any way you cut it]

As the spring semester starts so too does the off season for college football. Inevitably this brings lots of prognostication for what is to come in the fall but also for a look back to assess the past--recent and long ago. With this are a million arguments about what are the greatest college football programs and who among the elite can claim Blue Blood status.

The website College Football News (CFN) says the best of them all is the Oklahoma Sooners. As much as I love that idea, I can see reasonable minds disagreeing. Undoubtedly any such lists will imply some hair-splitting considerations. What I really like about their approach is that it has a definitive methodology to it. It is not just some "experts" giving us their feel for the answers as if they could divine the truth free from bias. 

Of course all approaches will have bias. This would come in two varieties: assumption based and disposition based. One can create a formal algorithm (that is what I have done below) or one can derive a list from an informal algorithm weighing factors mysteriously within one's mind. While any method can be logically sound, generally speaking the less formal the process is, the more subject to bad reasoning or bad facts it will be. Assumption-based bias would be something like assigning too much weight to a certain factor. Disposition-based bias would be something like favoring a team for a reason not meaningful to the ranking itself.

Many attempts at this barstool debate are prone to bad math such as overcounting a metric since there will naturally be high correlation between commonly used measures (e.g., national championships and winning percentage). To prevent this, simpler is better if a simple approach can yield the desired effect. 

Back to CFN's approach, they use a very common and logical method, the inverse of the final AP Top 25 Poll each year to score teams. A first-place team would receive 25 points all the way through #25 receiving 1 point. Summing all the points by team creates the list in order. I do not disagree with their top 3 teams (OU, Alabama, and Ohio State), but the list can be criticized for its obvious shortcomings. For example, leaving out teams' scores when they finish just outside of the top 25 creates artificial distortion making it look like there is more separation within the list than actually exists. Of course there is no easy way to fix this. Additionally the AP poll is not itself without bias as some teams, especially those not typically perceived as being elite, may be systematically underrated. All of this makes this list, like so many others, subject to folly as one works down the list. Technically speaking our confidence in the outcome diminishes by an increasing degree from the top working down.

The CFN ranking is the "greatest programs of all time". As interesting as that is, it isn't necessarily what we commonly are thinking about when we seek to rank programs. Specifically, when we talk about the so-called "Blue Bloods", we are thinking of the best programs with emphasis to one degree or another on where they stand today. This opens up one additional criticism that this list and basically all lists like it suffer from: reverse-recency bias. Maybe we would term it "old-timer bias". This is the fact that these lists give equal weight to success in the distant past as they give to recent outcomes. And this is true whether they are derived from algorithms (assumption based) or expert opinion (disposition based). Of course many expert opinions can have the traditional recency bias problem (favoring the recent over the past), but often it is the traditional teams that get more love than they might deserve--I'm looking right at you Texas A&M and Michigan.

To get around this problem, I have created the model below. Borrowing from the foundational concepts of asset valuation where future cash flows are discounted back to present day (a dollar of earnings in ten years is worth less than a dollar today), I have created a model that gives more weight to recent performance than the same performance achieved in the past. 

Model

I believe the most straight-forward way to evaluate teams is the win-loss record. The only enhancement to this might be to include margin of victory*--a technique I have used and will update soon in an additional post. 

My model looks at each team's winning percentage by year and then discounts it by a factor for each year back it falls. So a win% in a given year would be worth less and less in the past the longer and longer ago it happened. Notice that I am using winning percentage so that basically there is no impact from the fact that teams play and have played a different number of games within a year and throughout the years--typically more games recently. 

I also have included a starting-year cutoff to stop counting results that are past a certain date, which is a changeable variable in the model (see below for the link). Even though a discount factor makes the past less and less valuable in assessing a total score, it might be that football changed so fundamentally we don't want any results before a certain date and the discount factor necessary to otherwise achieve this would be too big--it would make results fade away from importance too quickly.

For me the discount factor I settled on was 4% with a cutoff date of 1946. My reasoning was at a 4% discount rate a 100% win percentage season 18 years ago would be worth only about 50% today--the factor cuts it in half. 18 years is the typical age of an incoming college freshman football player--so there is some relevance, maybe, to the people playing the game.

My starting-year cutoff is 1946, which has historically been marked as a beginning point of college football. However, as I've said before, I am not sure how valid that is. One-platoon football was the rule in most of the 1950s and into the 1960s. Furthermore, racial integration into college football did not meaningfully arrive until the 1970s. 

These choices of discount factor and starting-year cutoff are both very arbitrary, but you see there is some logic to them. Importantly, the results do not seem to be sensitive to reasonable changes in either the discount rate or the starting-year cutoff date--the top three remain the same no matter what reasonable parameters are used.

One additional limitation this model has is that I did not look at all college football teams in creating it. Yet this is not the problem it may seem to be at least at the top end of the list (yes, this is of the same type of criticism I made of the CFN list above). Because I had to calculate from raw data the annual winning percentages of each team in the database, I limited it to the top 30 teams in winning percentage over the past 50 years (1972-2021). So, to be sure there are teams that with certain discount factors used (high ones) would find themselves otherwise in the list but are excluded. But this is quite limited to the very bottom of the list. Sorry Oklahoma State, your recent success would not get you very high in this ranking even if you had been good enough to make the list (OkState is 31st in win% over the 1972-2021 timespan for teams that were in D I-A (now FBS) football the entire time). Which brings up another team excluded, Boise State. They have had phenomenal winning teams since joining top-level college football in 1996. I made the decision to disallow them because of this limited time in the sample (the strength of their historic schedule might be another reason). 

Some Results

Using a discount factor of 4% and a starting year of 1946:


Using a discount factor of 4% and a starting year of 1972 (last 50 years):


Using a discount factor of 4% and no starting-year cutoff (all years included):


Using a discount factor of 0% 
and no starting-year cutoff (all years included):


Check out the model for yourself including changing the parameters as you see fit. Here are some of the results given a few parameter choices.

https://drive.google.com/file/d/1M-3q6zWtTAyCFDHEuU5z3eA6jIwRplxq/view?usp=sharing 


*MoV isn't completely stable over time, a potential criticism of that model, but since it has tended to increase in the past 50 years, I believe there is some natural recency premium built into that model. Regardless, it would be interesting to add into it a discounting factor, which I will do before publishing the updated results.

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.