Showing posts with label dimension analysis. Show all posts
Showing posts with label dimension analysis. Show all posts

Saturday, February 26, 2022

Resistance to Coercion versus Fighting for Freedom - Dimension Analysis

What do you do when confronted with someone wanting to have you do something you don't want to do? In fewer words, how do you respond to oppositional, hostile force? 

Of course, the force in question is probably a key to your response. Is someone trying to manipulate you into taking an unfair deal, or is someone trying to steal your car, or is someone threatening your life or way of life? Importantly your alternatives matter greatly as well. Can you delay, demur, deflect? Can you exit the situation with grace or perhaps with just some slight shame? Must you submit or resist perhaps with violence?

Let's focus on serious conflict where the stakes are relatively high if not exceptionally high. And in doing so we will think about situations from the standpoint of the victim or person under threat/attack. Therefore, this will be about degrees of losing where the best case outcome is the status quo.

I see the options being somewhere between resistance to coercion and fighting for freedom. In a sense this is passive versus active or reactive versus proactive. Take the recent actions in Ukraine with Russia threatening and then attacking. As I write on February 26, 2022, Russia has invaded and is actively attacking various areas within Ukraine including the capital city Kyiv. It is very ugly, as war always is, and the initial news is likely sketchy and subject to revision. 

That said, we can assume some basic facts to explore the implications. The Ukrainian government has not been friendly to Russia. This is a government the U.S. helped install and support going back to Obama administration. Long before that under the Clinton administration and then continuing into G.W. Bush's administration were numerous political moves and positioning to expand NATO including potentially adding Ukraine at some future date. Regardless of the likelihood of that officially happening, the support for Ukraine from NATO and its member countries as well as the outright enlargement of NATO to include former eastern-block nations in 1999, 2004, 2009, 2017, and 2020 have presented an expanding defensive/threatening position vis-a-via Russia. 

This is not an apology piece for Russia or especially Putin. It does potentially give us some understanding for what Putin is doing and how he at least tries to defend it. The Russian government is a threat to its neighbors and NATO interests. But from the standpoint of Russia, the same can be said of NATO and actions the U.S. in particular has pursued. What is interesting to me is how the perspective of both sides can be used in this dimension analysis.

As Russia engages in violent acts harming and killing people, one could label it as "fighting for freedom"--just not in the noble sense we typically use that phraseology. They have turned from resistance to coercion as an option to actively striking out (I very deliberately don't say "striking back" since Russia has not been attacked). 

Similarly the Ukrainian position has been resistance to coercion and especially the threat of future coercion by building an alliance with the West. Was this the only or best way to resist coercion? I would say probably not. Rather building ties economically and politically with Russia might have been a better strategy. In this I envision taking on an active Swiss-like neutrality while developing economic co-dependence through trade. NATO and the U.S. itself might have been much wiser to not expand NATO nor threaten to do so. Perhaps NATO should have deescalated following the fall of the Soviet Union in stages negotiating further and further withdrawal and peace leading potentially to eventually dissolving NATO altogether. This is my view, but this is not aimed at being an advocacy post nor a criticism. Rather I want to suggest that in light of these alternatives the geopolitical moves in Ukraine were in actuality fighting for freedom disguised as resistance.

Consider an analogy: A man and his family live and work in a dangerous community subject to high violent crime rates. While moving would be a great solution in theory, exit is not practicable for them. Whether they are correct or not, they feel trapped. Recently they have noticed that there are increasing incidences of violence in places they must frequent like the local grocery store and their workplace. So the man decides to start carrying a gun. Because he lives in a state that allows open carry, he can make visible his choice. [NB: This is not a post about the 2nd amendment, etc.] 

Carrying a gun in this case could be thought of as resistance to coercion, but it also can be escalatory. The thugs in the neighborhood also feel trapped--they can't take their violent ways to another place. This is where they "work". So the thugs now consider their options. They could increase their own muscle/firepower. They could target others who look less capable of defending themselves. They might even consider tactics that amount to negotiating territory and room to operate like co-opting the shopkeeper or threatening more while accepting less. 

But carrying a gun could also be fighting for freedom. The man is taking a stand and putting himself in harms way to the degree this act is escalatory or empowers him to take more risk. As an alternative or complement, he could advocate for more policing or security guards. If he didn't have an open-carry option, this advocacy might actually be more difficult if it puts him at greater risk when he carries a gun. Even if he can carry a concealed gun legally, the advocacy still pushes back on his own fighting for freedom option forcing him to be much more passive.

Sturdy doors with good locks, bars on windows, and burglar alarms are tools of coercion resistance for this family. But so too are guns, knives, big dogs, and baseball bats. The latter can easily become the tools of freedom fighting or outright aggression. The former might not have direct offensive capabilities, but they do invite suspicion as well as stronger opposition when opposition does come knocking. You're probably better off bringing no gun to a gun fight than bringing an unloaded gun and no ammo. 

The point I'd like to make with the analogy is that it is hard to see where the lines are between what is resistance and what is fighting. Active resistance (e.g., carrying a gun) can be a threat, and that can be good, justifiable, and peacekeeping. It can also enable a fight where flight would otherwise be the better course of valor.

While it might be socially desirable to align with fighting for freedom, this positioning is antagonistic with unintended consequences. While it might feel noble to claim the mantle of resistance to coercion, this can be a provocative self-deception. Think how many so-called freedom fighters were either defending a brutal regime or whose actions lead to tyranny. Consider how often a resistance movement became offensive destruction. Once put into motion, forces opposing change or pursing change can be very hard to control.

George Washington fought for freedom, but so supposedly did Che Guevara. Washington's legacy was not a fight for complete freedom (see slavery), but I think his value alignment was much, much closer to virtuous than was Che's. It is hard to know where freedom fighters might lead us.

There is no left or right monopoly with either resistance or fighting. Easily I can think of resistance to coercion as being a conservative position as when something is threatening the status quo or tradition. I can also see how people could decide to resist being victimized by traditional norms--for example, racism, homophobia, etc. Fighting for freedom is on the other side of the axis where "Hell no! We won't go!" becomes "Come and take it." with no natural political connotations.

Neither motives nor outcomes can be determined based on which of these strategies is employed. Both methods can have a claim on the moral high ground as well as disastrous pitfalls if not evil ulterior motives. The non-aggression principle (NAP), a founding concept of libertarianism and classical liberal philosophy, implies strong constraints on both ends of this spectrum lest we become that which we seek to avoid. 

Saturday, January 29, 2022

Mistakes versus Traps - Dimension Analysis

Many of us have at one time or another drank too much in a given evening. This was certainly a mistake at least as judged by how the body and brain spent many hours the next morning screaming about it. Over drinking is an easy mistake to make especially when you are having a great time in unusual circumstances. One too many sneaks up on you. 

This type of mistake can have very serious including deadly consequences of course. It is all the worse since it compounds on itself through the natural impairment to judgement and accentuation of confidence. Fortunately in most cases this will only result in a painful hangover. 

Contrast this one-night stand of bad decision-making with alcoholism. A serial drinking problem is not so much a mistake as it is a trap. From what I understand there are about six percent of adults who suffer with what is labeled an alcohol problem. Some of these are people who are making a series of mistakes, which is in itself a form of trap. For others, perhaps a majority, the trap is the effect alcohol itself has in capturing them. 

I don't want to get into the weeds on how much agency those with an alcohol problem have or what the expectations of them should be. It seems in either case, low or high agency/responsibility, there is a trap condition being met. They are in a whirlpool from which escape is proving difficult. This is the nature of a trap as I am conceiving it. 

A mistake is just like it sounds. We are confronted daily with chances to make mistakes of many kinds with many varying potential magnitudes. In almost all cases the chances are extremely low to low--otherwise the world would be chaos. And correspondingly the implications are small. Yet life has fat tails and the realm of mistakes is no exception. 

One way to make mistakes worse is by following them up with mistakes--especially in the commission of a mistake cover-up. All the more reason to remember not to talk to the police. In this way a mistake upon a mistake can create a trap. Of the many great fiction depictions of this phenomenon, The Wire is perhaps the best showing time and again a wide variety of characters falling into traps because of mistakes made.

It can be hard but is important to distinguish mistakes leading to trap conditions and trap conditions alone ensnarling people in their grasp. Again, The Wire has examples of both. A kid in an inner-city public government school is a kid deep within a trap-rich environment. That same kid can be on a good course set for likely escape but for the kid-being-a-kid moment with the wrong teacher landing him in his first-time detention, getting connected to kids already within the trap, finding himself labeled by the bureaucracy, pushed and pulled into the trap. 

For traps we need paths to escape. Yet we must keep in mind two important truths: (1) We cannot change those who would not change themselves and (2) We should balance the tradeoff between help and enablement. 

In the first truth we fight against the cynics but also must come to grips with how in vain our efforts will be without willingness on the part of the would-be beneficiary. "You can't help them; don't bother," is too easy and too callous an excuse we use to not care and not try. However, resources are scarce. We can cannot afford to give effort to lost causes.

In the second truth we fight against the trap of simply treating symptoms* and insulating the trapped from the cost of their decisions when we are trying to render actually helpful aid and a true way out. To take one example, UBI's biggest shortcoming isn't its ridiculous math. It is the risk that becomes a lifestyle enabler rather than an enabler of life improvement. The adage "don't cry over spilt milk" needs a corollary: "quit doing whatever you're doing that is spilling the milk". 

For mistakes the framework needs to be quite different. Here we need a high tolerance for mistakes (the U.S. bankruptcy code is a great example) as well as robustness against their magnitude. Arnold Kling's conceptual tradeoff of hard-to-break versus easy-to-fix seems quite important here. We should seek more of both as they are not always mutually exclusive. When they are in opposition, we need to realize and prevent increasing one if it comes at too high a cost decreasing the other. 

Don't avoid mistakes--they are the lifeblood of success and progress. Forgive others and yourself for mistakes while working to not needlessly repeat them. 

Don't be blind to traps--they are everywhere attempting to seduce us. When you're in one, admit it. Work hard to get out knowing that the solution is probably somewhat counterintuitive

*look for a future Bandages versus Inoculation DA

Sunday, January 16, 2022

Introducing Dimension Analysis

Something I've been thinking about for a long while with every intention of exploring in blog format is what I term Dimension Analysis - an exploration into various concepts that can be placed upon a continuum or axis. 

It is somewhat simply a thought exercise limited to the topic or concept under consideration. But it can also be a more in-depth way of seeing things in a new light including combining distinct ideas and concepts.

I have a lot of things I would like to compare in this manner and have done a bit of this previously. Some ideas I expect to be covering would be:

Motives: Status versus Profit - What does one seek more of? When is one more dominant or influential than the other? Where are the tradeoffs?

Archivists versus Free Spirits - Sometimes we seek to record our lives into personal (if not public ledgers) while other times we are minimalistic nomads. To label people hoarders would be uncharitable and not the essence of what I'm driving at. Librarian isn't exactly correct either. On the other side think more live-for-today, focus on what is important rather than careless and thoughtless.

Editors versus Curators - One has the disposition of fixing through correction while the other seeks improvement by selection and promotion.

Puzzles versus Mysteries - The solvable realm compared to the unknowns and unknowables.

Engineers versus Epistemologists - Action upon theory versus theory for theory's sake. 

Philosophers versus Mechanics - Related to the prior, this was my first example I stumbled upon for this whole dimensions analysis thing. Shades of grey versus black and white. Two very different approaches or even definitions of problem solving.

Leaders: Managers versus Visionaries - Some are (or seek to be or need to be) great tacticians while some are (same caveat) great strategists. Plan execution versus plan design.

Sculptors versus Appraisers - Stolen from Caplan's The Case Against Education, both of these have the opportunity to raise or at least transform the value of a piece of stone. But they come at it from very different angles.

Honesty versus Pleasantry - Are you telling me what I need to hear or what I want to hear? Do I want to hear what I need to hear, or do I wish to hear what I'd like to hear? Best practices versus social desirability bias.

These are but a smidgeon of comparisons I would like to explore. My ambition has exceeded my ability to get to this topic so far. Perhaps getting it posted will spur me along. That inspires another dimension: Goals versus Desires. In all cases I hope to not draw upon distinctions without differences, but I'm sure there will be a degree of that error made.

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. 

Sunday, May 16, 2021

Dynamic versus Static Investments

One way to categorize investments would be dynamic assets like stocks and bonds and static assets like commodities and art. 

Investment taxonomy is multidimensional. Along one dimension would be concentration/dispersion diversification. For example owning stock in one company alone as compared to several companies within the same industry as compared to several companies among different industries. Still a greater level of diversification can be achieved as an investment portfolio approaches a share in all companies (e.g., broad-market index funds).

Along another dimension would be type of return claim. A stock investor has a residual claim to the profits that remain after all other claims have been satisfied. That is after all creditors have been paid--all liabilities have been settled. A bond investor (lender/creditor) has a primary claim putting them somewhere higher up the priority list. Keep in mind there are various levels for various types of debt issued. 

Along another dimension would be whether the investment generates cash flows or is dependent upon perpetual new buyers at higher prices for its rate of return. Consider my prior partial list and the explanation behind the distinction

Still another dimension would be how dynamic are the assets one is investing in. Can the asset maintain or gain value in a changing world? This is where I would like to focus today.

In my thinking dynamic assets are essentially investments in ideas with potential cash flows. Static assets are essentially investments in inputs (costs) where the market is continually working against you and high-risk speculations on future tastes and technologies (future desirability & greater fool theory rolled into one speculative bet). 

With static assets you can be right and still be wrong. The opposite is true of dynamic assets to some degree as businesses can change direction

Since static assets have a locked-in nature, they should command a risk premium. Indeed they do but it isn't necessarily sufficient compensation for the added risk of loss they offer. 

The general case is that the more dynamic an asset is the lower its experienced volatility and thus the lower its expected return. But there is more to this story. Volatility is a cruel mistress. It can rob an investor by impairing capital because of the pattern of returns--negative or even just low returns at the beginning of an investment horizon while cash is being pulled out can leave the principle so low that eventual recovery is not possible. Therefore, a static asset with high volatility and high expected return might experience high (negative) volatility, prices going down rapidly, at just the wrong time, early in the investment horizon. Dynamic assets can be the slow and steady that wins the race. 

Volatility's cruelty doesn't end there. It can collapse and vanish as well, but this leaves investors with low expected returns. A static investor needs volatility to justify future returns. 

One should not assume I am saying that one is preferred necessarily to the other. Rather this is one exploration into how assets can be categorized and how to think about investments. Assets along this spectrum fulfill differing objectives with differing opportunity/risk characters. Investing is about tradeoffs.

Consider this stylized linear example: 

Forever people have been trying to eliminate oil: first they were doing so because it was nothing but a nuisance, next they we're doing so because it was getting more and more expensive as more and more of the world's machines ran on it where the solution was to find more and more of it and produce it cheaper and cheaper, and now substitutes are becoming a better and better option. 

To bet on a technology one needs to be compensated for risk with commensurate returns, and because the chance of a given technology profitably working is incredibly small, those need to be exceptionally high potential returns. In that case don’t own oil; own mineral rights. Don’t own proven reserves; own unproven reserves. Don’t own production; own potential production. 

Oil was to the 1920s what cryptocurrency assets might be to the 2020s. Bitcoin, Ethereum, and all other crypto assets are bets on a particular strategy within a particular technology.  So invest with care. These are highly speculative and certainly very static within my classification. Do not mistake the dynamic ability of people and firms with ideas and fluidity to be attributes of the underlying crypto technologies these people and firms may be employing. 

One last example: Diversified real estate is a dynamic asset while concentrated real estate is static. Similarly investment in the rights to a franchise within a geographical area is more dynamic than is the franchise location itself and even more so than the specific land the franchise sits upon. To this end see the picture below and keep looking until you see it:

Monday, March 8, 2021

A Greater Sage Theory

Just a few wondering thoughts on the latest techno-investing development--non-fungible tokens or NFTs.

What gives a collectible object value? Are NFTs like Beanie Babies or Picasso paintings? 

Think of this as a spectrum between pure speculation and pure intrinsic value. An object never lies entirely on one end or the other of this dimension. Where it resides is also not necessarily stable.

Fine art is "fine" in that it has a low degree of speculation relative to perceived intrinsic value. 

Gold is the ultimate financial consensual hallucination – – we can easily, reliably believe that it will have value across societies and well into the future. It is much more difficult to believe that Beanie Babies will have that quality. Picasso paintings are somewhere in between.

Scarcity is an important quality for determining marginal value, but it doesn't say much of anything about intrinsic value. This is the crux of the diamond-water paradox. I think there are two important subtypes of scarcity as it relates to collectibles: organic and manufactured.

Organic scarcity is producing 10,000 Babe Ruth cards and only 1,000 survive decades into the future. Manufactured scarcity is knowing that 10,000 Derek Jeter cards are desired but only producing 1,000 of them. 

Organic scarcity might be thought of as "authentic", but that too is in the eye of the beholder. The 1,000 Babe Ruth cards aren't any rarer in the example above given those parameters.

NFTs are a manufactured scarcity. However that is not very important except to the extent that someone values genuine authentic scarcity--the organic kind--as opposed to fabricated scarcity. Yet I can easily see an appreciation for the manufactured scarcity nature of NFTs. So don't be too quick to dismiss the limited denominator as a factor for these collectibles.

To the extent you can believe that people will continue to value the interestingness of NFTs along with the thing (art work, sports moment, etc.) that a particular NFT is associated with, you can credibly and reliably believe that that specific NFT will have value. 

At this point they are obviously deep on the speculation side of the speculation vs intrinsic value spectrum. Time will tell.

Sunday, June 29, 2014

Highly Linkable

My finger painting never looked quite this good.

I like this framework comparing networks to hierarchies. I find it captures something very true. I'll have more to say on it once I get around to starting a new meme on the blog which I will call Dimension Analysis. (HT: Arnold Kling)

Cliff Asness makes the case for HFT and indicates how some of the "facts" and "reasoning" about it might not be quite so factual or reasonable.

David Bernstein weighs in on an on-going discussion over at The Volokh Conspiracy about how legal extremist (and ridiculous) the Obama Administration has been.

Sumner argues that the American system is rigged to favor the rich. I think this is part of a natural evolution and hope to expand on this thought in an upcoming post.

The O'Bannon v. NCAA trial has ended. Michael McCann has a good summary of how the last day turned a bit in the NCAA's favor. Anyway you look at it, though, the NCAA is in a prolonged process much like a divorce where there is no winning--only degrees of losing. They have all but lost the moral/ethical argument. They have been forced to admit to being a cartel (but a good one, not like any of those other bad cartels). Like I tweeted to McCann,
They can't have it both ways in either an ethical or legal sense: the NCAA is either a consumer-harming monopolist or a labor-harming monopsonist (or both, they can fail to have it both ways).

In a different realm of sports meets law meets consumer demand, it only surprises me that this has taken until now to come about. I expect a lot more up and through a tipping point. Poor guy . . .

PS. I've made many promises in this post. I hope I can live up to them.