Life Is A Negative Lottery

Being awaken by a phone call in the night is almost certainly a bad news event. At the least it is a wrong number that has disturbed your sleep. Unless you are the rare individual up for a Noble Prize, there are many dreadful bad scenarios about to play out.*

This is indicative of life in general where bad news typically comes as quick, acute shocks and good news develops slowly. One could say that life is constantly forcing us to essentially write (i.e., sell) put options. While insurance sometimes is available to mitigate these risks, to more fully counteract this exposure we should be prudently buying call options. 

Briefly, a put option is an agreement whereby the owner has the right (not the obligation) to sell something at a predetermined price usually on or before a specified date. By writing or selling a put option one takes on the obligation to buy at the price the owner can sell at. Think of it this way: If you sell me a put option on a barrel of oil that expires in one month, I can exercise this right any time in the next month** to sell a barrel of oil to you at the agreed-to price (let's say $40)--making you buy it from me at $40. If I don't currently own a barrel of oil, I simply go on the open market, buy it at the current price, and then sell it to you at $40. The lower the price, the better it is for the owner (me in this scenario) and the worse it is for the writer (seller, you). 

A call option is just the opposite in terms of the obligation--it is the right to buy at a specified price whereby the writer (seller) has the obligation to sell at that price. Imagine having bought a one-year call option on 100 shares of Tesla stock a year ago at the then current market price. On July 22, 2019 TSLA was going for about $255/share. By July 17, 2020 it was priced at about $1,500/share. Suppose you bought this option (right to buy at $255) for a cost of $5,000, and consider that the value of the call option right now would be about $125,000. That's a great outcome for the option owner and an awful outcome for the option writer (seller). 

Here are some examples in life of put options where we are the unfortunate, forced writers (sellers) and potential call options where we can be the prudent buyers. 

Puts: 

• Flat tire, car wreck, . . .
• Stomach bug, a cancer diagnosis, . . .
• House fire, termites, . . .
• Tripping on the sidewalk, bumping one's head, . . . 
• Tornado, flood, . . .
• [this list could go on and on]...

Calls:

• Nurturing good relationships and broad networks
• Maintaining a diversified investment portfolio added to regularly with constant market exposure--long-term compounding is the call option (outsized upside) aspect of this
• Putting a small but meaningful amount of money invested in esoteric opportunities like Bitcoin, a creative person's far-out idea/business, . . .
• Embracing a willingness to try new things and keep all options on the table (including the option to walk away)--for example, just a slight geographic expansion in one's willingness to relocate can have a large impact on their employment options
• Learning diverse skills--good for career options, building networks, and knowing something that randomly comes in handy for the right time/right place
• Not burning bridges; rather err on the side of putting oneself "out there"
• Buying risk when others are risk averse and in increasing proportion to that aversion
• Playing the lottery? Maybe, but...***

Find ways to disproportionately gain when things go well. Admittedly this is difficult as the opportunities are fleeting, rare, and easily outnumbered by fakes. Still, it is a very good way to improve one's holistic life portfolio. Perhaps the bottom line is when faced with two roads, take the one less traveled when the downside of each is close and the upside of the less traveled is high even if unlikely. 

*We don't even notify people of the Shazam Prize this way, or any way quite yet--coming soon.

**Technically this is an American option. A European option allows the transaction to only take place at the point of contract expiration. Effectively they are nearly identical in capital markets since one can always replicate the American option using a combination of European options or selling the European option to someone else.

***In most cases playing the lottery does not qualify under the prudent consideration--sometimes the expected value is actually positive, but the chances of a significant win are still mindbogglingly small. Still, $5 every once in a while (can you live up to that limit?) is a pleasurable escape from reality. My advice is simply to soak in the fantasy of what winning would be like considering also the downsides (change of lifestyle, lost friends, inability to trust many people, etc.). Perhaps to keep oneself in check, you should deliberately NOT play the lottery and accumulate those unspent funds in a separate account looking to its growth as a proud joy.

What Explains The Low Death Rate of COVID-19?

Perhaps that title has you scratching your head, or perhaps it has you filled with indignant rage. In any case your first question should be: low in comparison to what? 

There is good evidence about how low the risk is for some (young especially but middle-aged and otherwise healthy in general) and how high it is for others including the very old. 

What I want to do here is put down my current assumptions about what is driving the death rate from COVID-19. These are not just subject to change, but I plan to revise my thinking (whether or not I get a chance to formally update this post or make a similar future post). I invite the reader to do the same--putting down one's thoughts in precise numbers is a very good exercise for cutting through shallow thinking.

Let's start with the assumption that everyone who gets COVID-19 will die from it and everyone will eventually get it. Let's limit this analysis to the United States. Formally stated:

probability(Death) * probability(Infection) = 100% * 100% = 100%

We know those two probabilities are not true (at least not yet!). So what is mitigating against each? Below are my thoughts on the factors reducing each including the amount they reduce the probability. Keep in mind these are for the average case. Obviously there would be greatly differing answers for various subgroups, and the answers would vary greatly over various periods such as March versus July of this year. Also note that I am simplifying the math by assuming the factors are mutually exclusive, which assumes that a factor is assigned responsibility (the associated percentage) when it is the dominant factor (e.g., While a therapy and general healthiness might help to save a given patient's life, if it was in fact the patient's own T cell immunity that was the most important factor, T cell immunity would in that case be assigned as the decisive factor.).

Limiting factors on p(Death):

1. General healthiness = 50%--which, again, is to say that general healthiness reduces the death rate by 50%.
2. Therapies (not including a vaccine) = 15%
3. T cell immunity = 15%
4. Virus weakening over time to be less potent = 10%
5. Other natural immunity = 9.5%
6. Residual (i.e., an infection does result in death) = 0.5%

(Note: I have not included a vaccine since one does not yet exist.)

Limiting factors on p(Infection):

1. Good hygiene (active resistance to introducing infection) = 20%
2. Personal preventing factors (natural resistance to infection) = 20%
3. Social distancing (voluntary & intentional as a change from baseline normal behavior) = 20%
4. Natural physical isolation = 15%
5. Virus mutating to become more/less contagious = 10%
6. Government-imposed lockdowns = 5%
7. Residual (i.e., one does become infected) = 10%

(Note: The virus mutating to become more contagious could mitigate infection if it meant a faster burnout before 100% population infection. The virus mutating to become less contagious could mitigate if it meant that it changed the baseline for the other factors such that they were now more effective.)

The product of the two residuals gives us the population death rate. 

Residual(death) * Residual(infection) = 0.5% * 10% = 0.05%

This implies I am predicting 0.05% of the U.S. population or about 165,000 people will die directly from the virus. 

The ultimate accuracy of this calculation is not in any way my aim here. Rather I want to be constructive and precise about what I believe is actually driving the pandemic outcome. So it is the list of factors, which I very well may need to revise to at least add some or clarify existing, and the percentage share contribution I assign to each.

Notice that I believe lockdowns and their ilk, which could be construed broadly as involuntary, coerced social distancing, are responsible for a very small decrease in infection rates. However, I believe they have a very large economic and human cost (reduced happiness, reduced liberty, reduced agency, reduced dignity, reduced wealth, reduced health otherwise, et al.). 

Updated (7/25/20): I am seeing more and more evidence that the IFR may be lower than my estimate of 0.5%. If so and if the death level remains where it is today (about 150,000) growing less and less, then that implies the infection rate is higher. For example, at 150,000 deaths and an IFR of 0.5%, infections would be about 30,000,000. If the IFR is 0.25%, then infections would be about 60,000,000 or about 18% of the U.S. population. As for where I am wrong in the IFR, I have no guess--even though it is a factor of 50% perhaps (0.5% should be 0.25%), MAGNITUDE MATTERS! Any single factor is in that case just slightly off to get that new residual result. As for the infection rate, I can make a meaningful guess (and so can you disagreeing with mine for sure). I would guess social distancing explains a lower amount (e.g., 20% becomes 10% or so).

From Hong Kong With Love

We stand at the precipice of a great opportunity. The government of China is doing what governments do by going state on Hong Kong. The leaders there correctly perceive HK as a threat to their power and way of life. While I continue to predict that in the long run HK will eat China rather than the other way around, there are alternatives.

Many are suggesting a policy tool to challenge Beijing is to open borders to HK emigration. This is a classic tails we don't lose, heads we win situation. To wit: If China balks, HK keeps its autonomy and the progress of freedom marches on; if China digs in, we get a giant gift. I'm sure you can see the first case, but I expect the second case is a bit harder to swallow. Allow me to explain the benefits of Open Borders with this extreme example.

A few years ago I had the pleasure of visiting HK. Although I was fairly familiar with it, I was still completely amazed. I look forward to one day returning. At the time I planned on doing a post about the HK economy in comparison to my native Oklahoma economy. Unfortunately, I didn't get around to it, but I think I can quickly summarize one of the economic points I wanted to make: 

Hong Kong is 138% more productive than Oklahoma and most of that difference is because of population. The average Hongkonger is only 25% more productive than the average Oklahoman. And that is despite/because HK has much less land area on which to work. Key takaway: More people equals more opportunity.

(sources below)	Population	Area	2019 GDP (PPP)	2019 GPD per capita (PPP)
Oklahoma	3.95 million	69k sq miles	$206 billion	$52,150
Hong Kong	7.45 million	1k sq miles	$491 billion	$64,928
% difference	89%	-99%	138%	25%

My extreme example to illustrate the benefits of Open Borders begins with a bold proposition: I propose we open the borders of Oklahoma to ALL residents of Hong Kong to become permanent guests with the opportunity to become citizens if they so wish. 

I can already hear the dismissive laughter followed by the panicked apoplexy. "Dear God, you can't be serious!"

Of course I am! This is easy. Do you think there is something magical about the small island of Hong Kong? Well, there might be, but it is nothing a little policy changing can't fix. And fortunately Oklahoma is not too far off from the HK freedom trail. 

"But wouldn't that influx crash the local economy? Think of all those mouths to feed."

Yes, and think of all those hands to work and minds to think! 

The one big stumbling block to a massive migration like this would be finding a place to house all the people. Well, Oklahoma has 69 times as much space as HK and construction here is cheap. 

Not convinced? The heart of my extreme example is how this would affect my personal employment. When I was in HK, it was for a couple of CFA Institute conferences. While there I was treated to a personal tour of part of the city by the president of the Hong Kong CFA society. We had a chance to chat about our relative societies--I was president of CFA Society Oklahoma at the time. His society was one of the world's largest with about 6,700 members. Mine was one of the smallest with only about 170. 

So what would happen if 6,700 CFA charterholders began migrating to Oklahoma? Would there be pressure on my job? Probably not immediately as people aren't as interchangeable as classical economics assumes. Over time there would be competitive pressures, but so too would there be competitive gains. With that massive increase in talent would come much in the way of business opportunities. I would have new job offers as well as a bunch of new job competitors. Would the net effect be to lower my wages? Maybe, but even here there less to worry about. 

The median total compensation* for a charterholder in HK is about 4% higher than for a charterholder in Oklahoma. While the cost of living in HK is perhaps 67% higher than in Oklahoma, most of that is housing, which remember is much easier to come by in OK. And for those like me who own a home, this influx should greatly increase my personal wealth. 

Think about it this way: Should current charterholders in HK want more or fewer charterholders in HK? The instinctual answer is as simple as it is wrong--fewer sounds good until you answer the question of how would there be fewer. A shrinking market for any type of employment is not good for those in that line of employment. As a native charterholder I stand to gain much if other charterholders want to migrate to my community. The likely worst-case scenario isn't that I lose my job and/or take a massive pay cut. It is that my job changes and new opportunities force me to make some changes. Change is scary, but change is inevitable. I would much rather have the trends of change as tailwinds than crosswinds much less headwinds. Growth is good.

Open borders in Oklahoma for Hong Kong citizens is unfortunately not going to happen. And even if it did, 8 million people would not show up tomorrow. In fact, most would choose not to make the journey at all. But for those that did it would be a great benefit for those already in the place of their reception. 

Sources for data in table: 

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

https://fred.stlouisfed.org/series/OKNGSP

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

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

https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/weorept.aspx?pr.x=43&pr.y=16&sy=2016&ey=2021&scsm=1&ssd=1&sort=country&ds=.&br=1&c=532&s=NGDP_RPCH%2CNGDPD%2CPPPGDP%2CNGDPDPC%2CPPPPC%2CPCPIPCH&grp=0&a=

*CFA charterholder compensation data is from CFA Institute's 2019 Compensation Survey, which is proprietary to members--unfortunately, I can't directly share it.

A Parable On Perspective

"I saw a terrible, just tragic sight, last night at Chez Paul. A couple couldn't afford the wine pairing with the chef's tasting menu. I heard him lament something about his job at DrillRock. You know they've been one of the worst hit by the industry downturn. I can only imagine their worries... 'Do we sell the lake house--it was just in Architectural Digest!?! Will the kids have to go to public schools? At what point do I downgrade to a social membership at Bushwood?...' It all makes me question my own good fortune and if I am blissfully ignorant of how precariously close I actually am to a dramatic scaling back in my life."

"Oh! And while the valet was getting the car we saw paramedics assisting a homeless man ... heard a bystander say something about him passing out and hitting his head. He looked downright skeletal. That was sad too."

The Future of Education Post COVID-19

Tyler Cowen pointed to this “debate”, which I was a bit disappointed in for being too much an untethered discussion. Tyler’s portion I found more meaningful, but still it didn’t do much to advance my thinking.

Since they didn’t really have an objective topic, I guess I shouldn’t be too critical. But I find that a lot of the recent thinking on how things will change in the age of COVID-19 to be like this—not very deep, a combination of wish list and fear. My own view is an attempt at nuance between "most things will change very little" (we will snap back to prior norms) and "this epoch event has accelerated by multiple years that which was already underway" (e.g., teleworking just leapt forward at least 5 years along the prior trendline). To be clear I think holding both views is the best prediction--that is the nuance. Not a lot will change, but that which was already changing has been accelerated. 

Here are some of my thoughts regarding changes in education (both what was already happening and how they have accelerated) as well as the obstacles faced (incumbents and traditionalists don’t go down without a fight).

Elementary and High School

• The major role of babysitting that school plays for many families has been shown to be replaceable. Schools aren’t as essential as previously imagined.
• While the pandemic-induced schooling-from-home experience was miserable for most of us forced into it, schooling from home was already widely assumed to be awful. Now many are probably seeing arrangements other than traditional school as decent substitutes.
• Much of what kids do in elementary school has little to no benefit for them. This is likely much more widely realized or at least considered as parents got a more up-close look at their kids “learning”.
• For the kids trapped in poor schools, online and other arrangements now look like realistic improvements.
• Teachers and schools that cannot provide good online options and flexibility have been considerably exposed.
• For students old enough to not need babysitting and for those capable of learning outside of the regimented classroom (perhaps a large majority of students are in this latter category), questioning the necessity of a 7 to 8-hour daily routine is rising.
• Unions and bureaucracies will be as formidable obstacles to change. However, they have a conundrum: teachers, administrators, and parents are afraid of the risk of infection. All of this pushes for alternative options to be explored, which drive experimentation toward alternatives that threaten the existing power structure.
• Status quo bias/inertia are also obstacles. People tend to be very traditional when it comes to choices for their children. It is hard for them to wrap their heads around questioning the conventional wisdom narrative of school as we know it--especially government school.

Higher Education

For higher education I think we should solve for the equilibrium and use a typical university, the University of Oklahoma, as an example.

• Although non-profits are insulated from market forces, they are still subject to the strength of the underlying economy on which they draw resources as well as the philosophical support of those in power. For universities those in power includes donors, alumni, legislators, employers of graduates, purchasers of research, and the public zeitgeist. So where are these headed? Saying that expectations will be to do more with less is a considerable understatement. Donor money and state funding will be much lower for a long time. However, desires/demands of universities will continue with smaller changes in overall goals. We will continue to virtue-signal about college-education being great hope for the future. So….
• How does OU do more with less? By outsourcing what is not in their core competency. Why would we have students show up in a gigantic auditorium to watch a professor repeat a lecture he has given every semester for a decade plus? What is the value in having everyone in that room squinting at the board from the back rows and trying to avoid the inherent, multiple distractions? Can’t that be done online without the risk of infection? And once you realize that it can, it is just one more step to realize not each and every university need duplicate the tasks. Rather have grad students available to perform office hours and optional workshops. What is the point in offering the ~100th best programs in this, that, and the other? Partner with other universities for those services especially the undergrad basics. Specialize in only that where there is comparative advantage. For OU that might be areas like petroleum engineering, social networking, and football.
• Social networking? Yes, with one of the biggest/best Greek life systems in all of higher ed, OU is among those that offer this feature. Even if the benefit is only perceived rather than real, perception matters to consumers. Drinking Gatorade doesn’t make you a better athlete.
• And football? Yes, the football team is a source of revenue and marketing for the university. OU is great at it. And OU is in a much better position than most now that paying football players for their value contribution is rightfully (finally) trending to be the reality.
• Thinking more of the general case, these trends lead to barbell effects: niche schools (elite quality where average is very much over) and enormous diploma-producing machines (economies of scale). While this is probably a trend within the realms of both undergraduate and advanced degree programs, it is more so a trend between these levels because . . .
• The line between high school and undergraduate college will blur greatly while the line between undergraduate and graduate work will likely sharpen. This latter division will resemble the distinction that once existed between high school and major university such that grad school becomes the new, true higher education. 
• Universities need to maintain their status (true in either the human capital model or the signaling model). To do so will require some exclusivity, which I think comes mostly at the entrance process to grad school--getting accepted to graduate programs becomes much more difficult. 
• What happens to research? More rent-a-lab, rent-a-brain with corporate interests outsourcing to universities more than ever and universities renting away these resources. 
• Obstacles? The same forces as above are at work against change here, and they are probably more powerful. But the stakes are higher and the willingness to experiment is probably higher too.
• The major universities aren't going away, but they may be transforming so much that what emerges over the next ten years is vastly different from what we've known for so long. Imagine "going to" a major university, but not directly taking but a few classes there until upper-division-level work.

P.S., John Cochrane had two great posts recently on this topic (here and here).

Things That Can Both Be True - Mind-Blowing Partial List

Beware of false contradictions. It can be the case that:

• One is against the drug war (wants to completely legalize all drugs) and is against the use of most currently illicit drugs.
• One believes that prostitution should be legalized and that prostitution is morally wrong and culturally damaging.
• One finds many of the actions and policies of the Trump administration have been bad and many of the actions and policies of the Obama administration ON THE SAME ISSUES were bad. 
• One wants the best for low-wage workers and one is against the minimum wage. 
• One desires a strong, vibrant job market and one views jobs as an economic cost rather than a benefit. 
• One believes the government-commanded lockdowns were absolutely bad policies and voluntary social distancing is absolutely good behavior in light of the COVID-19 pandemic. 
• One thinks the United States of America is a great country and the U.S. government with the support of the people of the United States has done many very wrong things. 
• One believes a highly successful person worked very hard while being very smart and they benefited greatly from luck. 
• One sees college education is very valuable to college graduates and it is not the best option for a very large percentage of college attendees.
• One thinks college education is valuable to society and society would be better off with a lot less college education.
• One strongly supports freedom of speech and strongly disagrees with the specific speech that freedom of speech is protecting.

Updated to add:

• One believes that the use of fossil fuels meaningfully contributes to a negative effect on climate change and that the use of fossil fuels has been a wonderfully positive thing for humanity and the Earth.

The Competitive-Efficiency Paradox

A more competition-friendly society will be more efficient (extract more wealth from a given level of resource consumption) which will make it wealthier which will allow it to have more inefficient production. For example, my ability to more cheaply purchase furniture from the finest woodworking craftsmen in the world allows me to myself dabble in woodworking at an uncompetitive, amateur level.

There are two sources of this effect:

1. My own wealth growing--call this the personal-income effect.
2. Society's wealth growing--call this the production effect.

I am generally concerned here with the second of these; although, the first is a derivative of the second thus it is in play as well. There are countless examples throughout culture and industry.

Think about this in capital markets. In the past few decades retail-investor trading costs in stocks have plummeted to now be explicitly zero. (Note: if your broker is still charging you a commission for trades, you might need to explore your options.) This massive reduction in cost has allowed a lot more trading to happen--both more traders especially amateurs and more frequent trading. Did this result in increased price-discovery efficiency? Probably some up until a point. But the next new person trading AAPL (Apple Corporation's stock) probably is not bringing new insight into the market. More likely that person is lowering average accuracy ever so slightly. Otherwise, why weren't they trading before this point There is probably enough liquidity in Apple stock so that is not a benefit of an additional trader's trades either.

Here we are suggesting another aspect of this paradox: without easy market entry/exit, we cannot maintain competitive markets. Yet, the next entrant into a highly competitive market is probably likely to be uncompetitive. Ban additional trading or traders for Apple stock and you will unravel quickly the efficiency we have come to enjoy in this highly-competitive market.

Back to the original paradox, is there more efficiency or less? To resolve the problem we should consider it as a continual process as opposed to being linear and finite. We should also expand our understanding of what ends we are achieving. The socialist's fallacy would be to look at two firms both producing cereal and declare this inefficient. "Obviously we could eliminate the duplication as well as the advertising costs by combining the firms," they would proclaim. But this would break the very process that allows for the desired efficiency (higher and higher production at lower and lower cost).

Imagine how disastrous a true socialists should view a marketplace like Etsy. Here the line between hobbyist and profitable craftsman is magnificently blurred. Magnificent because it is the essence of a culturally and materially rich society where experimentation is both allowed and enabled. A society that embraces competition necessarily invites dynamism. This is a foundational principle and an essential characteristic of growth. It is Schumpeter's creative destruction. It is a gift not a curse.

Perspective

To the Moon, Alice!

Imagine if in the summer of 2018 you embarked on the vacation of a lifetime--a 2-year journey to the Moon with SpaceX. This was their "Get Away From It All" package which includes no contact with Earth during the voyage.

While gone, you left me in charge of your affairs including your investments.

You have a wonderful trip and then return late in the summer of 2020.* Settling back into terrestrial life, you ask me for a rundown of what you missed. My reply: "Well, a few things happened here and there. Perhaps most interesting, we had a pandemic."

"A what?!?" you exclaim.

"I know, a once in a generation viral pandemic. It was bad, but not nearly as bad as some of those in history. Still many people died. There was a lot of chaos and confusion at times. Lots of events were cancelled; so life was pretty disrupted for a while. The overall hit to well being for the typical person as meaningfully, negatively impacted." I explain.

"Oh, that is horrible." You dare to ask, "How are my investments?"

"They are worth basically just as much today as they were when you left plus a little for inflation." I say calmly.

"That's wonderful. Surprising even. But how did you manage that?"

"Well, it wasn't much that I did. There were a few moves here and there that probably added a little value--just sped up the time to recovery. For a while the investments had lost quite a bit. You would have been pretty worried had you been around to witness it. And the values were up quite a bit from when you left right up until the pandemic really set in. All in all it was wild times."

Reassured, you say, "Well, I'm glad that is all behind us. I left after a great 9 years of investing, and I got to ignore a crazy few."

. . . The end is not near, folks. There is a LONG journey ahead. If you don't realize those are positive thoughts, you need to re-read the passage above. The pain that has and will hit human life is beyond sadness. Don’t compound your worries with shortsightedness—in investing or any aspect of life. Cherish those around you and make good choices for the long term.




*Make it a three year trip returning 2021 or a four-year trip until 2022 if that makes this more realistic in your view.

Choose Your Own Adventure - Voter Edition

Choose one of the following ideological menu items by candidate:

Welcome to big-government democracy. Democracy is better than the rest, but the strong-state version has big shortcomings that are widely underappreciated. This is not an argument against voting. Let's assume that your vote counts; in fact, let's assume it is the only vote that does. If we assume a strong, powerful government that will be called upon to play a role in most affairs, we are doomed to a world filled with disappointment. This is true even for you, the sole voter. Surely this, a small sampling of each candidate's views, has conflicts with your own preferences. If not, let me present you with a longer list to certainly reveal disagreement.

Beyond you there is the rest of us. If we can find someone for each of the four candidates whose interests align at least in the strongly opposes and strongly supports positions, we will therefore have the ingredients for at least three disappointed people. But the problem is deeper than that. Each issue above is but a category unto itself filled with a myriad of nuanced issues. I would imagine the three candidates who strongly support government involvement in education have important differences in how they would effectuate that desire.

It should be clear from this alone that the will of the people is a silly myth. Voting doesn't count in two fundamental ways: (1) in any typical election you can be reasonably certain your vote will not determine the outcome, and (2) even if your vote did determine the outcome, you could be reasonably certain that outcome would be disappointing.

If all you do is vote, the best you can hope for is a political climate that is conducive to the changes you want and resistant to the changes you oppose. In that sense it is like standing in an open field as a storm approaches hoping that lightning does not strike you.

Rather than just vote, I recommend thoughtful advocacy, approachable engagement (pick your battles but be prepared and respectful enough to kindly offer your disagreements), a willingness and ability to change your mind, but also a fundamental resistance to the power and growth of the state. The more we ask the government to do, the more we demand to be disappointed. 

City Intelligence - Knowing What I Don't Know

There are many aspects to this (things to do, how to get around, what to look for, what to avoid, etc.). In this case I am trying to solve the problem I have when visiting a new city and I want a place to eat. 

There are obviously different dining experiences I am looking for at various times. Many times this problem is solved by the benefit of branding (e.g., McDonald's and Panera Bread are the same everywhere--don't give me no Royale with Cheese counter examples). Still other times a binding constraint "solves" the problem (e.g., I am hungry NOW and this place is good enough and very close). 

But what about those times when I am going for a nice weekend date with my wife out of town or travelling with friends to a football game and need a good meal the night before or on a business trip with a colleague and/or client? Perhaps a matching process I will call "Goldilocks" could be the solution. 

Basically what I am envisioning is a big-data solution that will take my prior experiences and my general preferences and combine them with similar cohorts to develop a suggestion algorithm. I know others have and are trying this, but I have yet to come across anything close to being as robust and easy to use as I desire. Perhaps simplifying the input dimensions and ranking options is the key to being accurate in prediction, reliably useful, and fast. 

The process would start with a few questions and then followup after with the same questions to build and refine calibration:

• What type of dinning experience are you wanting: more formal than average or more casual than average?
• Overall for what you desired was this restaurant too formal, too casual, or just right?
• Are you looking for: a lively more festive place or a quiet more intimate place?
• Was the restaurant too loud, too quiet, or just right?

Some additional questions would be asked after the experience to further enhance the database:

• How did the food's taste and presentation meet your expectations: better, worse, or just right?
• How did the service meet your expectations: better, worse, or just right?
• How did the value for the price paid meet your expectations: better, worse, or just right?
• How would you rate this restaurant overall: excellent, just right, or poor?

The goal would be to suggest restaurants that were just right. Why not always hope to exceed expectations? Because expectations should change such that just right is, well, just right.

A Radical Idea

I'm going to propose something that is completely crazy. . . Hear me out on this.

I think we should get the government completely out of the manufacturing and distribution of automobiles. We should fully and completely privatize autos.

I know, I know, this sounds crazy. But I truly think that the free market can best provide automobiles for people.

Oh, I hear your complaint, "But Steve, you're crazy. Many people cannot afford cars." As hard as might be to conceive, I believe the free market could do a much, much better job. I also think that we should give people the trust and respect and dignity by expecting that they can actually make the best choices for themselves and their families. 

It is my firm conviction that if we completely got the government out of the business of making and allocating cars, say over a five-year period, that we would get cars at a third the price if not better. After accounting for quality improvements and specialization of needs met, we might see prices effectively a tenth of what they are today.

Imagine a world where cars are not one size fits all. Imagine that we have various sized trucks and sport utility vehicles. Imagine we have sports cars and family cars; we have cars that are small and highly fuel-efficient. All this would be possible if we would let the free market help people figure out what is best for them. 

And yes I hear the objection: some people simply would not be able or be willing to get themselves an automobile. I hear the concern that some people won't make great choices in this regard. For those people we can come up with other solutions. But there is no reason to totally sacrifice all of our well-being just to try to address the very nuanced and isolated problems of particular cases.

For those people that simply can't or won't provide for their own automobile needs, we can provide a bus service; we can provide funds for taxi and ridesharing; we can help organize carpools.  We see the free market work so splendidly in so many other regards. We don't question its ability to provide for our needs in so many countless ways.

Just imagine if you will some alternate universe where we had a public school system. Imagine in this crazy world we decided that because some people won't make the best choices for their children and some people very truly cannot on their own come up with the resources to get their children's educational needs met, that we force everyone to pay for a government-run, public school system. Imagine how inefficient that would be. Imagine how large the cracks would be in that one-size-fits-all world.

Even if we allowed private school alternatives, we would still be mightily restraining the free market by forcing resources into this public school system. It would also be subject to powerful political influences that would shape the school in ways that were at best suboptimal and at worst abject failure. It is easy for us to see how having the government run education would not in any way address the needs of the most needy. It is easy to conceive of how there would be very large disparities in education between the Haves and the Have Nots that couldn't be rectified and corrected because the market process would be thwarted.

All I ask is that you think about this clearly and realize the same is true of automobiles.

P.S., Thanks to Don Boudreaux and Bryan Caplan for the inspiration.

Arrogance in Nostalgia

If you were teleported back in time 40 years, how easy and quaint does doing the same job you have now seem at first blush? 

Assume you don’t know anything specific about the then future to come—you just are used to what the world is like today. Very specifically you are used to that job as it is today. 

I’m sure if you thought about it, you’d realize the stress, monotony, slowness, paperwork, and general frictions would be unbearable. If your job didn’t exist 40-years ago, think of the closest analogue. Remember job doesn’t mean industry. 

Consider it along these dimensions: 

• tools you work with
• general work environment
• your job's status and prestige in the world
• competition for your job
• workload and hours on the clock
• and prospects for the future.

Why You Should Sometimes Value Uncertainty

Do you always prefer certainty over uncertainty?

Are you sure?

Uncertainty brings value. There is value to me in charities being uncertain how much money I make and value to me in friends being uncertain how little I make. But there is also value in the uncertainty for each of those groups as well. Charities can play off my desire to look good to my friends while my friends can imagine my generosity is not a big sacrifice.

Perhaps a hypothetical example will convince you. Imagine we are sitting at breakfast and I get up to get us both more coffee. I pick up your cup with my right hand and my cup with my left hand before leaving the table for the kitchen. When I get to the coffee, I put down both cups, pick up the carafe, and fill each cup. I soon return with each cup, but I have not paid attention to see whose cup is in which hand. We are in a state of uncertainty. I can take away this uncertainty very easy--I can spit into each cup and remove all doubt that you will receive "my" cup rather than your own. 

To Infinity and Beyond

This is a bit of a followup to the Dracula post from earlier this year. 

Foundations and endowments DO NOT have infinite time horizons. Technically speaking, nothing does. But I would argue they don't even have extremely long time horizons. 

These types of entities have no reason to believe they will exist into the long, far future. At the very least they will transform so dramatically the future them is not the current them--donors, beneficiaries, and employees will all be different as will its mandates, goals, and mission. Over very long periods of time slight changes to average inflation or average rates of return very significantly affect the purchasing power of assets. These are highly uncertain variables where the difference between phenomenal growth and permanently impaired capital is almost imperceptibly small to a current observer. The tax structure governing these entities over the long-term future is also highly uncertain. A related but independent threat is if the powers that be and the powers that will be even allow the entity to exist . . . forever.

Perhaps despite all of this they should act as if they have infinite time horizons? Let's assume a few conditions: 

1. Foundations and endowments in at least some cases are the best available option to serve a desired purpose. (If you simply take this for granted, you probably are not thinking hard enough. These entities may not be the best way to accomplish the goals they ostensibly are designed for.)
2. It is desirable for foundations and endowments in some cases to exist into perpetuity. 
3. It is possible to design and implement an external and internal governing structure and to craft a mission statement conducive for the first two conditions. (This might be where this entire process deviates too far from reality.)

For those entities where a perpetual time horizon is appropriate, we obviously do not want them to engage in behavior that unreasonably jeopardizes that goal. One quick and tempting way to jeopardize it is to spend too much money.* Another is to invest poorly. Notice that this bad behavior is a bit murkier. Investing could qualify as being done "poorly" in a number of contradictory ways. Defining it as taking the wrong risk(s) in the wrong way(s) doesn't provide any clarity other than to suggest how complex and complicated the error can be. 

Tying this back to the question at hand, should they act as if they have infinite time horizons, begs the question: what exactly does that mean? How would they be different as compared to acting as if they had long, but limited time horizons? Let me describe the difference in terms of a couple of problems I can foresee:

• Doing too little good now (spending too little!) so as to safeguard sustainability. Yes, this cuts a bit against the grain of what I've said and implied above. But it is a real risk especially for a perpetuity mindset. Doing more now might solve a problem that wouldn't otherwise exist in the future--keep in mind that our descendants are very likely to be extraordinarily wealthier than us with entirely different problems (even if they aren't that much richer). 
• Investing in a manner that jeopardizes near-term access to sufficient capital. If you have an infinite horizon, what do you care that your 5-year or 10-year or even 20-year returns are very bad as long as the long-term expectation is high enough? In fact, let's tie that money up in illiquid assets if that is the trade-off for above-market performance. Unfortunately, simple beats complex in almost all categories but not in the competition of hope. Which is why a perpetual outlook fosters an esoteric investment strategy. I think these entities should push back against this natural inclination to invest in opaque, illiquid, and non-benchmarkable assets. Any investment that is not accessible (lock-up periods), marketable (secondary market discount), or verifiable (Internal Rate of Return (IRR) is a useful fiction) for a period of time longer than the expected tenure of the investment staff recommending it is highly suspect. I would suggest the same evaluation against the average board member's remaining term. And this is all before we begin a discussion of manager selection and dispersion risk--alternative investing is not about asset allocation; it is about finding the best and avoiding the worst. Good luck with that. 

What about governments? Should they act like they will be around forever? Again, let's consider what this means by jumping to potential problems:

• A government that behaves as if it cannot fail to be or should not cease to be risks being way, way to aggressive--both to its own people as well as others. 
• This encourages disruptive experimentation since the government can simply outlast any temporary ill effects. Normally, disruptive experimentation is my jam, but not for government. Government lacks the proper incentives and the rightful decision makers. 
• Paradoxically this perpetuity outlook also encourages extreme neglect as any problem today will either be solved tomorrow or be some future government administrator's problem.

I think the assumption that foundations, endowments, governments, et al. should behave as if they have unlimited time horizons is sloppy at best and dangerous at worst. Long time horizons are appropriate and very useful for these entities, but there is a big gap between a long time and forever. 

My thoughts for this were spurred in part by listening to this episode of Macro Musings. 

*I will leave for another day further discussion on the well-debunked conventional wisdom that a 5% or even 4% spending rule is likely sustainable in real terms. 

Keep Looking Until You See It

Once you have a guess, scroll below for the answer . . .

In The News . . .

A vivid childhood memory for me that I think about every time I hear the phrase "in the news" are the shorts CBS used to run during Saturday morning cartoons during commercial breaks. Here is a long compilation.

Generally these bugged me--I didn't want to hear what they had to say and wanted my cartoon back on.

Something I've been thinking about is what does it take for something to be news.

Perhaps a measure of the relevancy and importance of something that is "news" (newsworthiness) is the answer to this puzzle: Imagine rescuing someone from a desert island. How long could they have been there such that a particular piece of news is still topical and worthy to tell them?

Given enough time anything of great importance in the moment will eventually fade into the background of oblivion. Its relevance will disappear.

I would suggest that 90% of news is entertainment and 90% of that entertainment is to one degree or another proverbial porn. On balance the most popular sources are simply NDDs (nonsense delivery devices), GDDs (gossip delivery devices), or PDDs (propaganda delivery devices).

Consider this a corollary to this post.

On the Matter of Carts and Horses

I want to be wealthy.

The wealthy take fabulous vacations, drive expensive sports cars, and surround themselves with luxury.

Therefore, I am going to New York for a week at The Plaza. While there, I will do some amazing shopping; eat at Tavern on the Green, The Russian Tea Room, et al.; and take in some fabulous theater. Upon my return, I am buying a Ferrari.

Of course . . . it doesn’t work that way.

Will someone please tell local governments that? Please? Please? Please? Please?

Honesty versus Politeness in a 2x2 Grid

I have a number of things I've been thinking about in the form of a 2x2 grid for comparison and contemplation. This is the first of these: honesty against politeness.

Examples of each of the four resulting categories (one fictional character and one real-life one): 

	Rude	Polite
Dishonest	Bugs Bunny, Donald Trump	Eddie Haskell, Barrack Obama
Honest	Colonel Nathan Jessup, Ayn Rand	Atticus Finch, Abraham Lincoln

Not All That Glitters . . .

What does it take to be rich? 

Consider this thought experiment:

Imagine an island where the trade winds and the sea currents effectively prevent any ships from reaching it. On this island is a tiny mountain of gold about 10-feet high and 10-feet wide at its base. The value of this gold at today’s price of $1,500/troy ounce is about $6.89 billion.  But it is the 1800s, and this island is completely uninhabited and never discovered. Is this island rich?

Now suppose a big storm causes a ship to go off course and wreck into the island. There are 30 survivors of the shipwreck cast away on the island. The island has a minimal amount of resources to sustain these shipwrecked survivors. They live for a few years and then sadly perish having not been found. Before their deaths, are the shipwreck survivors rich?

Now suppose that modern air travel has revealed this island's existence. The shipwreck is discovered decades after its occurrence, and no one since the wreck has come upon the island. Although all of the survivors have a long died, the direct descendants of the survivors (some of them had children before having left on the final voyage) are tracked down and happen to be a limited number of people--about 1,000. It is determined that the shipwreck survivors were the first to stake claim on the island and are thus the rightful owners. By inheritance the 1,000 descendants are equal owners of the island and all its possessions. Are these descendants now rich?

We're Doomed, I say. DOOOOOMED!

Is humanity doomed? We certainly don’t lack apocalyptic scenarios: nuclear war, a robot uprising, out-of-control climate change. Unlikely, far-fetched? Not according to scientists and mathematicians who, in recent decades, have found a surprising new source for anxiety about the long-term survival of the human race: probability theory. The so-called “doomsday argument” holds that there is a 50% chance that the end of human life will come within 760 years.

That is the opening paragraph from an essay by William Poundstone in the Wall Street Journal. He also was a recent guest on Michael Shermer's Science Salon podcast discussing the wide implications for this elegant theory.

Also from the essay:

Since it is equally likely that those of us living today are in the first or second half of all past and future human births, let’s say that we are in the second half—which would mean that there are no more than 100 billion births yet to come. There is a 50% chance that is true, which at the current global birthrate (about 131 million a year) translates to a 50% chance that we have at most 760 more years of births. A changing birthrate would modify that estimate, but the calculation is that simple.

A friend forwarded the original link to me and we had a bit of discussion on it basically agreeing that the math and process is compelling, but that it seems to be missing something to make it as much as it seems to be. Specifically, I find it very interesting, but it seems to me like a confusion between or muddling of two different concepts.

One (German tanks) is like a kid turning to a football game on TV randomly and guessing about how much longer in real time (not game time) the game will last. The other (humanity) is like being a kid on vacation who wakes up in a car wanting to know "are we halfway there yet." The second case is much harder to answer if we include a key condition that the destination distance is not known by the kid. Even if he knows he is 100 miles from his house in OKC, he doesn’t know if the destination is Branson or New York City or elsewhere. It is much easier to ascertain where he might be in the football game as opposed to the vacation. A score of 14-7 and a flash of the scoreboard showing "3rd Quarter" is much more revealing than a road sign that has a highway number inside a Missouri silhouette. While he can apply the analysis in both cases, his prediction revisions will be orders of magnitude different as time passes for the vacation as compared to the football game.

Another problem I have is that the time frame is inversely proportionate to the future population growth rate. If we slow birthrates down to just above replenishment (about 2.1 births/woman), then we extend the time between now and the next 100 billion people. Thomas Malthus and Paul Ehrlich might agree, but Jean-Baptiste Say and Julian Simon (and I myself) would not.  So my complaint boils down to: that when applied to something like humanity and it’s future, this doomsday calculation is not telling us as much as it is purporting to.