Traders Bet on Horses; Investors Bet on Horse Tracks

At times it seems that everybody wants to be a trader. Nobody wants to be an investor. 

Trading is exciting. Investing is boring. 

Traders are trying to find the arbitrage, the sure thing, trying to outthink and out play the market. 

Investors are simply trying to participate with the market as efficiently as possible and with a long-term focus. 

For every winning trader there is an equal and opposite losing trader. It is a zero-sum game. 

For every winning investor there are only various beneficiaries all of whom gained on net to one degree or another. It is a positive-sum game. There are no losers in that game provided the investor was a winner and all costs were internalized.*

*Yes, I know those conditional statements are doing a lot of work. 

Paul Kehrer, CC BY 2.0 <https://creativecommons.org/licenses/by/2.0>, via Wikimedia Commons

WWCF: Sensors in Football or AI Calling Balls/Strikes in Baseball?

Which will come first?

Sensors in the NFL (determining touchdowns, etc.)

or

Artificial Intelligence Calling Balls & Strikes in the MLB

Basically, which of these two professional leagues will first adopt a replacement for human officiating judgement? The Hawk-Eye system has been finding wide adoption in many sports with tennis being the most substantial example to date.

For decades now we have had greater and greater use of replay review. NBA basketball is perhaps the most developed version of this even if it is imperfect. And despite the old-fashioned nostalgia and general complaints ("they still don't get it right!" . . . "it takes too long to be worth it" . . . et al. ad nauseam), I don't think the trend of trying to get it right with the help of technology is reversing.

You don't have to look far for examples of meaningful mistakes in both sports all of which are painful for fans and damaging to the brand. But vested interests (unions and fans who fear change, to name just two) hold back improvement*--slowing us down from where we are otherwise going. 

Here are the terms: 

• Football - in the least having sensors used to determine touchdowns when the officials on the field are in doubt. It would qualified if these are used to overrule upon challenge or if the officials can use them similar to how every score is reviewed by rule.
• Baseball - in the least the calling of balls and strikes by an autonomous system. To be clear this is not overruling the umpire but autonomously determining in the first place. 

Baseball would seem to have the clear lead in this evolution. However, football would be less disruptive since this would only be employed at critical plays like scoring (the criterion for this WWCF) as well as potentially first downs and out of bounds. 

My prediction: The MLB has more to gain as that sport is much more at risk of losing fan share. It also has obviously been making more moves in this direction. Therefore, they will opt to make a leap out of a greater sense of urgency thus being the first mover.

*One could argue that there is some art involved in catchers framing pitches as well as potentially some game improvement by umps having degrees of freedom in the strike zone. However, the spirit of the game is probably not in how sly a player can deceive, and it takes ~25 umpire "improvements" to negate one obviously blown at bat. Likewise in football I fail to see anything desirable about referee mistake.

Does Ranked-Choice Voting Really Work?

All else equal, it would be good to reduce divisive partisanship in politics and to get elected officials who are more generally representative of their constituents' views. At least it seems like that would be good. Upon typing it I immediately have my doubts that I can both defend those goals as meaningful and desirable. And even if I can, it might be ridiculous on its face with the "all else equal" qualifier being impossible.

After all, all else equal, I would love to be worth $100 billion.

Regardless, let's briefly explore one possible method of improving elections, ranked-choice voting (RCV); aka, instant-runoff voting. From Ballotpedia ranked-choice voting is

an electoral system in which voters rank candidates by preference on their ballots. If a candidate wins a majority of first-preference votes, he or she is declared the winner. If no candidate wins a majority of first-preference votes, the candidate with the fewest first-preference votes is eliminated. First-preference votes cast for the failed candidate are eliminated, lifting the second-preference choices indicated on those ballots. A new tally is conducted to determine whether any candidate has won a majority of the adjusted votes. The process is repeated until a candidate wins an outright majority.

Let me state up front that I very much like this as something that might help break the two-party duopoly that corruptly prevails in America today. This is a goal that isn't necessarily in line with the reasoning that RCV could reduce divisiveness, etc., but I think it is consistent with those goals. 

Yet a simple but extreme thought experiment gives me some doubts about RCV as a cure for the supposed ails. 

Consider this election ballot: 

• Jesus
• Almost The Devil
• A Goofball
• The Devil

Now suppose that we hold the election and the first-place results are:

• Jesus - 38%
• Almost The Devil - 30%
• A Goofball - 20%
• The Devil - 12%

Under RCV we don't yet have a winner because no candidate has a majority. So, we eliminate the lowest first-place vote getter and give his second-place votes to the remaining candidates. Presumably in this hypothetical everyone who voted for The Devil, who has now been eliminated, put Almost The Devil as second place. Therefore, the new results are:

• Almost The Devil - 42%
• Jesus - 38%
• A Goofball - 20%

We still don't have a majority vote getter; so we now eliminate A Goofball whose voters equally split their votes for Jesus and Almost the Devil as second place. Therefore, the new results are:

• Almost The Devil - 52%
• Jesus - 48%

My hypothetical has resulted in Almost The Devil defeating Jesus. That seems bad on its face. Additionally it probably does not satisfy the Condorcet criterion (a known short coming of RCV among other systems). This is just one way RCV might not live up to our dreams. The Volokh Conspiracy at Reason explores another, similar dampening of expectations for what RCV can achieve in heavily contested elections. 

My hypothetical concern here might be rejected for at least one of two reasons (or both): 

1. In repeated experience voters should get better and better at using the new system. This is similar to rejecting the argument that a simple one-time experiment in a classroom "proving" prisoner dilemma problems mean people will fail at coordination ... therefore, government force is required to make them make the right choices. 
2. Don't let the perfect be the enemy of the good. If this is a 90% solution to known problems with elections and democracy, it might be worth this hypothetical, unlikely risk.

Perhaps mine is an uncharitable view on the electorate in general. The thing is when I apply the labels (Jesus, The Devil, etc.) so as to be self evident about the hypothetical candidates you get an unfair look into the future that is not visible to the voters ex ante. Reasonable minds will be rationally ignorant about specific candidates, and no amount of homework done ahead of time will tell us the future with certainty. 

Perhaps it is an argument against democracy--one could charitably say it is simply an argument in favor of less democracy. I think it is certainly an argument for less government power. Electing Almost The Devil as Advisement-Only Czar to the Local Private Firm Dog Catchers minimizes his tyrannical reach. 

I still think RCV is a big step in the direction of improvement. But this thought experiment has given me some moderation in my expectations of what it can achieve. 

P.S. See also this podcast from Building Tomorrow for an overview on RCV and its potential implications. 

The Seductive Allure of Socialism

The more local something is the more essentially socialistic it becomes. I think the best way to describe this is that size/complexity has a positive relationship with the net benefits of the market (free market principles and market incentives, etc.) while size/complexity has a inverse relationship with the net benefits of socialism (yes, there are benefits). Simply put: the bigger or more complex something is, the more you want/need markets and not central planning to do the heavy lifting.

Intelligent people recognize that they know things and understand how to solve problems much better than most other people. They see this in action locally where it works or seems to at least. Thus, their belief is reinforced. This leads them down a bad path to an unreasonable conclusion that they can guide the world.

Keep in mind that what distinguishes a person as being "intelligent" can be local knowledge rather than pure IQ. Therefore, a local shop keeper may be orders of magnitude more intelligent about running her shop than would be a team of McKinsey consultants. 

Art Carden gives a model, salient version of this. For example, consider the family, the firm, and especially small and midsize towns. The local banking relationship in these places illustrates this nicely. 

The key skill of a banker today is not financial acumen. It was once upon a time at least to the degree of assessing credit risk. But large firms, algorithmic models, and risk spreading have largely supplanted that need. It is still important--vitally important for the bank itself--but it is not primarily dependent on the skill of individual banker. I believe financial risk assessment is a quality of secondary importance.

Rather the key skill of a banker today is relationship building. That is what makes a great banker. Hence, bankers are deeply involved in their communities. Again, this is not new, but it is now the primary attribute rather than a secondary one as it was in decades past.

It is strange then that a bank and its bankers, the stereotypical image of a capitalist (think of the board game Monopoly) are in fact the leading proponents of a road to local socialism. 

Here is how it unintentionally works. First, bankers are deeply interested in current customers' wellbeing and credit soundness. They have made loans, and they want them paid back. Second, they want to make future loans. These same customers would be the easy way to accomplish that goal. This gives them an all-too human impulse to favor the known and familiar as opposed to the new and (perceived) extra risky. 

Certainly bankers are interested in growth and new development. It is just that the unseen has a built-in bias against it. 

How is this a slippery road to socialism? I am not proposing that it formally leads to socialism, but it is central planning friendly. Most directly it runs the same risks of all central planning whether at the household, firm, or governmental level: decisions are made that suffer from the knowledge problem and are subject to the local maximum problem. 

Bankers are deeply imbedded within their communities for good reason: they want the business relationships and they want to stay close to the credit--all the better to monitor the risk. Yet this presents a sort of capture risk similar to formal regulatory capture. The bankers can easily be persuaded to support their customers' desires at the expense of their customers' competition. 

P.S. When I was in college I had a righteous disdain for kids wearing Che Guevara t-shirts, etc. They were "old enough" to know better. As the great P.J. O'Rourke explains, that is no longer true of kids these days, who are now the same ages as those who I rebuked back in the day.

P.P.S. Iain Murray's The Socialist Temptation explores this topic in depth. For a good discussion on it I recommend this recent episode of Jonah Goldberg's The Remnant. 

See this for more on the source for the above image and related story.

Fighting Words

This is a partial list and probably just a glimpse of the many ways in which I am unelectable as a U.S. Presidential candidate. I feel like I am part of a small minority advocating that the world is round in the midst of a powerful and vocal majority who dismissively says "No, quite obviously, it's flat".

• If you support government schools, you are part of the problem. Do whatever you can to get your kids out as well as help others to get out as well--especially the most needy, inner-city kids and others. Starve the beast. It does not serve its customers, children and their families.
• Social Security and Medicare = Welfare. And it is unsustainable welfare at that.
• (Related to the above) Baby Boomers need Millennials and immigrants (especially illegal immigrants) to bail them out of their financial peril. 
• Most news is entertainment and most of that is proverbial porn. Watching and reading popular news sources is entertainment with negative intellectual value--it is making you dumber.
• Support for the Pledge of Allegiance is virtue signaling, and recitation of it is an activity of un-American obedience.
• The national anthem being played before sporting events is state worship of dubious origin, and the rationale given for its continuance is awkward at best. 
• You don't own "your" culture. You are a part of a greater human culture and many, many subcultures. Hopefully you are contributing to them, and hopefully you are finding where they are and how they are changing beneficial to you. Regardless, to claim ownership is nonsensical. 
• The push for National service is motivated in large part on resentment. People resent how good life is for the young, and how bright and relatively easy their prospects are; therefore, they want to instill hardship on them, and they believe the only way for them to develop character is for them to be placed into a form of involuntary servitude. 

P.S. For those scoring at home, that is 2.5 points for Bryan Caplan as a fellow traveller reference. Perhaps I should formally outsource my thinking to him? Hopefully I have not subconsciously done so.

When a Deal is Not a Deal

Ben Thompson writes:

Swift is doing the exact same thing, which is why the story of her breakup with Big Machine and the question of who was right or wrong ultimately doesn’t matter; Swift, like Chappelle, is taking her masters, whether she owns them or not.

That’s the part that Logan forgot: when it comes to a world of abundance the power that matters is demand, and demand is driven by fans of Swift, not lawyers for Big Machine or Scooter Braun or anyone else.

That is part of a very good analysis of how content creators are ultimately king. The story rankles me some from the standpoint of the ethics of going back on a deal even if the deal was not made under purely power symmetrical terms.

He relates it to NFTs. The persuasive claim he makes is that NFTs derive value from the collective agreement, Arnold Kling would say consensual hallucination, that there is value.

Near the end Thompson concludes:

If the creator decides that their NFTs are important, they will have value; if they decide their show is worthless, it will not. And, in the case of Swift, if she decides that albums are valuable they will be, not because they are now scarce, but because only she can declare an album “Taylor’s Version”.

Annuities - A Troubled Solution in Search of a Problem

Years ago I'm sitting in a San Francisco coffee shop with my wife enjoying breakfast. Without trying to or really wanting to we can easily hear the conversation from a close-by table. It was two young couples. Both were well dressed, but one was decidedly more outgoing and charismatic. One might even describe them as smooth.

They were clearly on travelling together. Somehow their conversation turned to topics that drew my attention. It began innocently enough.

"Well, what are your plans?" or so went the inquiry. "Nobody wants to think about this stuff, but it is important." They were clearly talking about someone who wasn't there. 

"It is hard to know what to do."

"Look, we obviously can't know the future. But with this approach at least you have something to show for it..." Turning to her partner a little too on cue, "Remember Grandma’s experience..."

I don't remember too vividly the exact conversation--I honestly wasn't trying to listen.* It was not a simple case of a couple-friend giving friendly advice. This was a sales pitch. And they were selling the other couple on the idea of long-term care insurance, a type of annuity that has very strict terms regarding when it will be paid along with sharp limits on how much and long payment will occur. 

LTC insurance plans are not bad per se. They can work in practice; though they more frequently work in theory. While I didn't know all the relevant facts in this situation, and it was none of my business regardless, the conversation frustrated me. In fact I was offended. Why?

I was offended because they were using emotion to solve a math problem. Well, more precisely they were disguising an emotional pitch as if it were a math problem, pretending it was a math problem, and not doing or even hinting at any math! 

Presumably there would be some assumption-laden work-up presented at some point before signing on the dotted line. Let's charitably assume there was--that all we were witness to was the initial hook. Regardless, I resented both the approach and the fact that it appeared to be working.

It was a learning moment for me. As analytical as I want things to be, the truth is humans are emotion-driven beings. Many of our decisions are based on feelings. We seek social desirability and find comfort in confirmation. 

This is why confident people are charming. Especially it is so when they are selling us something. 

How you say it versus what you say--delivery versus content. They will remember how confident they were in you long after they have forgotten what you actually said. 

I remembered this story as I read this recent piece from Vanguard, Guaranteed Income: A Tricky Trade-Off. From the summary bullet points:

The math is clear. A certain income can leave retirees better prepared for an uncertain lifetime. But retirees’ reluctance to annuitize suggests that the irrevocable decision to exchange liquid wealth for guaranteed income is about more than math.**

It is not too much of an exaggeration to say that there are two types of people in the financial products industry: those who sell annuities and those who detest them. A derogatory but perhaps not unfair way of describing annuities is to say that they are never bought always sold. Another is that the primary beneficiary on a variable annuity is the sales person.

Annuities work extremely well in theory. They are straightforward instruments that spread risk and smooth income. 

In practice they are extremely complicated, notoriously misleading, and very expensive. There are exceptions. The regulations around them have improved the situation some, but I would argue strongly that this is a second-best solution behind simply allowing more competition in the industry in the first place. World-class fine dining in Napa Valley isn't because of world-class restaurant regulation. 

If you're paying attention, you'll have noticed a paradox. I started by showing that people often use emotion to sell a financial solution but then argued that emotion is keeping people from adopting those same financial solutions. But that really isn't a mystery. If people are reluctant to listen to the clear math supporting annuitizing future income, it stands to reason that emotion will be perhaps necessary to get them over the hump. 

*In fact they were so bad at attempting to be discrete that I can only assume we too were part of the sales audience.

**The Vanguard piece points to fear of regret and a strong bequest motive as the major obstacles to annuity adoption. I liked their analysis, but I don't think they sufficiently considered just how few good, honest annuity options there are. Hard to buy what isn't being sold--especially with fair options that do leave bequests. And it is harder and harder to sell them. Whether deserved or not (it is definitely deserved!), annuities have been given a bad name by all the many investment advisors who rail against them.