Monday, January 20, 2020

What is Holding You Back?

Partial list of things I would do if I had more time and/or more money.

Each should be viewed independently. The substitution among them would either imply even more time/money is needed or they simply would not be done any more than they are currently as they compete for room in my basket of things.

Of course, more money almost always can buy more time, but I've chosen to focus here on those things for which time and/or money is the essential scarce resource.

[edited to add] These are in no particular order--just listed as they came to me.

The Things I Would Do More But For...
More Time
More Money
Sports (attending)
Sports (participating)
Food (quality)
Podcast Listening
Podcast Creating
Investing (private equity and other assets with consumption value)
Clothing (quality more so than quantity)
Gaming (video and board)
Wander, Tinker, and Explore

*Look for a future post on philanthropy in which I chastise the field and narrowly define that which passes the "Shazam Test" (TBD). Include in this category advocacy.

Saturday, January 18, 2020

My Plan for a Much Better College Football

Now that a season is behind us, let's dream of a better world. In this case I am limiting the thought experiment to the competitive structure of the college football game leaving aside the ever-important and (thankfully) increasingly popular discussions of allowing players to more fairly benefit financially from their contributions.

The three key features I would envision for the highest level of college football are:

  1. Create a true Power 5 - an elite 60-team top division of football comprised of FIVE 12-team conferences
  2. Continue the 12-game regular season - standardize 8 conference games and a maximum of 2 non-conference opponents outside of Power 5
  3. Crown a champion using an 8-team playoff  - conference title game winners get automatic playoff berth; 3 at large playoff teams determined by CFP committee (see below)
The CFP committee would be comprised of 25 members chosen by the conferences (each conference gets 5 members). The committee members' individual votes would be secret but the discussions in committee would be eventually fully released to the public after the season and playoff concluded. There would be no abstentions or exiting of the room when a member's affiliated school was discussed or any other charades to pretend there isn't bias. Rather, biases would be out in the open for all to examine and take into account. 

In regards to the establishment of a Power 5, we have to consider who is in and who is out. There are currently 130 FBS football teams (the highest level in college football). It is clear this is too many if we mean to group teams competitively. Just about any early-September match up reveals this outside of the handful of games designed to be competitive. Much of conference play itself reflects Have vs. Have Not. 

I would suggest a system where by teams bid to own a seat in the Power 5. The process might be something like the highest 60 bidders would pay the 60th highest bid amount plus 10% of their own bid amount into the pool. The bottom 70 teams would receive out of the pool 50% of their bid amount. Essentially, we would want to elicit from teams good information about how much they value football and how valuable football is to them. The remainder of the pool would be returned to the winning bidders in proportion to their bid size.

For example, say Texas is the top bidder at $200 million, Washington is the 60th bidder at $60 million, Kansas is the 61st bidder at one dollar less than $60 million, and Akron is the 130th bidder at $15 million. In that case Texas pays in $80 million ($60mil plus 10% of $200mil), Washington pays in $66 million, Kansas receives out $30 million (50% of ~$60mil bid), and Akron receives out $7.5 million.

Teams would be able to sell their seat with 50% of the sale price going to the selling team and the remaining 50% equally distributed to the other 59 seat-owning teams. Again, we want to know who should be in the Power 5 on an on-going basis and have a good incentive system to do so. Perhaps this is too capitalistic for American sports, which have always had a strong socialistic tendency as opposed to European sports where relegation rules soccer and revenue sharing and spending limits are less prevalent. But were dreamin' here . . .

A comment on the playoff to determine a champion every season: There exists a tension between a judgment-based approach (AP poll, BCS, CFP committee) and a merit-based approach (computer polls, conference champions feeding playoff). We can have a certain process of crowning a champion or a certain outcome of who is crowned. These two goals cannot both be realized in all cases. Usually there is a tradeoff between them. If we don't clearly define it ex ante, the ultimate criteria people want to use is fluid and subject to biases and inconsistencies. If we do clearly define the criteria out front, we tie our hands. Either approach has a degree of feature and bug. Remember before you condemn any outcome (actual or hypothetical) that we are dealing with sample sizes of 13 just to get into the playoff if we keep a 12-game season plus conference title game. For only the two teams in the championship game of an 8-team playoff do we even get to a 16-iteration test. We NEVER know as much about how good teams actually are as we think we do. In fact one could argue that in today's college football we know less than that implies given that so many games are nonsense gimmes against gravely inferior opponents. Because of this the only system I think we can justify is a structured conference feeder to a multi-team playoff. We can't possibly know who the best team is or even who the best teams are. The best we can do is define the process of earning a title and hope (with confidence) it matches up for who the best teams are most of the time.

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.

Tuesday, January 14, 2020

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. 

Sunday, January 12, 2020

52 Things I Learned in 2019

I would like to think that I learned more than 52 things last year. Nevertheless, here are 52 notable ones.

1. "The British Empire At Its Territorial Peak Covered Nearly The Same Area As The Moon".

2. Manhattan reached its peak population about 100 years ago.

3. The Millennial Generation exhibits preferences for consumption that are very similar to previous generations. This includes a demand for cars, work preferences, and where to live (suburbs versus the high-density urban core).

4. Army ants "commit" suicide.

5. A quantum physics experiment suggests that objective reality doesn't exist. (categorize my "learning" this as superficial at best)

6. The average state prisoner's time served in prison is surprisingly low.

7. The asteroid that about sixty-six million years ago struck the Yucatán peninsula killed over 99.9999% of all living things and unleashed the energy of about 1,000,000,000 Hiroshima bombs.

8. "The vast majority of roads in Sweden and Finland are operated by the private sector and maintained by local communities".

9. Speaking of socialist paradises, Sweden sharply rejected socialism decades ago in favor of capitalism.

10. All perching bird species, about 60% of all birds, may have come from Australia.

11. "Books don't work".

12. Pork Bellies Futures stopped being traded in 2011. Better tell The Dukes.

13. Girl's comparative advantage in reading can explain the math gender gap. I learned a lot from Alex Tabarrok this past year.

14. Adding to the number of whales in the oceans could significantly help reduce CO2.

15. Speaking of whales, the Soviet Union illegally killed over 180,000 whales simply to say they did it.

16. It is overall faster, safer, and more efficient for people to stand rather than walk up the escalator.

17. A great use case for blockchain is insurance markets.

18. Total energy use in the United States is essentially flat for the last decade. And this amazing trend is true of many other resources despite the economy bring much larger today.

19. Mathematicians actually have a system to rate how "crackpot" a theory is.

20. I knew it is false that we only use about 10% of our brain, but I did not know a lot of these neuromyths including that it is false that Individual learners show preferences for the mode in which they receive information (e.g., visual, auditory, kinesthetic).

21. There are perhaps "600 new academic philosophy articles and books written per week in the English-speaking world, or over 30,000 a year".

22. Breathalyzers should not be trusted.

23. Rod Stewart is into model trains.

24. Injuries should be moved (not rested), allowed inflammation (don't ice)--RICE is a myth. More here.

25. You CAN yell "FIRE!" in a crowded theater. This has never been a First Amendment exception in the law.

26. Converting "dog years" to "human years" is not dog age in years times seven, but there is a way to do the conversion.

27. Pasta should be made starting in cold water--not dropping it into boiling water like so many recipe boxes say.

28. The Eiffel Tower, the tallest building in the world for more than 40 years, was built in 2 years and 2 months at a 2019 cost of only about $40 million. There are more amazing speeds of things being brought to life at the link.

29. About 30,000 people each day escape poverty.

30. Turkeys (birds) are named after the country.

31. The main benefit of circumcision is a potentially significant reduction in the risk of penile cancer.

32. The magnitude of personality differences between males and females is large and significant.

33. Sydney, Australia has more foreign-born residents than all of mainland China.

34. Germany owns no nuclear weapons itself, but it does have U.S. nukes that it can use at a moment's notice.

35. The Pilgrims' first encounter with a Native American was him asking if they had any beer.

36. The cost of a standard Thanksgiving dinner was virtually unchanged from 2018 to 2019 rising just one penny.

37. Blind people can hear at an extraordinarily high speed.

38. U.S. life expectancy peaked in 2014, and the death rate of middle-aged Americans has risen for three straight years.

39. Andrew Garrido learned to play the piano without a piano and is now at one of the world’s leading conservatoires.

40. The finest chocolate should be eaten by letting it melt in your mouth never chewing.

41. The placebo effect works even when you tell people they are using a placebo.

42. The nuclear ban in Japan following Fukushima killed more people due to higher electricity prices than the nuclear accident itself.

43. It is a myth that Van Gogh only sold one painting in his lifetime.

44. "Take Me Out To The Ballgame" is about a single woman who loves baseball and is bucking societal norms. As such, it should be celebrated for its pro-feminist message.

45. It is NOT true that failing to take an entire prescribed antibiotic course risks antibiotic-resistance in bacteria.

46. Brazil has more than 60,000 murders per year--more than a good share of the rest of the world combined.

47. The average age for founding entrepreneurs at companies that go on to hire at least one employee is 41.9.

48. World War I was not the deadliest war up to that point--the Taiping Rebellion some 50-years before it was much worse.

49. In 2003 a group of young artists built a secret apartment inside a mall in Providence, RI and lived in it for days at a time for years.

50. Most modern practices and rules of dentistry have very weak to no scientific basis.

51. Hundreds of American cities are (thankfully) abandoning recycling efforts.

52. And finally:
I'm already well into learning things in 2020. I hope you are too!

Saturday, January 11, 2020

Disease Diagnosis - 2019 New Year's Resolution fulfillment

With the unintentional help of Alex Tabarrok and Eric Helland, I fulfilled my annual New Year's Resolution to change my mind on something. Specifically, I changed my mind:
That the runaway cost increases in higher education over the past several decades were simply due to third-party funding (spending other-people's money by the education-industrial complex (Big Chalkboard)). It turns out there is a much more elegant, though less tribally satisfying, answer: the Baumol Effect (aka, Cost Disease).
If relative productivity doesn't rise in a sector for which demand is rising, prices in that sector must rise relative to the sectors for which productivity is rising. This elegant explanation applies to health spending as well. Here is Tabarrok on the prototypical example:
The Baumol effect is easy to explain but difficult to grasp. In 1826, when Beethoven’s String Quartet No. 14 was first played, it took four people 40 minutes to produce a performance. In 2010, it still took four people 40 minutes to produce a performance. Stated differently, in the nearly 200 years between 1826 and 2010, there was no growth in string quartet labor productivity. In 1826 it took 2.66 labor hours to produce one unit of output, and it took 2.66 labor hours to produce one unit of output in 2010.
Fortunately, most other sectors of the economy have experienced substantial growth in labor productivity since 1826. We can measure growth in labor productivity in the economy as a whole by looking at the growth in real wages. In 1826 the average hourly wage for a production worker was $1.14. In 2010 the average hourly wage for a production worker was $26.44, approximately 23 times higher in real (inflation-adjusted) terms. Growth in average labor productivity has a surprising implication: it makes the output of slow productivity-growth sectors (relatively) more expensive. In 1826, the average wage of $1.14 meant that the 2.66 hours needed to produce a performance of Beethoven’s String Quartet No. 14 had an opportunity cost of just $3.02. At a wage of $26.44, the 2.66 hours of labor in music production had an opportunity cost of $70.33. Thus, in 2010 it was 23 times (70.33/3.02) more expensive to produce a performance of Beethoven’s String Quartet No. 14 than in 1826. In other words, one had to give up more other goods and services to produce a music performance in 2010 than one did in 1826. Why? Simply because in 2010, society was better at producing other goods and services than in 1826.
The 23 times increase in the relative price of the string quartet is the driving force of Baumol’s cost disease. The focus on relative prices tells us that the cost disease is misnamed. The cost disease is not a disease but a blessing. To be sure, it would be better if productivity increased in all industries, but that is just to say that more is better. There is nothing negative about productivity growth, even if it is unbalanced.
And this has very interesting implications. Tabarrok again:
  • The Baumol effect predicts that more spending will be accompanied by no increase in quality.
  • The Baumol effect predicts that the increase in the relative price of the low productivity sector will be fastest when the economy is booming. i.e. the cost “disease” will be at its worst when the economy is most healthy!
  • The Baumol effect cleanly resolves the mystery of higher prices accompanied by higher quantity demanded.
Note that this does not change my view that we have inappropriately encouraged too many people to go to college and we have pushed and pulled too many resources into that chasm. Other-people's money and wishful thinking are still in play (as this discussion with Bryan Caplan indicates). But it seems they are only contributing and potentially secondary factors.

See here for lots of brief blog posts. See here, here, and here for very good podcasts on the study.

Friday, November 15, 2019

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.