Two Methods of Improvement

Let's compare two general methods of improvement: 

1. Truncating the left tail so as to eliminate the undesired portion of the distribution
2. Increasing the distribution so as to grow (fatten) the right tail and therefore increase the desired portion of the distribution. 

Both methods have the effect of shifting the mean rightward. But the first is artificial.

Let's explore the first method. People paid primarily for their looks are an example of truncating the left tail. (One might be tempted to say “supermodels”, but that is a particular, specialized subclass of this universe. It is like saying basketball players when we are actually talking about athletes.) They exist within a distribution of attractiveness (subjectively considered as that is the only way) that simply has lopped off most or all of the left side. Some are gorgeous to you; others are gorgeous to me. Some are not so attractive to you while others, perhaps ones you really like, are not so attractive to me. Anyone in particular within this group might be just okay to any random observer. Taking everyone's opinions together as a whole, though, on average gives us an ordered distribution [similar to the theoretical and problematic Keynesian Beauty Contest]. 

When considered from the average observer’s viewpoint, the only thing missing in the distribution are all those who would be below some threshold. In other words the “lowest” (most left) person paid for looks is just an average looking person compared to all of humanity. Because we can’t manufacture attractive people yet, we are forced to use the truncate strategy. 

So the only way to bring about beauty improvement is by leaving out those who are less than some level of beauty (I used eliminated everyone below the average beauty score in the example). So we can get there, but it is artificial--we just left out the less than "beautiful", whatever that actually means in this hypothetical.

Now think about wealth. How do you increase average societal wealth? This is problem from a different realm because unlike beauty where we are currently limited to some degree of diet control, physical fitness training, and plastic surgery we can move wealth around. 

In the case of wealth what is the better path: Minimizing the impact of bad ideas (truncating the left tail via redistribution) or increasing the rewards for good ideas (fattening the right tail)? 

Bailing out bad ideas has moral hazard risks--we are subsidizing bad ideas. When you subsidize something, you get more of it. Taken to the extreme income redistribution is not sustainable. The system collapses in on itself through actual complete resignation (a dead-end Nash equilibrium) or deliberate exit (John Galt). Because of this, we are forced to use the grow the distribution strategy. 

Notice how this distribution is truncated and non normal (there is a minimum at 70 and the distribution has a right skew). No one is below some level of actual wealth (even debtors and prisoners get a meal and a place to sleep). So in some sense I am assuming some of the first strategy--a social safety net of some kind. I wanted to make it more realistically skewed, but time didn't permit. However, we should be careful how easily we succumb to the notion that there are people with true wealth at the far, far reaches of the distribution. Just how rich is Jeff Bezos compared to you or me really, seriously? 

Growing the distribution has a side benefit of minimizing the impact of bad ideas--a kind of resistance to bad ideas having meaningful, lasting impact. Subsequently the opportunities for good ideas are increased since this method is positive sum (it grows the pie) while the former strategy is zero sum and eventually negative sum if taken too far.

Am I assuming too much? I really don't think so. 

Unfortunately, advocacy for method two is unpopular because of social desirability bias. People don't want to admit that they want the rich to get richer. Or worse yet, they think letting the rich get richer somehow makes us all worse off. 

Dynamic versus Static Investments

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

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

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

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

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

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

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

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

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

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

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

Consider this stylized linear example: 

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

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

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

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

The Surprising Truth About the 2016 Election

Which major political party of the late 1950s won the US presidency in 2016? It turns out the 1960 Democratic Party won both the 1960 election as well as the 2016 one. 

To illustrate why this is true, I recently perused the 1960 Democratic Party platform and the 2016 Republican Party platform selecting key slices for comparison--links below, but read the rest first. While this is certainly subject to lack-of-context and selection biases, I think it is a good glimpse into a larger truth about the evolution of our politics. 

Make no mistake about it, I think this is an overall positive development and not the case of a need to "restore the true Republican Party" etc. As others have pointed out, where Republicans are on many social issues today represents great progress, but the same can be said for Democrats. 

Keep in mind as well that a lot of this is a case of the 'more things change, the more they stay the same', 'nothing new under the sun', and good ole 'will it play in Peoria?'--the resonating American themes are largely constant over time. Perhaps most importantly these documents have always been empty rhetoric. It would be a grand and interesting undertaking to go platform by platform through the years to show all the empty promises and outright contradictions when compared to actual pursuits and results.

With all of this considered, read through the two groups of selections below (after the jump) from the 1960 DNC and 2016 RNC platforms and see if you can identify which is which. Both are excerpted in order as written except the very last paragraph in one as identified. That might give some clue as to the prioritization, but then again it might mislead. Incidentally, in terms of prose having myself read both in their entirety, the 1960 Democrats were both much more succinct as well as streets ahead in elegance.

Being Nostalgic for the Future

Nostalgia is not a fond memory of an accurate past. Rather it is either fond memories of being young, good moments taken out of perspective (over emphasized), or a mythologized history that is not based on fact. 

As the philosopher Billy Joel told us, “…Cause the good ole days weren't always good, and tomorrow ain't as bad as it seems…”.

Put another way and paraphrasing the historian Austin Powers: As much as we might want the future to resemble a fictional past that we are nostalgic for, that is just not in the cards, baby. 

A much more productive and healthy mindset is to be excited about what the future will bring. Think past technological advancements, as great as they should be. The cultural developments will be splendid. 

If we can just get out of its way, there awaits us a brilliant future eager to get here. 

Great News, Everybody! They Are Just Stupid. Not Evil.

Consider this graph from the COVID-19 vaccine page on the CDC's website: 

Notice the red trendline, which is the 7-day moving average of first doses, and how it peaks around April 11. Notice also how it is now as of May 8th (as reported May 13th) lower than it has been at any time since January 12th. 

What happened on April 11th??? Well, that was when the CDC and the FDA began floating concerns about the Johnson & Johnson (Janssen) vaccine. Concerns that would manifest themselves two days later in a "pause" of administration of that particular vaccine. 

From not allowing experimentation and wide-scale testing, to not allowing challenge trials, to insisting on doing their own, slow trials on vaccines, to delaying the information and launch of the vaccines, to not doing first doses first, to not approving the Oxford-AstraZeneca vaccine, to not doing half doses or using more efficient needles, etc. we have seen over and over our medical regulatory state fail us. The cost is unnecessary deaths, unnecessary and compounding hardship (emotional and economic), and deterioration in the confidence people have in public health. 

So how is this great news? Consider this:

Summary of Recent Changes

• Update that fully vaccinated people no longer need to wear a mask or physically distance in any setting, except where required by federal, state, local, tribal, or territorial laws, rules, and regulations, including local business and workplace guidance
• Update that fully vaccinated people can refrain from testing following a known exposure unless they are residents or employees of a correctional or detention facility or a homeless shelter

The CDC and federal officials in general are backpedaling fiercely from every policy and limitation they adamantly were insisting upon over the past several months. It is clear they are in panic mode over the plunging rates of vaccination. They probably correctly understand that there was a coming falloff from both the most vaccine resistant as well as those who had COVID and didn't feel a vaccine was necessary. All of this snowballing against vaccination as cases and deaths decline rapidly.

The great news is they actually do care and don't want a good portion of the U.S. population to die. One would be forgiven for thinking otherwise given the above list of mistakes. But it turns out they are not evil. They just are stupid. Hanlon's Razor for the win!

You May Not Always Believe in Incentives, but Incentives ...

... believe in you.

Progressives are not hesitant to believe that McDonald's, for example, induces consumers to eat at McDonald's. They in fact will in many cases paint a picture whereby McDonald's is insidiously using some kind of mind-control secret sauce to force people to buy and eat lots more of its food than they would otherwise want to. 

What's more progressives tend to believe that many people can't or won't decide for themselves how best to choose something as important as education for their children--especially in a voucher/school choice system that funds students rather than systems. If left up to "them" (so the narrative goes), they would opt for a choice that benefited the parent even if it harmed the child. 

It seems that progressives believe many or most people are bad at making good choices for themselves and easily influenced by convenient temptations. Their worry often is that people will be hapless victims to manipulation in opposition to their own actual long-term interest. 

So why is it so hard for progressives to believe that government programs invite moral hazard and incite poor behavior and bad long-term choices? How is it that they can with a straight face claim unemployment benefits do not impede job search and acceptance? 

Megan McArdle illuminates the problem quite plainly. This is not a new problem with regard to unemployment benefits nor is it unique to it. There are many examples of this phenomenon. We saw the same obstinance the last time unemployment benefits were interfering with economic recovery. Progressives pushed back emotionally and strongly against arguments and evidence like that from Casey Mulligan.

It is as if progressives are not entirely consistent when it comes to believing in the power of incentives.

P.S. Veronique de Rugy was ahead of this problem over a year ago developing a straightforward and MUCH better method for unemployment insurance. From the linked piece:

Personal unemployment insurance savings accounts (PISAs) are designed to maintain a financial incentive to return to work as soon as possible. These accounts are individually owned by workers who, during spells of unemployment, can make orderly withdrawals to partially compensate for the loss to their income but can keep and build the balance during their regular times of employment. At the time of retirement, workers can use the balance in these accounts to bolster their retirement income or transfer to their heirs.

The incentive for workers to return to work is as strong as their desire to keep their own savings for retirement. It is thus a solution that solves the double bind of providing insurance and keeping strong incentives to return to work.

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