Serial Correlation: Patriots Win

The Patriots (that’s my team) beat the Falcons, Tom Brady is the GOAT, Bill Belichick is the GOAT.

How could this have happened?

ESPN’s model had the Patriots as having 0.3% chance of winning at one point, at <1% at more than 20 points.

However, ESPN’s model and many others aren’t properly factoring in serial correlation. Or at least I doubt it, I don’t actually know the inner workings of the model, other than that they use other games in similar situations to project the results.

Serial correlation is essentially the momentum effect. The application in football is thus: it’s unusual for equally matched teams to be separated by a lot of points early in a game, but because it’s a high variance sport, that can happen whether the teams are equally matched or whether one team or the other is superior.

Once one of the teams begins a comeback, if they are actually better than their opponent, they’ll be much more likely than statistics based on other similar games would show to finish the comeback. And there’s a snowball effect, if a team comes back from down 10, they’re likely to be better than their opponent, so more likely to be able to come back from down 14.

That’s because all of the actions the Patriots had to take to come back are related to each other, they’re all team A vs team B, but a sample of similar games played by various teams is going to include more closely matched teams or outmatched teams. But once team A has come back vs team B, it’s more likely that team A is actually beating team B, and will continue to do so. The probabilities have fat tails.

Anatomy of Missing the Point

The entire election and what appears to be at least the next four years have/will be dominated by the same two halves of the country talking past each other in a way that neither of them quite understand.

Let’s use a hypothetical to illustrate the point.

Let’s say the POTUS, a Democrat, were to make a statement comparing the United States to a steaming pile of shit, and assume for the sake of argument, we all agree that’s pejorative.

Now, that President’s detractors, Republicans, are going to say, “whoa whoa whoa, that is simply un-American, and perhaps not true”. Democrats support their leader and point out that while it might be hyperbole, there are certainly things that could be better.

Now the next POTUS, a Republican, makes a statement comparing the United States to Russia, and assume for the sake of argument, we all agree that’s pejorative.

It might not seem like it, but the conditions are in place for a total meltdown of the brains of both sides.

Now the Democrats say, “whoa whoa whoa, you told us that was un-American! Also, that’s un-American!”. The Republicans respond, “It wasn’t so un-American last time, it was an accurate representation of the facts, you have changed your mind to suit the narrative”.

Both sides have now made both arguments, but more importantly, they’re now making the argument that the other side has played both sides of the coin and is either a) now wrong or b) inconsistent and therefore idiotic/puppets of their party. Neither side considers door c) which is of course that the other party is now correct and was incorrect before (and that their idiocy isn’t an unforgivable sin which makes them wrong even when they are right).

We are now stuck in a loop. Welcome to the next four years.

Confirmation Bias

No, the stock market is not ‘finally taking “X” [insert pet cause] seriously’ when there are back to back down days.

Not very many things move the market, and when they do, they almost always move it fast. If your inclination when seeing the market go down 1% is to shout from the rooftops that at last your worldview is vindicated because the markets agree with you, keep in mind there is a 95% chance the market couldn’t care less about whatever you think the problem of the day is.

The market goes up and down — many times for no discernible reason.


Consumption Smoothing

WCI touched on consumption smoothing in a recent post. This is one area where classical economics and real life observation (and behavioral economics) differ greatly.

Consumption smoothing is the act of consuming a more equal amount over your lifetime than just a percent of income or some other measure. The textbook says if you expect your earnings from 40 years old and on to be $1,000,000+ each year, but only $30,000 before that, you should borrow and spend as much as you can get your hands on in your 20s and 30s because you’re probably going to die sleeping on a fat pile of money anyway, so there is no reason to share the kitchen with cockroaches even when you are young and poor.

However, nobody knows the future, and as soon as we start looking even 5 years out, there are so many unknowns that from a stress minimizing perspective, any appreciable attempt to smooth consumption would, at least for me personally, be totally counter productive.

There is also a (puritanical?) values system that suggests living young and lean so that later you can be comfortable and use the optionality you’ve created. This is as opposed to consumption smoothing from the beginning, and getting yourself to a place of negative optionality because you’ve accumulated debt which you have to pay off, limited your future possibilities.

Now, don’t get me wrong, there is certainly some place for consumption smoothing, but as the original link says, moderation is key. When I moved to California after school, I was paying more than 50% of my take-home pay on rent and saving very little at all. This is definitely consumption smoothing in action, as my expenses have increased much more slowly than my (expected and actual) wages since then. However, I’m still early in my career, and classic consumption smoothing models should still have me saving very little, yet that is not my preference.

I’m not sure exactly why not, and haven’t come across (though I expect it exists) a model that describes my utility curve. Something about a very low/negative discount rate on future spending, a desire for optionality early on, and a high aversion to debt.

Jack’s Links

This week, a few links about Trump that won’t cause you to claw your eyes out because of the terrible journalism.

  • Scott Sumner on Trump the mailman: Scott’s main points that Trump doesn’t drive the economy or the stock market, and that he shouldn’t get credit or blame for either, and that a person can be good-neutral for the market and a terrible person are all well made.

The vast majority of my commenters do not know how to read for content; they indulge in mood affiliation.  “Sumner said Trump was horrible, so if Trump does something good, or if stocks rise, then Sumner was wrong.”

In the social media age, observers tend to equate silence with approval, or at least disinterest.  At least in my case, you shouldn’t.  By default, please assume I think all of Trump’s immigration policies are terrible.

Another reason for promoting lying is what economists sometimes call loyalty filters. If you want to ascertain if someone is truly loyal to you, ask them to do something outrageous or stupid. If they balk, then you know right away they aren’t fully with you. That too is a sign of incipient mistrust within the ruling clique, and it is part of the same worldview that leads Trump to rely so heavily on family members.

Trump specializes in lower-status lies, typically more of the bald-faced sort, namely stating “x” when obviously “not x” is the case. They are proclamations of power, and signals that the opinions of mainstream media and political opponents will be disregarded.

Trump on Immigration

With Trump signing an executive order to halt immigration from 7 countries, there is a resounding reaction (at least in my bubble):

Most people are deeply offended by what is pretty obviously a disgusting policy, and yet here we are.

So what is a bad-case here? That the current bans become permanent, that they are expanded, that the federal government grabs more power, that this erodes America’s inherent love of opportunity.

So why does nobody seem to be speaking up? For democrats, it’s easy, they have nothing to gain, they were even laughed at for taking Trump literally before the election.

But what about republicans? There are two possible ‘good’ outcomes here for republicans. #1 is that somehow whatever Trump ends up doing doesn’t cause much damage or backlash or change and this ends up being forgotten. #2 is that after the 90 days are up, there is a relatively thoughtful new framework to put into place so that Trump can claim to continue to be tough on Islam, or whatever he thinks he’s doing, but nothing will change or maybe we’ll even stop a terrorist or two from entering the country. I’m skeptical, but it’s a possibility.

It has been remarkable how weak the response from both sides of the aisle has been on this executive order. I have to think they are either praying to Allah that this will go away by itself, or that they think Trump is digging himself into a hole out of which he cannot climb. The third alternative is too terrible to contemplate.

What’s a Pension Worth?

Someday I’ll write a blog post with the same title and I’ll wax poetic on the piece of mind that comes from fixed income, or the weak bonds that keep the pension system together (thanks PBGC). But today, I’m actually talking about the dollar value of a pension.

You’re a teacher, and you’re about to retire at 65 and get a $50,000 pension. You also saved some money in your 403(b), maybe half a million bucks. If you include your pension, how much have you saved?

In what is surely not a surprise, with a little clever math, we can put a value on it.

The first step is to figure out what you’ve got — a guarantee of $50,000 per year until you die, and usually increasing by the CPI each year. An inflation-adjusted pension.

Someone who worked somewhere that doesn’t have a pension isn’t out of luck, they can buy what you’ve got. It’s called an immediate annuity. They can even buy one with an inflation adjustment. What would they have to pay? Right around $1,200,000.

That’s similar to another rule of thumb we could use to back into a value — how large of a portfolio would you need to be able to withdraw $50,000 per year using the 4% rule? $1,250,000.

So then, we have a value. What does that mean? Well, if we want to, we can reverse-engineer an estimate for what you would have had to have saved over time to get that lump sum.

Let’s imagine you started saving for the last 30 years of your career, from 35-65. If your savings had compounded at 2% per year (quite low), you’d have been putting away $29,580 each year to have $1.2 million at age 65. On the other end, if your savings compounded at 10% per year (quite high), you’d have been putting away $7,295 each year.

That $50,000 per year pension you’ve got was worth something like $7,000-$30,000 per year. Probably quite a hefty portion of your salary.


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My Favorite Interview Question

I have had the (often) enlightening experience of being one of the primary interviewers at a growing firm, and have had the chance to interview dozens of (often) interesting, bright people.

The question I’m probably most known for is a variation on the classic ‘walk me through your thought process for estimating a very large number’ genre of interview question. I won’t go into the details, but as a brief aside, it is shocking to me how many people are complete unaware that this is a genre of question. If your follow-up question is asking me about why I would ever ask such a question, you clearly didn’t do much research on interview questions.

Anyway — most people, in the course of answering my thought process question, start with the population of the world. It would shock you how many people have no idea how many zeroes worth of other people share the planet with them. Over time, I figured out that I think knowing how many other souls are on this little rock we call home is a better indicator to me of the general intelligence (or whatever it is I’m looking for) than even my beloved question.

I’m not sure why that’s the case, it’s a fairly trivial fact that everybody learns at some point in their life, and can probably be searched by speaking at your watch, but somehow it is deeply important. If you don’t know how many people are on the Earth, how can you discuss ‘the bottom billion’? How can you put anything in context? I think this is just one of those facts that people who are great co-workers walk around with.

Frankly, as long as someone knows it’s between 1-10 billion, I’m not sweating it. They are nervous, it’s been a long day, whatever. But when someone can get within a billion or so of the actual population, it stands out to me more than I ever thought it would.

Dow 20,000! We did it!

I’m just kidding, nobody cares about arbitrary round numbers that we happen to have passed on an index that kinda sorta measures growth of big companies in America.

And may god help you, if like Business Insider, you post a graph of 100+ years with a linear instead of log y-axis.

djia landmarks COTD

I have to admit, though, if a year ago you told me Trump would be President and we’d be at Dow 20,000, I’d have thought you were totally off your rocker.

By the way, if the Dow goes up by 10% per year, we’ll be at Dow 100K right around the end of 2033. If it goes up by 5% it’ll be right at the beginning of 2050. Compound interest, you crazy.

Book Highlights: Capitalism, Socialism, and Democracy, Schumpeter, (Part 2.2: Can Capitalism Survive?)

  • The conquest of the air may well be more important than the conquest of India was—we must not confuse geographical frontiers with economic ones.
  • Thus agricultural countries or regions may lose permanently by the competitive synthetic products (rayon, dyes, synthetic rubber for instance), and it may be no comfort to them that, if the process be taken as a whole, there may be net gain in total output.
  • But we cannot reason in this fashion about the future possibilities of technological advance. From the fact that some of them have been exploited before others, it cannot be inferred that the former were more productive than the latter. And those that are still in the lap of the gods may be more or less productive than any that have thus far come within our range of observation.
  • But for us the negative result suffices: there is no reason to expect slackening of the rate of output through exhaustion of technological possibilities.
  • Some economists have held that the labor force of every country had to be fitted out at some time or other with the necessary equipment. This, so they argue, has been accomplished roughly in the course of the nineteenth century. While it was being accomplished, it incessantly created new demand for capital goods, whereas, barring additions, only replacement demand remains forever after.
  • The period of capitalist armament thus would turn out to be a unique intermezzo after all, characterized by the capitalist economy’s straining every nerve in order to create for itself the necessary complement of tools and machines, and thus becoming equipped for the purpose of producing for further production at a rate which it is now impossible to keep up.
  • Was there no equipment in the eighteenth century or, in fact, at the time our ancestors dwelled in caves? And if there was, why should the additions that occurred in the nineteenth century have been more saturating than any that went before? Moreover, additions to the armor of capitalism are as a rule competitive with the preexisting pieces of it. They destroy the economic usefulness of the latter. Hence the task of providing equipment can never be solved once for all.
  • barring possible disturbances in the saving-investment process which it is the fashion to exaggerate—no
  • no different in the case of devices that economize outlay on capital goods per unit of the final product. In fact, it is not far from the truth to say that almost any new process that is economically workable economizes both labor and capital. Railroads were presumably capital-saving as compared with the outlay that transportation, by mailcoach or cart, of the same numbers of passengers and of the same quantities of goods that actually are being transported by railroads now would have involved.
  • Those who hope to see capitalism break down solely by virtue of the fact that the unit of capital goes further in productive effect than it used to, may have to wait long indeed.
  • First, with increasing wealth certain lines of expenditure are likely to gain ground which do not naturally enter into any cost-profit calculation, such as expenditure on the beautification of cities, on public health and so on.
  • When the habit of rational analysis of, and rational behavior in, the daily tasks of life has gone far enough, it turns back upon the mass of collective ideas and criticizes and to some extent “rationalizes” them by way of such questions as why there should be kings and popes or subordination or tithes or property.
  • First it exalts the monetary unit—not itself a creation of capitalism—into a unit of account. That is to say, capitalist practice turns the unit of money into a tool of rational cost-profit calculations, of which the towering monument is double-entry bookkeeping.4
  • This element has been stressed, and more suo overstressed, by Sombart. Double-entry bookkeeping is the last step on a long and tortuous road. Its immediate predecessor was the practice of making up from time to time an inventory and figuring out profit or loss; see A. Sapori in Bibhoteca Storica Toscana, VII, 1932.
  • it is a vital fact to notice that rational bookkeeping did not intrude into the management of public funds until the eighteenth century and that even then it did so imperfectly and in the primitive form of “cameralist” bookkeeping.]
  • The rugged individualism of Galileo was the individualism of the rising capitalist class. The surgeon began to rise above the midwife and the barber. The artist who at the same time was an engineer and an entrepreneur—the type immortalized by such men as Vinci, Alberti, Cellini; even Dürer busied himself with plans for fortifications—illustrates best of all what I mean.
  • Precapitalist economic life left no scope for achievement that would carry over class boundaries or, to put it differently, be adequate to create social positions comparable to those of the members of the then ruling classes. Not that it precluded ascent in general.5
  • But business activity was, broadly speaking, essentially subordinate, even at the peak of success within the craft guild, and it hardly ever led out of it. The main avenues to advancement and large gain were the church—nearly as accessible throughout the Middle Ages as it is now—to which we may add the chanceries of the great territorial magnates, and the hierarchy of warrior lords—quite accessible to every man who was physically and psychically fit until about the middle of the twelfth century, and not quite inaccessible thereafter.
  • At that I could leave this point if radical liturgy did not consist largely in picturesque denials of what I mean to convey. Radicals may insist that the masses are crying for salvation from intolerable sufferings and rattling their chains in darkness and despair, but of course there never was so much personal freedom of mind and body for all, never so much readiness to bear with and even to finance the mortal enemies of the leading class, never so much active sympathy with real and faked sufferings, never so much readiness to accept burdens, as there is in modern capitalist society; and whatever democracy there was, outside of peasant communities, developed historically in the wake of both modern and ancient capitalism.
  • Again plenty of facts can be adduced from the past to make up a counterargument that will be effective but is irrelevant in a discussion of present conditions and future alternatives.8
  • And it cannot be replied that “those were different times.” For it is precisely the capitalist process that made the difference.
  • As a matter of fact, the more completely capitalist the structure and attitude of a nation, the more pacifist—and the more prone to count the costs of war—we observe it to be.
  • The armored knights practiced an art that required lifelong training and every one of them counted individually by virtue of personal skill and prowess. It is easy to understand why this craft should have become the basis of a social class in the fullest and richest sense of that term.
  • The centerpiece, the king, was king by the grace of God, and the root of his position was feudal, not only in the historical but also in the sociological sense, however much he availed himself of the economic possibilities offered by capitalism. All this was more than atavism.
  • we might well wonder whether it is quite correct to look upon capitalism as a social form sui generis or, in fact, as anything else but the last stage of the decomposition of what we have called feudalism.
  • And we have finally seen that capitalism creates a critical frame of mind which, after having destroyed the moral authority of so many other institutions, in the end turns against its own; the bourgeois finds to his amazement that the rationalist attitude does not stop at the credentials of kings and popes but goes on to attack private property and the whole scheme of bourgeois values.
  • Why, practically every nonsense that has ever been said about capitalism has been championed by some professed economist.
  • rational recognition of the economic performance of capitalism and of the hopes it holds out for the future would require an almost impossible moral feat by the have-not.
  • In the short run, it is profits and inefficiencies that dominate the picture. In order to accept his lot, the leveler or the chartist of old would have had to comfort himself with hopes for his great-grandchildren. In order to identify himself with the capitalist system, the unemployed of today would have completely to forget his personal fate and the politician of today his personal ambition. The long-run interests of society are so entirely lodged with the upper strata of bourgeois society that it is perfectly natural for people to look upon them as the interests of that class only.
  • Secular improvement that is taken for granted and coupled with individual insecurity that is acutely resented is of course the best recipe for breeding social unrest.
  • Intellectuals are in fact people who wield the power of the spoken and the written word, and one of the touches that distinguish them from other people who do the same is the absence of direct responsibility for practical affairs. This touch in general accounts for another—the absence of that first-hand knowledge of them which only actual experience can give. The critical attitude, arising no less from the intellectual’s situation as an onlooker—in most cases also as an outsider—than from the fact that his main chance of asserting himself lies in his actual or potential nuisance value, should add a third touch.
  • Charles V was a devoted husband but, during his campaigns which kept him from home for many months at a time, he lived the life of a gentleman of his time and class. Very well, the public—and what particularly mattered to Charles, his empress—need never know, provided arguments of the right kind and weight were duly handed to the great critic of politics and morals. Charles paid up. But the point is that this was not simple blackmail which in general benefits one party only and inflicts un-compensated loss on the other. Charles knew why he paid though doubtless it would have been possible to secure silence by cheaper if more drastic methods. He did not display resentment. On the contrary he even went out of his way to honor the man. Obviously he wanted more than silence and, as a matter of fact, he received full value for his gifts. [5Pietro Aretino, 1492-1556.]
  • Cases in which among a dozen applicants for a job, all formally qualified, there is not one who can fill it satisfactorily, are known to everyone who has anything to do with appointments—to everyone, that is, who is himself qualified to judge.
  • Thus, though intellectuals have not created the labor movement, they have yet worked it up into something that differs substantially from what it would be without them.
  • The most glamorous of these bourgeois aims, the foundation of an industrial dynasty, has in most countries become unattainable already, and even more modest ones are so difficult to attain that they may cease to be thought worth the struggle as the permanence of these conditions is being increasingly realized.
  • the reader need only visualize the situation in a thoroughly practical spirit: the successful man or couple or the “society” man or couple who can pay for the best available accommodation in hotel, ship and train, and for the best available qualities of the objects of personal consumption and use—which qualities are increasingly being turned out by the conveyor of mass production3—will,
  • In any case there are no purely economic reasons why capitalism should not have another successful run which is all I wished to establish.]