I have two gift recommendations for you this year. Typically, I purchase a lot of very practical items. My wife makes fun of me for requesting tools and hardware as gifts – but hopefully the following list will provide some crossover between practicality and good gift ideas.
Depending on your family’s traditions both of these gifts are stocking stuffers.
1) Laurie Berkner CDs
Having children means that you hear opinions and preferences from more people. And children are sure to share those opinions. When you’re in the car, I recommend that you strike first with 2 different CDs (or mp3 albums) by Laurie Berkner. Laurie Berkner is a singer songwriter who creates outright good children’s music. She has variety and produces earworms that are not too bad to have around. The Ultimate Laurie Berkner Band Collection is a crowd-pleaser. If you’ve got a more intense personality and your children can handle it, then I strongly recommend The Dance Remixes. It rocks.
The idea here is game theoretical. Your children are going to find something that they like. A lot. Odds are good that waiting for them to encounter something won’t bode well for your happiness once they find it. Take the first-mover advantage and introduce them to Laurie Berkner. They’ll get hooked and you’ll be stuck listening to a lot of children’s music. But at least it will be good/tolerable that you also enjoy… Unlike some other alternatives…
2) Highly Specific Treats
We live in a rich society. Most of us walk the store aisles implicitly saying ‘no’ to the vast majority of goods. Even the ones that we like. Take the opportunity that the holiday season provides and say “yes” to getting some special treats. These treats fall into two categories: 1) “Nostalgic Treats” & 2) “I’ve never tried it”.
1) Sharable Nostalgic Treats
When I was about 4-5 years old, I remember getting great big bags of pretzels that were covered in a mustard powder (“mustard pretzels”). As it turns out, they are only a regionally available product and I never saw them again after my family moved from Tennessee. But 33 year old me thought “Surely, the internet has them”. And indeed they do! I made this purchase at a per-unit price that I would not typically indulge. However, I got to share the story and the experience with my family. It pleased me to share a deep memory with them and it pleased them to get a ‘special’ snack. For me, it was mustard pretzels. For my wife, it was a bulk pack of Heath and Skor bars.
2) I’ve never tried it
Separately, while watching Captain America and the Winter Soldier, it occurred to me that I had never knowingly had Turkish Delights. So, I found a variety pack of fancy ones. First, they’re delicious and you feel fancy while eating them. Second, this is 21st century America. What’s the point in saying that we’re rich if we’re not willing to act like it a little? Maybe it’s not Turkish Delights for you. Maybe it’s Pilipino rice candies or Mexican Tamarind candies. Make sure that you get a couple of new treats and share them with others. The purchases are much more worth the price when you consider the nested utility function among your loved ones.
One soccer manager is over-exhausting their resources because of a confluence of bad contractual incentives while another team is witnessing a renaissance in a player they essentially forced to take 7 weeks off. While so many NBA careers of the 80s evaporated in a cloud of cocaine and clubbing, Lebron James’ entire life is built around managing the only two resources whose limits are salient to his life: his body and relationship with his family. Playing baseball growing up I watched pitchers blow out their arms before they finished puberty in service to Little League glory, while modern professional pitchers are (finally) on strictly managed pitch counts to maximize their expected output.
There are two manners in which I armchair quarterback the rest of the world. One is the things in which I have just enough knowledge to be frustrated by others decisions, but no so much as to actually know what I am talking about. These frustrations are ephemeral, they flatter myself to the point of mild embarrassment upon reflection, and, if I am being honest with myself, are fun.
The other manner is resource management. These are the times when armchair quarterbacking is less fun and more exasperating because they are the moments when outsiders, with inferior levels of narrowly-applicable expertise, are often actually right. Which is not to say the knowledge that resources are being poorly managed is uniquely held by outsiders. Insiders are more often than not quite aware of the suboptimal deployment and conservation of resources, but are unable to overcome the status quo institutions, incentives, or inertia of decision-making power loci. It’s obvious to lots of people that athletes, CEOs, doctors, and congressional representatives are over-extended. What’s not obvious is how to get out of these equilibria.
When I see most attempts at self-improvement, I am generally skeptical of anything that doesn’t start with the identification of a key resource that is salient to outcomes and the options available to better manage it. Maybe its calories and how to budget them. Maybe its time and how to better partition and conserve it. It could always be money, but in general I find that money is so immediately identifiable as a finite resource and entirely fungible that people who ostensibly are managing it poorly are, in actuality, failing at managing a different resource (time, emotional energy, vices, etc) that is intertwined with financial resources.
When I see successful firms, teams, and individuals, what I most often find myself admiring is not (just) a worldly talent, but a facility with managing resources that others haven’t yet adopted or mimicked. An appreciation for sleep, a protection of time blocked for creativity, an adeptness trading low opportunity competitive minutes for higher opportunity cost moments on the biggest stages. Or even just the ability to recognize that this is the moment to savor a 600 calorie dessert with a loved one because the emotional sustenance will make it easier to walk away from three vending machine Hostess pies during the high-stress moments in the week to come.
Once you learn to manage your donut-based caloric intake, the spreadsheet of your life will be revealed before you, an endless cascade of resources to be managed and optimized. A life with the right donuts at the right time. Thedolce vita economica.
For those who didn’t know, as part of the American Rescue Plan, there were some changes made to the Child Tax Credit (CTC) for the tax year 2021.
First, the credit was expanded from $2k to $3,600 per child for children under 6 years of age (to $3k otherwise). It’s also fully refundable.
Second, half of the credit is being disbursed to tax-filers early: over the latter 6 months of 2021.
What does this mean?
For context, I have 3 children all under that age of 6. My total 2021 CTC is $10,800. Half of that is being distributed as monthly checks from July through December. For me, that’s a check for $900 per month that I had not anticipated. While it is true that I will see less of a remaining credit when I file my taxes by April of 2022, I strongly suspect that most similar households are somewhat short-sighted about these funds.
Depending on the number of children in a household, the monthly check from the IRS can be quite significant. From the parent point of view, there has been a lump-sum transfer. There is no endogenous response to obtain more children – there’s no time for that. The transfer also occurs regardless of any activities, economic or otherwise. In essence, tax-filers with children have experienced a positive income shock.
The big question is: What is the effect on employment?
In one sense, the effect is ambiguous and depends on preferences: People can now afford more leisure and more consumption. How they engage in more of each is a matter of preference. But, given that both are goods, both will increase by some amount.
That’s my simple model. I hereby make multiple predictions:
Parents with children will have consumed more in the 3rd and 4th quarters of 2021.
Parents with children will have lower employment growth for those quarters.
The effects will be stronger for parents with children under 6 years of age.
The employment rebound in the 1st quarter of 2022 will be stronger for these groups (and stronger than forecasted overall).
Finally, while I’m feeling silly enough to make predictions publicly, I predict slower growth in consumer durable expenditures in 2022 Q1.
I looked at the BLS for data to corroborate my predictions. Excitingly, the Current Population Survey (CPS) does slice the data by sex, age, and age of own children (conveniently by younger than 6 and 6-17 years of age). This is where I post the great visual to demonstrate the veracity of my claims, right?
Players are breaking down breaking down, which may not be of any particular interest to you, but it seems odd considering that modern nutrition and sports medicine has NBA and NFL players competing at later ages than previously considered possible. I’ll go farther and suggest there is a growing sense in soccer that outfield players (i.e. not goalies) are peaking earlier, particularly in the physically demanding English Premier League. What is happening in soccer that isn’t happening in other sports?
A professional soccer players runs about 6 miles (10 km) a game. They do so in a series of sprints and stops, all while humans with deadly pistons for legs kick at them repeatedly. Even without getting into the costs of repeatedly of striking the ball (and sometimes other craniums) with your skull, it is hard to overstate the cumulative toll on soccer players and their bodies.
Over the course of the 2020-21 English Premier league season, Pierre Emil-Hojbjerg played 53 games for his club and 12 games for the Danish national team. Son Heung-Min has flown 140,000 miles over the past 3 years to play for his club and the South Korean national team. The most prominent coaches in the world are adamant that their players are being asked to do too much. So, if we know that the players are breaking down, some of the most prominent figures in the sport think they know why they are breaking down, and the players are highly compensated employees who are themselves highly valued assets for their contracting clubs, why hasn’t this problem already been fixed? In two words: property rights.
Professional footballers have become a common pool resource. And if there is one thing we know about commons is that they often suffer a tragic outcome. See what I did there?
Long story short, the “Tragedy of the Commons” occurs when property rights to a good are either lacking entirely (i.e. fishing rights in the Atlantic Ocean) or incomplete (i.e. irrigation systems, professional soccer players). While it would be everyone’s interest to limit total usage to maintain the long-run sustainability of the resource in question, without property rights any individual has incentive to claim as large a portion of the resource as possible in the short run (i.e. catch as many fish as much as possible, use a player as much as possible), even if that means the resource in question is destroyed, preventing future use.
The English Football Association pays it’s national team players about 2,000 pounds per match played. When you consider that nearly all of it’s players earn in excess of 100k pounds per week from their club teams, it’s a pittance. How does the English FA get these players so cheap? Partly because they are paying the players in honor and prestige and glory and even more honor, partly because of the stigma and shame that would be levied against them if they refused the social obligation to play for their country. It’s a pretty amazing racket for FIFA (International) and UEFA (European) associations, through which 100s of millions of dollars/pounds are funneled while paying pennies to the players.
For a top player, each year is filled with final and qualifying matches for international tournaments (World Cup, European Championships, Confederations Cup, the League of Nations,…), two or three different league tournaments, and 38 games of regular league play. On top of this are the international “friendlies” that are played whenever the players might actually enjoy a break. As if designed to prove my point, FIFA has proposed having the World Cup every 2 years (instead of 4), which would only increase the load. If this sounds ridiculous, consider it from FIFA’s point of view. As far as they are concerned, player bodies are the lowest cost input in their enterprise. They don’t value the players because they don’t have to.
We shouldn’t let the clubs off the hook completely, either. Yes, they have contracts with the players, which makes them an resource that should be valued accordingly. But that assumes that the managers of a team’s resources have time horizon’s aligned with the team and it’s players, which is often very much not the case. Coaches last less than 3 years on average. Sporting Directors come and go. Even ownership can find itself looking to add short-term shine to a club so they can sell it today, even at the expense of it’s long term value. Don’t be shocked when a coach who needs to win this year to keep his or her job runs their players into the ground. What do they care about preserving their star forward’s rapidly decaying ankles if they can’t count on being around to benefit from their long term value? Hell, it’s more likely the coach will be playing against those ankles in 5 years!
At some point clubs will begin to push back – they simply have too much capital invested in these players, and international tournaments are imposing too much risk on them as franchises. But don’t expect this problem to be solved quickly or easily. The Tragedy of the Commons is an economic cliché for a reason, doubly so when one side stands to lose a lot from the (re) establishment of property rights. Fortunately in this case, there are two parties that stand to benefit from a better property rights: players and their employers. The only side that stands to lose are the wasteful grifters of FIFA and the individual national team associations, and all they have on their side is nationalist pride and populist indifference to professional athlete health….
I’m a big fan of Milton Friedman. I’m also a big fan of easy-to-remember phrases that impart great wisdom. It honestly made me wince the first time I said the following:
“Inflation is *not* everywhere and always a monetary phenomenon“.
The reasoning is as plain as day. Consider the quantity equation:
MV=PY
For the uninitiated, M is the money supply, V (velocity) is the average number of times dollars transacts during a period, P is the price level, and finally Y is real output during a period. This equation is often called the “equation of exchange” or “the quantity equation”. Strictly speaking, it is an identity. It is a truism that cannot be violated. All economists agree that the equation is true, though they may disagree on its usefulness.
Inflation is simply the percent change in price. We can rearrange the quantity equation, solving for price, in order to see the relationship between the price level and its determinants.
P= MV/Y
What does this mean? It means that more money results in more inflation, all else held constant. It means that higher velocity results in more inflation, all else held constant. It means that less output results in more inflation, all else held constant.
Why would Milton Friedman say that inflation is always caused by changes in the money supply if it is clear that there are two other causes of the price level? When Milton Friedman said his famous quote, output growth was relatively steady. Velocity growth was relatively steady. For his context, Milton Friedman was right. The majority of price and inflation volatility was found in changes in M. See below.
Strictly speaking however, Milton Friedman knew better and he knew that the statement was not strictly correct. Friedman was a public intellectual and he was a great simplifier. He taught many people many true things. At the time, people were blaming inflation on a great variety of things: taxes, fish catches, and unions, to name a few. Arguably, Friedman got them closer to the truth.
What does this mean? It means that higher NGDP results in more inflation, all else held constant. It means that less output results in more inflation, all else held constant.
But economists dismissing M in lieu of AD are committing the same oversimplification. Y can also change! Maybe economists figure that our recent history is full of relatively stable Y growth and that we ought not pay attention to it. And indeed, unsurprisingly, RGDP growth has been less than NGDP growth.
But what is driving the current bought of inflation?
Pardon the crude image. The pink lines are eye-balled trend lines on natural logged data for AD, Y, and P. Prices are up. Is it because of exceptionally high NGDP? Nope. Total spending is back on pre-2020 trend. Does Y happen to be down? Yep, it sure is.
Right now, assuming the previous trend was anywhere close to potential output, inflation is not being driven by excess aggregate demand. It’s being driven by inadequate real output. The news tells the story. There have been supply-chain bottle-necks, difficulty employing, lockdowns, and fear of covid. Right now we have an output problem and higher prices are a symptom. We do not have an aggregate spending problem.
PS – In fact, it is my belief that the Fed successfully avoided a debt-deflation aggregate demand tumble that would have been catastrophic. Inflation is expected when supplies of goods decline.
Grade inflation in the US education system is a common observation, one that is, at least at the college level, largely undeniable. A couple recent interactions with students has brought it to the front of my mind again. When discussing their majors and what classes they were taking, there was considerable hesitation to take what were perceived as difficult classes. What I thought this called for, in the moment, was a bit of confidence building, for a professor such as myself to say “You can do it!”
It turns out confidence in their ability to learn the material was not the issue. What they were unsure of was their ability to get an A. No, to guaranteed get an A. It was the risk of a sub-A grade that concerned them (likely exacerbated by the fact that my university does not award + and – grades in undergraduate classes). So I went through my usual pitch:
You take 5 classes a semester for 8 semesters. That’s 40 classes. The cost of couple B’s or even a C will pale in comparison to the benefit acquiring more technical skills, which would pay out for a lifetime. A couple courses in computer science, econometrics and statistics, maybe real analysis for those thinking about a PhD in economics – these would all have huge payoffs. There was a problem with my logic, however, that quickly became apparent.
They weren’t sure what they wanted to do after their bachelors. They didn’t know what advanced degrees they might pursue, whether law or medical school was something they were interested in. What they did know, however, is that GPAs were really important. That students were applying to things they might be interested in, and doing so with 3.8 and 3.9’s. When they saw classes that regularly handed out C’s (not D’s or F’s mind you, just C’s), what they saw was pure downside risk. If they were great at something, no one would ever be able to tell. But if they weren’t, or if they had a bad day on a hard final exam, that it could close doors. What I inferred was that they were trying to maximize their expected outcomes, and in order to do so they had to minimize the number of hard classes in their portfolio. Each path had a handful of unavoidable hard classes, so to take a an additional hard class beyond the requirements of the path they chose was suboptimal.
I don’t know that they’re wrong.
I’ve told this story before. When I was considering getting a PhD in economics I planned on just going to my local school. I was visiting a friend on the opposite coast, though, and thought I’d stop in at a really good local school there. I met with the director of graduate studies in the economics department and was flatly informed that my application would not be read because my GPA (3.2, if you’re curious) was below their cutoff. I said thanks and left. It was some time later that it dawned on me that this was ludicrous. Did they simply never admit students from (the famously uninflated grades of) CalTech? Were they discriminating against math and engineering majors? Likely not. But this is deeper knowledge than that held by your typical undergraduate. All they know is the average admissions statistics and the implied (or in my case explicitly stated) cutoffs.
When we inflate grades and get rid of standardized tests, we put greater pressure on students to curate their education to expected grade outcomes and, more important, to minimize risk. There’s no upside to shining in a difficult class if the best 50% all get A’s. The signal value of success has been attenuated. The signal value of failure, however, has not just been left intact, it’s been heightened. There’s no positive variance to balance it out. There’s no way to be an excellent B+ student whose occasional C in risky classes are balanced out by some exemplary A’s. We’ve effectively raised the costs of taking challenging classes and in doing so discouraged students from acquiring the skills that are most rewarded in the marketplace.
The problem only becomes all the worse when we think about the cultural biases in the confidence we cultivate in different groups of students. If a deficiency in math and science has been low-key implied at every stage of your education, you’re that much less likely to incur the risk of “hard classes”. There’s much pearl-clutching over “everyone winning a trophy” and school being too easy from folks who walked to and from school through 12 months of snow, uphill both ways. Those arguments, which are often little more than a sort of grumpy money illusion, miss the real problem entirely. Undoing grade inflation to make school harder is like giving 7 points for every goal in soccer to make it more exciting.
The actual grades don’t matter. What matters is the the shape of the distribution of grades . If we bunch everyone in the A’s and then disproportionately select into institutions based on those grades, we’re incentivizing students to stay in the herd. To risk your GPA for the sake of hard classes is to risk being isolated. To risk being cutout by admissions committees trying to sort through 1000 applications, half of with have near-perfect GPA’s, and for whom the fastest way to make their workload manageable in an acceptable manner is cut out everyone with less than 3.7.
I’m not sure students are wrong in their grade-mongering. They got into college in many cases based on nothing but those GPAs. They’ll be able to go to grad school without taking the GRE. There will come a day, however, when the next step isn’t school, and after which no one will ever ask them their GPA again for the rest of their life. After which the only thing that will matter is what they know. And who will know more: the overconfident student of upper-middle class parents who graduated with a 2.8 BS in electrical engineering or the pragmatic student who curated courses to maximize their 3.7 GPA while preparing for the MCATS and medical school? I don’t know who will leave with more skills, but I also don’t worry about either. Who I worry about is the first-gen college student, the child of a working class household with a 4.0 BA and 4.0 MA in communications who, desperate to prove to others that they belonged in school, made sure to protect that perfect GPA at every turn. What have we done to ensure that they know enough when they enter the job market?
I sympathize with the sentiment of the meme. But friends of friends were quickly critical of it. Then I wasn’t sure what to believe. So, I crunched the numbers.
First of all, there is an inherent ambiguity in the meme’s claim, seeing as future tax rates, maximum taxable income, benefits, and plausible returns are unknown. But we can address the data so far. The meme is dated in 2019, but current data is even more charitable toward it.
What we know as of 2021:
The maximum annual benefit is currently $46,740. It was previously lower, but this is a charitable post.
We also know the historical tax rates and maximum taxable incomes. Currently, 12.4% and $142,800. YES, we’re about to assume that somebody met the maximum income criteria over their entire working life.
If someone worked for 40 years while making the maximum contribution each year, then they would have contributed $406,255.20. If we plainly calculate the rate of return on this amount, then we’d yield 11.5%, which is not too shabby ($46,740/$406,255.20). Of course, this is entirely unreasonable because the funds could have been earning interest in private hands during the contribution period. If the funds had been earning 5% throughout the entire period, then the 2021 value of the contributed funds would be $968,838.39. The annual benefit implies a return of 4.8% ($46,740/$968,838.39). Investing those funds in a private account that yielded 5% would have provided $48,441.92 per year, which is not a huge difference. In this light, social security appears not to be a terrible deal. Not as good as the private sector – but not far off.
Let’s be more charitable to the spirit of the meme. What about for 50 years of work? Then the total contribution would have been $423,905.38, yielding an implied return of 11%. Considering the time value of money changes the rate of return to 4.2%. Again, not terrible, but now noticeably less than 5%. If the funds had been invested at and paid out 5%, then the private annual benefit would be $55,846.56. In other words, the privately invested funds would have yielded an annual benefit that is 19.5% higher than what is currently paid. That is substantial. The social security investment is definitely not excellent.
How reasonable is the meme? Well, in order to get the $1.9M figure, interest rates would have to be 7.2% (assuming 50 years of work and that we don’t spend the principal). The concomitant annual retirement benefit would be $136,825.51 (Now that’s an exciting number). In order to get the $95k, we only need to assume 6.3% per year. The S&P 500 has yielded an annual return of 7.6% over the same period (not including dividends). The meme is reasonable. Not perfect. But not ridiculous.
One BIG caveat is that this entire analysis assumes that the employee could simply invest equivalent amounts if Social Security were abolished. This is very unreasonable. Currently, part of the contribution comes from employers. While employees would experience an increase in total pay if the taxes were abolished, the employer would also enjoy a lower cost of labor. Not all of the gains would go to the employee. One could also argue that abolishing Social Security would improve growth and real incomes generally, but that’s a counter-factual beyond the scope of this post.
And by cursory inspection of excerpts and reviews, it is chock full of all kinds of silly ideas that experienced what I can only imagine to be a frictionless path from the authors’ minds to publication. I don’t really care about this book or the specific ways in which it is is bad. And I don’t really care about the authors, who appear to be mediocre self-styled evolutionary scientists whose major claims to fame appear to be favoring ivermectin over vaccines and supporting themselves financially by levying a lawsuit against Evergreen State College.
What I care about is evolutionary biology and psychology as subfields. The core idea is that the evolutionary framework of persistent adoption and adaptation of traits under unrelenting selective pressures can be a useful modeling framework for generating theories of social, economic, biological, and psychological phenomena. Evolutionary selection is a good idea, one of the most powerful in intellectual history! But to me, an outsider economist with a long-ago acquired undergraduate degree in biology, the subfields seems to be suffocating under the weight of ad hoc theories generated in volume by marginal practitioners and non-scientists. Why? What’s wrong with evolutionary sciences? Here’s a couple thoughts.
1) There’s nothing wrong. Saying something is wrong with the subfields is like watching The Shining and thinking “There’s something wrong with axes”. This is just a bad book with bad ideas thought up by authors with minimal right to claim the mantle of evolutionary science.
That’s a totally reasonable response but I’m in no mood to leave well enough alone.
2) There’s a perverse selective pressure within evolutionary sciences where the worst ideas rise to the level of public dissemination. The culling forces of the popular press select along dimensions that are not merely orthogonal to good science, they are actively selecting against it. Put in the language of my own field, publishing bad ideas seems to be more profitable than publishing good ones.
That’s pretty big claim, and one for which I have no real proof, just tacit intuition and a small number of anecdotes. Sorting through the reviews of the Heying & Weinstein book, I thought of the brief phenomenon that was “Sex at Dawn” a decade ago. It, similarly, sold a breathless explanation of human behavior, specifically promiscuity. Emphasis on the world sold. “Sex at Dawn” proved that you could be scientifically hollow and still sell a boatload of copies. For those who are curious, here’s a review by an evolutionary psychologist that doesn’t hold nearly the grudge that I do. He politely sifts through the major claims, weaving through the silliness to find the handful of specific claims, and proceeds to debunk them. Other reviewers were considerably less kind (including those at Oxford Press, who rejected it for publication).
So why are these and similar books, so successful?
I’ve long suspected that there is a Gresham’s Law of Popular Science at work. Simply put, bad ideas are less costly to generate than good ones, so they are more plentiful. For the non-expert consumer of popular science, this raises the costs of search probability that a randomly encountered book is bunk. What I believe to be more problematic, though, is that bad ideas are often less costly to consume. Spoon-fed as common sense writ magnificent and powerful, pseudoscientific books get a foothold in our mind first through the scarcity of our time and attention only to then grow roots in our ego. Easily consumed during rare moments of relaxed reading, they then show us ideas that give us explanatory access to life, the universe, and everything. Why struggle through caveated niche explorations when someone else has distilled the complexity of a modern life well-lived to something that is as flexible in its flattery as a horoscope and often conveniently enumerated?
Does this happen within economics? Of course it does. It happens in every scientific field. But that is why scientific fields evolve intellectual immune systems, and often very aggressive ones at that. The entire field of “Statistics” essentially exists as the custodian of the scientific method. But there are little details that matter, too.
Take, for example, the core concept of “maximization” in economics. Sure, it gets abused, but at the end of the day it’s pretty tough to get very far with an ad hoc utility/profit/wealth maximizing model in economics that produces useful predictions. Why is that? Well, a big reason is that we’ve left out a very important word. Economists deal almost exclusively in constrained maximization. Absent constraints, nearly every maximizing model amounts to little more than a tautology. It’s requirement for maximization under constraints, both components transparently introduced, that gives a model it’s power. When I observe meritless pop evolutionary science books, mostly what I’m seeing is unconstrained just so stories that work backwards from a conclusion they believe there is a book-purchasing audience for. There are selective pressures, but where are the resource constraints? There are groups but where are the rivals they are competing with? There is this evolutionary path, but why not the other paths?
So what should evolutionary sciences do? Well, first of all, I don’t know. But if I had to guess, the answer is nothing. Nothing but do the thing a proper science always does. Do the work, push the good ideas, kill the bad ones, and trust that the custodians of the scientific method will do their jobs. And so will the editors. And the hiring committees. And the critics. Sure, a couple folks will pay a couple years mortgage, but a bit of financial and status injustice are a small price to pay while we keep the scientific mission moving forward. At least until we’re all crabs.
Hopefully by this time we all know about index funds. The idea is that by investing in a large, diversified portfolio, one can enjoy the average return across many assets and avoid their individual risk. Because assets are imperfectly correlated, they don’t always go up and down at the same time or in the same magnitude. The result is that one can avoid idiosyncratic risk – the risk that is specific to individual assets. It’s almost like a free lunch. A major caveat is that there is no way to diversify away the systemic risk – the risk that is common across all assets in the portfolio.
We can avoid the idiosyncratic risk among assets. But, we can also avoid idiosyncratic risk among times. Each moment has its own specific risks that are peculiar to it. Many people think of investing as a matter of timing the market. However, people who try to time the market are actively adopting the specific risks that are associated with the instant of their transaction. This idea seems obvious now that I’m writing it down. But I had a real-world investing experience that– though embarrassing in hindsight – taught me a heuristic for avoiding overconfidence and also drilled into my head the idea of diversifying across time.
I invested a lot into my preferred index fund this past year. I’d get a chunk of money, then I’d turn around and plow it into the fund. What with the Covid rebound, it was an exciting time. I started paying more attention to the fund’s performance, identifying patterns in variance and the magnitude of the irregularly timed and larger changes. In short, by paying attention and looking for patterns, I was fooling myself into believing that I understood the behavior of the fund price.
And it’s *so* embarrassing in hindsight. I’d see the value rise by $10 and then subsequently fall to a net increase of $5. I noticed it happening several times. I acted on it. I transferred funds to my broker, then waited for the seemingly regular decline. Cha-ching! Man, those premium returns felt good. Success!
Silly me. I thought that I understood something. I got another chunk of change that was destined for investing. I saw the $10 rise of my favorite fund and I placed a limit order, ensuring that I’d be ready when the $5 fall arrived. And I waited. A couple weeks passed. “NBD, cycles are irregular”, I told myself. A month passed. And like a guy waiting at the wrong bus stop, my bus never arrived. All the while, the fund price was ultimately going up. I was wrong about the behavior of the fund. Not only did I fail to enjoy the premium of the extra $5 per share. I also missed what turned out to be a $10 per share gain that I would have had if I had simply thrown in my money in the first place, inattentive to the fund’s performance.
Reevaluation
I hate making bad decisions. I can live with myself when I make the right decision and it doesn’t pan out. But if I set myself up for failure through my own discretion, then it hurts me at a deep level. What was my error? Overconfidence is the answer. But why did it hurt me?
Bo Burnham is a comedian and musician who, like so many of the artists I enjoy, produces art that I can only describe as extremely specific to him. His newest special on Netflix features a song, “Welcome to the Internet” (some NSFW lyrics), that I liked so much I thought it was worth writing as a formal model.
No, really. Hey, we all need a hobby.
The whole song is a meditation on the overwhelming nature of the internet and is, in my opinion, fantastic. I think if we zero in on two pieces of refrain in the lyrics, we can get some traction in what Burnham believes is the underlying problem, if not outright crisis, that resides within the internet and those that are “extremely online”:
First, the lure:
Could I interest you in everything? All of the time? A little bit of everything All of the time
This is the value-add of the internet and why we can never, and will never, leave it behind willingly. This is also the “cognitive overload” hypothesis of why the internet is bad. Sure, for the infovores of the world there hasn’t been a bigger technological shift since the printing press, but there certainly exists the possibility that most human minds (if any) aren’t built to handle the deluge of information they are drowning in. That’s one theory, but I think that’s the kind of problem that isn’t actually a problem. Some will consume more of the internet, some will consume less, c’est la vie.
It’s in the second half of the refrain, however, that we see the actual problem.
Apathy’s a tragedy And boredom is a crime Anything and everything All of the time
And therein lies the rub. You can’t opt out. But is that true? Well, that depends on who you are and how you live your best life i.e. how you optimize your utility function. So let’s do it. Let’s write down the utility function that lives inside the song. What we’re going to do is this- we’re going to lay out the simple components as natural language, then turn it into formal math, and then bring it back to natural language.
In our Burnhamian mode, people need two things: Private goods like food and shelter and Social Goods like friendship and camraderie. How much Utility you enjoy will always be increasing in both, but the optimal mix will depend on your constraints (wealth, time, accessible population) and the mathematical function determining how much Utility you get from a mix of Private and Social goods i.e. are they additive, multiplicative, or something else. Utility equal to zero is equivalent to death.
Let’s add one last layer of complexity. Let’s say that your Social goods are a function of two kinds of elements: Friends and Clubs. Friends are direct, one-to-one relationships. Clubs are large social groups. We will define and differentiate between the two as such: if you cease to be part of a friendship (whether between 2,3, or 5 people), then that friendship no longer exists in the same form. If you drop out of a club, on the other hand, that club will persist without you.
So what a person has to do is, within their constraints, try to optimize how much of their resources they invest in their Private goods, their Friends, and their Clubs.
The first line is our base model, the second is an expanded version with our two-input model of Social goods. The function we are using is called a Constant Elasticity of Substitution utility function. The key parameter, α, determines how Private and Social goods interact. If α=1, then they are what economists call perfect substitutes. All that matters is how much you have in total of the two inputs, and if you want you could specialize in just one of them. They are perfectly additive. If, on the other hand, α=-∞ (negative infinity), then they are perfect complements, like right and left shoes. There is no point in adding even one more unit of Private goods until you have another unit of Social goods to pair with it. In a sense, they are multiplicative, meaning if either value is zero, then your utility is zero. The value of α will tell us whether the best life requires more of a mix of Social and Private inputs (if they are more complementary), or simply the most of whatever is the easiest to come by (if they are good substitutes for each other).
We’ve nested in our Friends and Clubs production of Social goods as a CES function within the second equation, with a similar story, only here β will determine how much of a mix of Friends and Clubs we want, or whether we can specialize more in one over the other. In the third and last line of the model, we’ve reduced it down to the underlying questions that will tell our story represented by addition and multiplication signs:
Are Private and Social Goods complements (multiplicative) or substitutes (additive) when we internally produce utility? Are Friends and Clubs complements or substitutes when we internally produce our Social goods?
Assumption 1: α= -0.1 Private and Social goods are weak complements. What this means is that there are diminishing returns to Private and Social goods, you need some of both, but you can have less of one or the other and its fine. Let’s just assume wealthy people need other people in their lives to stay sane while, at the same time people with rich social lives and supportive communities still need food and shelter. You can specialize a bit more on one side, depending on what’s available, but you can’t live without at least some of both.
We’re all different in how we build our social lives and, in turn, how we internalize the internet in our lives. I think we can gain some insight into this process by working out the stories in this simple model through our second parameter, β. Let’s consider three broad types of people.
Person Type 1: Friends and Clubs are Strong Substitutes (high β)
These people are either relatively offline (e.g. they still use their phones as phones to make phone calls) or extremely online (e.g. they get a panic attack unless they have 80% battery and a charge pack on their person). These are the people who can become hyper-specialized in new clubs if they are extricated from prior social networks or club settings. This is why cults recruit people who move to new places where they don’t know anyone. This is how your diehard hippie socialist friend grew up to be a conservative evangelical after they moved to the Texas suburbs.
With regards to our original question, people who hyperspecialize in their club and club identity will be constantly contributing grist to the club’s identity: evidence of the necessity of the club and it’s mission, rage at non-members, disappointment in members who aren’t committed enough, and constant vigilance in the monitoring of everyone else’s commitment. They are in it, they are of it, and they are ready to purge.
Apathy’s a tragedy(You must care about everything the club cares about) And boredom is a crime(All of your time must be allocated to the club) Anything and everything All of the time
Type 2: Friends and Clubs are strong complements (low β)
These are the people that I think Burnham’s song is targeted at, for whom he has the most sympathy, and with whom I suspect he would count himself. These are people for whom the internet is the most taxing, the most exhausting to navigate.
Type 2 folks want to have personal friendships and friend groups while still feeling a part of something bigger, whether it’s a community, a political movement, or spiritual affiliation. Type 2 people will have preferences towards one or more social identities manifested as clusters on the internet, but they don’t want to purge people who don’t share those preferences from their circle of friends. Type 2 folks are interested in civil rights and social justice, but they want to diversify their emotional and material resources across their personal relationships and private wellbeing as well.
The deluge of the internet, with its stark images, focus on extreme outcomes, battle cries, and public reputation mauling, are constantly admonishing and shaming Type 2’s. Type 2 people are tired. Perhaps most importantly, the pandemic has been especially hard on Type 2’s. While Type 1 club-specialists have thrived by focusing the totality of their efforts to the online arena, their voices have been tearing the Type 2 social-portfolio diversifiers to shreds.
Type 3: Friends and Clubs are weak complements (middle β)
Type 3 people are a lot like Type 2’s, but it is easier for them to compartmentalize the production of their social goods. Type 3 people are often in clubs, but they are rarely ofclubs. They’re not joiners. Whether you’re looking at sacrifice-demanding religious cults or extremely-online political culture warriors, if the social associations of the world demand too much of Type 3 people, they are happy to half-ass their contribution or opt-out entirely. They might be on Twitter or Facebook, but they don’t need to reply to anyone. They might go to church on Sunday with the family, but if the minister tells them their sister is going to hell for their sexual preference, it’s just not that costly to stop going. For them clubs will always remain a luxury good, never a necessity.
To be clear this post is an exercise in building a toy model of something big and complex and important. It’s a gross abstraction and shouldn’t be taken too seriously. The process of formalizing your thinking on a social mechanism, however, is something that I think you should take very seriously. Formal models are useful because there is no hiding what your idea actually is. There’s no “sorry, you misread me” or reliance on obscure jargon. Formal models force you to clarify and reveal your thinking to everyone, including yourself. They can open up new avenues for explorations and even generate empirically testable predictions. Formal models have in many ways been the principal force behind economic imperialism in the social sciences. Not because the math is perfect or all encompassing or even correct. It’s because it’s all out there, ready to be judged and dissected and tested. That transparency makes it a useful.
I don’t know if my interpretation of Bo Burnham’s theory of the internet is correct or even necessarily what he intended it to be. But this is one way we can take it a step forward and see what we can actually learn from it. Which is pretty much all I want to do for the rest of my research life, on every topic, all of the time.
Economist Writing Every Day 