Ridiculous Speculation

Posted on by David Wright

Here’s a theory of Human Progress: the more humans integrated economically and socially, the more progress there is.

The idea is that specialization of labour is the only reliable theory of progress. At any particular margin, innovation requires further specialization – the paths multiply like a web. The more scarce human-level intelligence is, the less innovation there is. Fewer paths are walked.

Likewise, these humans need to be brought to the font line before they can strike out on their own in their particular specialty. This is education, of course.

But the ‘system’ only really takes you to the 19th century-level of specialization; beyond that, you need to work and learn from people who work at today’s front line or, more specifically, where today’s front line is forming.

Sometimes this extra boost of education happens concurrent to the regular kind (think of computer programmers messing around on their own time, then founding a startup tech company).

THEN your training is complete and THEN you can innovate and contribute to technological progress.

Hammering a Nail Outside the Box

Posted on by David Wright

Here‘s a very interesting article on the cognitive cost of expertise. The author takes us through some studies, particularly of London Taxi drivers, that when you learn a particular skill, you have a very hard time changing that skill. London cab drivers had a tough time figuring out the new Canary Wharf layout.

“To a man with a hammer, every problem is a nail”.

This really resonates with me. The process of applying new cognitive strategies to solve problems that ‘experts’ in a field are struggling with (by, perhaps, using a strategy from another area of expertise), is called “thinking outside of the box”.

Hex Ante, Post Haste

Posted on by David Wright

I remember soon after Lehman failed, I was at lunch with a manager at a fund of funds. She said that the bailouts forestalled Armageddon. Really, I asked? Like, REALLY?

I backed down eventually because she clearly knew more about credit markets than me and was obviously genuinely, truly rattled by the prospect of all the investment banks going down.

You see that?

Right there, where I backed down.

Right where I overlooked the conflict of interest and focused on the expertise and the fear of a friend?

THAT is regulatory capture, kids.

Banker Bonuses – Shoot the Canary, Kill the Symptom, Treat the Messenger…

Posted on by David Wright

This article is pretty common. And stupid:

Investment banks, it seemed, were not being run in the interests of the economy or even of their owners, but for their staff. It was financial mutiny.

Bankers are salesmen. Just like Vacuum cleaner salesmen, jet engine salesmen and TV salesmen. If you’re selling a product that makes someone rich, they’ll pay you a big commission.

Bankers get rich because the people that buy their products get rich buying them. Their wealth the symptom of something else. Find a way to cut the bonuses/earnings of fund managers today (my favourite idea: stop friggen bailing out bondholders, for chrissakes), and banker bonuses will collapse tomorrow.

Guaranteed.

Why do Small Town Downtowns Suck?

Posted on by David Wright

In Canada, small town downtowns have much in common with one another: packed block-sized developments with shops on the ground floor and two or three levels of apartments above.

And they mostly really suck.

The instances where this model persists yield pretty consistent results: a feeling of dirtiness, a bizarre assortment of low-end businesses (ex. fortune tellers, pawn shops and porno dealers) and, of course, limited parking space. It just ‘feels’ poor, or something. And the trend gets worse as the towns get larger.

Thank God for Walmart

Box stores have convenient parking, better prices and no-nonesense homogeneous offerings (if the suburban economy has done nothing else, the removal of knock-off/junk dealers and astrologers from my shopping experience is enough to win my everlasting gratitude).

This results, my grandparents used to lament from their nice suburban home, in a “doughnut city”. Vibrant auto-driven (ha!) economy surrounding a run-down middle.

Why is this? Well, if BS sociology helps: I learned from Daniel Boorstin that settlers were required to actually live on their land and resulting dispersion made the idea of a ‘town center’ unworkable. Leisure was precious and walking to and from a town center was probably an unpopular hobby. Precedent set.

In any case, when land is plentiful, we live on it. And when we all have so much land, the only ones who live in close quarters are those who can’t afford bigger tracts.

Crappy, poor downtown follows and, bingo! Doughnut city.

So what happens when you can coax the middle class into a city? Manhattan happens, is what.

Extraordinary concentrations of wealth are like micro-economic rocket fuel. Massive spoils fund all kinds of businesses that ‘should work’ everywhere: food delivery, local wine and grocery stores that actually have nice stuff, esoterica for everyone,  renovated and maintained restaurants and pubs (“quaint and comfortable”, not “battered and tired”). All the while feeling like a ‘charming’ ‘authentic’ ‘neighborhood’. Or something.

The rule is that when you try to create this kind of personalized, consumer paradise in every city, you will fail. The Manhattan exception proves it.

It’s not just wealth, it’s the concentration. And that’s not for everybody. You need particular socio/demographic characteristics: under-representation of families with kids, over-representation of wealthy migrants, over-representation of educated people, over-representation of high-income earners and an over-representation of people who desperately WANT to live in the Manhattan of their dreams.

Manhattan isn’t New York. New Yorkers live in the other boroughs like real people. Manhattan is a fantasy land.

No wonder people like it so much.

The Power of Data Mining

Posted on by David Wright

Reading about Emerging Adolescence in the NYT, I was particularly annoyed at this:

People can vote at 18, but in some states they don’t age out of foster care until 21. They can join the military at 18, but they can’t drink until 21. They can drive at 16, but they can’t rent a car until 25 without some hefty surcharges.

Rental companies’ decisions are based on insurance data and so are based on behaviour. The rest of these are political artifacts, long ago dressed up in the ‘logic’ of that age but really resting on ugly political deal-making, warped by public choice failures and surviving thanks to status quo bias.

But our author redeemed himself eventually:

The scientists found the children’s brains were not fully mature until at least 25. “In retrospect I wouldn’t call it shocking, but it was at the time,” Jay Giedd, the director of the study, told me. “The only people who got this right were the car-rental companies.”

This is why the auto industry has the capacity to be the most competitive insurance market of all – standardization of coverage and vast amounts of high quality data.

A Little Blast of Seratonin

Posted on by David Wright

I read something on the Internets today that tickled my bias. Always get the warm & fuzzies when that happens.

Here are the pertinent two quotes (on why Yahoo failed):

In the software business, you can’t afford not to have a hacker-centric culture.

and…

So which companies need to have a hacker-centric culture?… The answer is: any company that needs to have good software.

So what if every company needs to have good software?

The Future (no less!)

Posted on by David Wright

David Leonhardt has kicked off quite a discussion with an excellent piece in the NYT. Here’s the key bit:

In 2008, only 13.2% of the labor force was unemployed at some point. That compares to 18.1% in 1980, and 22% in 1982.

Real wages, which normally fall during recessions, have risen in this one. Even nominal wages are up.

Arnold Kling’s view (?) -this quote is out of context, but I think still gets the message across.

I am inclined to view what is happening today as the death of the pre-Internet economy.

Arnold goes on to say that this trend may change education and health care, which suffer from Baumol’s cost disease, of course.

I think he’s skipping a step, though, and is perhaps too influenced by Robin Hanson, the ultimate long-range thinker. I think that Arnold’s out-of-context quote is more normative than positive, more what-should-be than what-is.

The what-is is, to me, that, at the margin, the non-technical are having much more trouble getting a job.

I know that any time I have any influence in a job hiring situation, I push hard for someone who has math/science/programming skills or, at the very least, inclination.

As administrative roles are replaced by capital and ‘engineers’ are hired to run them, the unskilled labour either gets pushed, wrongly, into sales and fails or has to tool up with some technical skills.

Two effects: one, get those skills; and, two: the ways in which those skills can/will be deployed are exponentially increasing.

The Business

Posted on by David Wright

I wanted to write a post that discussed why the insurance business is split into such a bewildering array of classes and sub-classes, each with its own specialized practitioners and each of which sits at a different point on the arts/science continuum.

I realized that I actually can’t write the damn post.

Richard Feynman said that unless something can be described easily to a first-year undergraduate, the teacher, and perhaps the entire profession, doesn’t understand the concept deeply enough.

I love this idea. And I realize that I don’t understand the basics of the fragmentation of insurance classes deeply enough to explain it properly.

So let’s just say this: for some reason, there are lots of insurance classes. For some reason, practitioners don’t tend to cross classes too often. Is it because of relationship networks? Is it because the exposures of this business requires a body of knowledge that is immune to generalization from or into other lines of business?

No idea.

Tort Reform

Posted on by David Wright

90% of insurance press falls into three categories:

1. Puff pieces about some industry grandee or cat product “innovation”

2. Chicken Little Tales about how some legislative catastrophe is just around the corner (climate change is big, as is whining about the lack of US tort reform)

3. SHOCKINGLY boring actuarial stuff.

#2 is the intellectual trap. You think you’re doing a good job because you think you’ve identified a neato risk nobody has priced in.

*smack*

Insurance folks are meant to be paid to assess risk. But risk isn’t something you see and touch, have drink with and that gets punched out by that drug dealer because it touched his girlfriend in the strike zone at a bar late that night in Vegas last year.

No, risk is a helpful intellectual framework in which to think about things that might happen. You might think that this is a profession for people who are good at figuring out what risks are out there.

You, my friend, could not be more wrong.

(Exaggeration for effect alert)

Insurance isn’t about assessing risk. Insurance is about getting on oversubscribed deals, writing more in cyclical upswings, having low expense ratios and conservative bond portfolios and not being played for a sucker by a broker. People who assess risk don’t write anything.

Not that you should have a team of died-in-the-wool morons running your portfolio, mind you, but you could probably get away with it if you had a microscopic expense ratio and laid ¾ of them off in a soft market.

But that’s barbaric. My point is that people that think too much about stuff don’t write any business – imagining ways something could go wrong is easy. I had a prof in U that said MBA programs are about teaching people a hundred million reasons to say no to ideas. Living with risk is the real skill.

So all this whining about Tort Reform by insurance companies is a red herring. The market price will adjust if claims blast off into the sky because of climbing tort expenses.

Otherwise, you’re still making money on it, so why waste your breath?