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Terri Vaughan on the Financial Crisis and State Regulation

This episode features Terri Vaughan (mp3youtube), professor of actuarial science at Drake University and CEO of the NAIC during the Great Recession. We can call this the Not Unreasonable 10-year retrospective on the financial crisis. I first came across Terri’s work as an actuarial student and been fascinated ever since by her case for state regulation and citation of the insurers’ performance during the financial crisis as evidence in its favor. Here’s the gist:

Terri Vaughan: the traditional arguments that you will hear about state regulation are the laboratory the states. That’s the big one sure how states can experiment with different things. Diversity of markets. We need to be able to respond to local markets. I think one of the biggest strengths of state regulation is the diversity of thought. The fact that you don’t and this is something I think that as the any I see becomes a bigger and bigger force in regulation the states have to guard they have to really be focused on making sure that they maintain that diversity of thought. When I was a regulator and it’s still the case New York would think about things differently than Illinois. Yeah. And that would cause you to go to a meeting and really engage in a very deep conversation about how should we look at this issue.

David Wright: You have two different perspectives.. what’s right about each one.

Terri Vaughan: Yeah. Yeah and it was it was very it was thought provoking

David Wright: yeah, constructive

Terri Vaughan: constructive. I think that is a very powerful feature because it’s not a you know kind of people at the top making the decision and sending it down. It’s a very diverse you know way of looking at things and then you have to figure out how do we pull these two together. I think that’s one. I think the other big advantage of state versus federal regulation is leveling the playing field in the industry. And this goes back to the conversation we had earlier about who gets access in Washington. There’s so much responsibility in washing so much power in Washington who gets the access and the access or the ones who know the policy makers on a personal level. You know they they maybe their kids went to the same school and they go to the same country clubs or whatever. It’s a it is much tougher for a mid-sized company in Des Moines Iowa to have the kind of access

And on the feds:

David Wright: And it seems to me that that’s an inherent feature of Washington and feature of anybody who’s distant and smart who thinks I know more than you because I don’t know you so I’m going to assume the worst of you. And then I know that I’ve done so many good things with my look on my resume. Let me just figure it out. You know I can figure things out. It’s hard to talk them out of it! Because you can’t really dispute the premise in some ways. You can’t say no you’re not smart because you know they all know they are smart.

Terri Vaughan: Yeah they are smart but this is why I said there are smart people in the States too.. you know don’t tie their hands. Let them think it through and my experience with Washington is that too often it was about hand tying. And the more we can get now I’m showing my political kind of perspective the more that we can free the states from tying the hands of from Washington tying their hands and the better we’re going to be in this.

Finally, where is state regulation going?

David Wright: You mentioned earlier that you’ve made an allusion to how the NAIC may be keep may be growing importance and that I suppose relatively speaking means the states are receding in importance.

Terri Vaughan: And here’s what I think is happening. There’s a tendency when something new is created for example. We have principles based reserving on the life insurance side. And so you need to have expertise at the state level on principles based reserving. How do you look at these filings that the companies are making how we’re going to have the regulatory expertise in this new model of reserving and the tendency is to say well let’s create expertise at the NAIC and that expertise will then

David Wright: the smart guys, like the federal government.

Terri Vaughan: Exactly. Exactly. And then that will educate the states and I while you still have a system where the states are you know independently responsible and they have influences from their local market place. So they’re going to have they’re going to take this and learn from it differently. But it does create a. Different a different structure. It’s not just the NAIC staff there to facilitate this exchange of information among the states. It’s the NAIC staff driving how the states look at things and that I think is something that we need to be real careful about how we do that

We also cover the origins of insurance regulation, how and why she joined the NAIC, what it was like in Washington during the financial crisis and more! Terri has been a huge influence on my own thinking about our industry, it was an honor to have her on the show!

Transcript below:
Continue reading Terri Vaughan on the Financial Crisis and State Regulation

Tyler Cowen on Stubborn Attachments

This is a special interview for me because Tyler Cowen (mp3, youtube) has been an enormous intellectual and moral influence on me over the last ten years or so.

I’m not alone. Tyler blogs with Alex Tabarrok at marginalrevolution.com, which is usually ranked as the top economics blog and Tyler as one of the most influential economists of the day. Tyler’s books (see below) are also enormously influential and you name your favorite economic or financial public intellectual and they probably read Tyler every single day.

The interview I’ve wanted to do with Tyler has been the “who is Tyler” conversation. Luckily he just wrote an entire book on what he values and why. That new book, Stubborn Attachments, is the foundation for Tyler’s entire value system. What an opportunity to dig in.

And yet I am so immersed in Tyler’s thinking that it’s hard for me to appreciate that you might not yet see why I think he’s worth understanding (and he is!). So down below I’ll put a quick run-down and reading list of some ideas and books that will help prime you for this conversation.

From my interview, here is the first question:

David Wright: I want to start with what I see as the most marginally important Cowenian contribution. For the sake of the audience, marginal in this case doesn’t mean small, it means that there are a lot of commentators and public intellectuals out there saying for the most part a lot of the same stuff. But given all the very smart people saying very smart things, where does Tyler stand out? What do you *need* to go to him for? My answer is it isn’t even Tyler… it’s Tyrone. I’ll defend this selection in a moment but can you explain to us who Tyrone is… and I don’t mean the name on his driver’s license, but you can tell us that, too. Who is Tyrone REALLY..

On how Tyler might have hatched the most important philosophical innovation in 2000 years. Really, you ask? You be the judge!

David Wright:…we read the ancient philosophers because they.. they’ve.. I’ll use my my word: infected our thinking and it’s the roots of quite a lot of current philosophical thought.. they wouldn’t have had a chance to think about compound growth and and in zero time preference right. So it seems to me this is actually a philosophical innovation the likes of which the world hasn’t seen in millennia. Could that be the case?

Tyler Cowen: Yes, you know.. Agnes [DW: Agnes Callard, CoT guest, see below] has one of the deeper understandings of ancient philosophy because she also has a Ph.D. in ancient history and has studied ancient philosophy and the view of many of the early Greeks was there’s something retrogressive about history or sect like so you advance for a while and then you move backwards. So it’s hard to keep a lot of compound returns was probably correct for them to believe that in their time. But we’re now in a world where at least say Great Britain since you know the 16 twenties or so has mostly had positive compound returns for centuries. And that’s a practical innovation and our theories need to adjust accordingly.

What I think is really going on in this book (and then get one-upped!):

David Wright: So I have a Straussian reading of this book and my Straussian reading is that

Tyler Cowen: I’m happy already by the way.

David Wright: It’s that it’s actually a sequel to Average is Over. And I know it’s not. But I would think of it as a sequel to average is over and I was listening to your podcast with Russ Roberts and in that he made the point or you made it I’m not sure who made it first but you were agreeing about the fact that Average Is Over which I’d like you to summarize if you don’t mind a moment I’ll give it my shot which is it’s about how there’s this.. in society there is going to be a big difference between people who are very good at the kind of development the technology that society is producing and then you have people who are not and you’re going to wind up with you know what Ross calls a bi-modal distribution which as you have you know a whole bunch of haves and a bunch of have nots and sort of hollowing out of the middle of society. And in that conversation you were talking about how really the book was not, as you put it, this is not normative in the sense that you weren’t really venturing an opinion on it saying this is good or bad this is kind of what’s happening. And I think that the Straussian reading of Stubborn Attachments is *that that’s not true*. It actually is a message to the have nots from Average Is Over and saying *just do it for your grandkids*.

Tyler Cowen: I agree with that. But I’ll see your bid and raise you a few…

This interview is so jam-packed with awesome moments including where I worry about the social status of venture capitalists (and Tyler tries to reassure me), who the Einstein of Journalism might be, Straussian readings of Conversations with Tyler, how Tyler consumes podcasts, how we value non-economic social phenomena and of course much, much more on Tyrone.

I needed this show to try to understand who Tyler really is and why and came away pretty satisfied! Big thanks to Tyler for his time and thanks for listening!

Tyler Cowen reading list:

I haven’t even told you about his daily links, yet. Read marginalrevolution.com!

I’ve been experimenting with transcripts of my podcasts. Here is one below:

David: My guest today is Tyler Cowen, professor of economics at George Mason University, blogger at marginalrevolution.com. Podcast host had conversations with Tyler, and my words cannot convey how strongly I recommend his work. Tyler is the author of numerous books, the latest of which and the subject of today’s show is Stubborn Attachments. This is a philosophical work where Tyler lays out his value system. Here’s a quick quote from his blog, “No punches are pulled. This is my account of what I strongly believe, and you should believe too my bottom lines so to speak.”

Before we start though I want to try and give listeners a little bit of insight into why I’m talking to Tyler because honestly, I’m worried that I’m going to fail him what I’m trying to accomplish today. It might sound weird, but before reading his book I thought of Tyler as an emotional mentor and role model to me. Luckily, I think morality as being built on emotional foundations, so Tyler’s book actually gives us a pretty good framework for exploring what I mean by that. The goal today is to do no less than figure out what Tyler is and why. Big project. So let’s see how we do. Tyler welcome to the show.

[00:03:12] Tyler: Thank you for having me on. Thank you for the kind words.

[00:03:14] David: I want to start with what I see as the most marginally important Cowenian contribution. Now for the sake of the audience, Marginal in this case doesn’t mean small, it means that there are lots of commentators and public intellectuals out there saying for the most part a lot of the same stuff. Given all the very smart people saying very smart things, where does Tyler stand out.

What do you need to go to Tyler for? My answer is that it isn’t even Tyler, is Tyrone. I’ll defend that selection in a minute, but maybe first Tyler if you can explain to us who Tyrone is and I don’t mean by name on his driver’s license but you can tell us that too. Who is Tyrone really?

[00:03:47] Tyler: Tyrone is a guest writer on the Marginal REVOLUTION blog, and he appears periodically and writes very controversial or provocative ideas in a very straight forward no holds barred tone. The reason there is a Tyrone, I thought some while ago well, these thinkers out there you’d like to read variants on them.

Like couldn’t you like to read a pessimistic Steven Pinker, or maybe a right wing Paul Krugman you wouldn’t necessarily agree with these variants, but you’d want to see what would come out of the talent mixed with some different set of views, different approach.

What I did was, I got on a plane and I flew to South Korea. Just as that woman had her dogs cloned in South Korea, I thought I would have myself cloned. I had myself cloned in South Korea and then brought back the clone, but I figured most people wouldn’t believe this. I described Tyrone as you know my brother.

In fact when I was born my father wanted to name me Tyrone, my mother wouldn’t let him, and it became Tyler. He liked Tyrone Power, the movie star. Now, there’s this persona Tyrone who’s a clone of me but you know the cloning process a lot doesn’t carry through. So you get like a variant on Tyler, and it’s a way of having multiple Tyler voices that may be is interesting or provocative, but Tyler himself doesn’t have to bear all the hassles of being Tyrone.

[00:05:06] David: Reason I think Tyrone is important is that it seems to me that you’re able to through that persona embody a couple of different points of view the gap for which we do not see many people cross. There’s a strong kind of almost anti intellectual sort of bent about Tyrone, I’m not sure the right way of putting it. But he has a perspective on the world’s problems that are as wrong as certain kind of way and you’re often quick to point out Tyrone is so wrong about all these things.

Then in a near they go publish it on your blog, under your own name is the author that goes in the publisher line or the writer line. I think of it as embodying a kind of conflict within yourself. If there’s a dialogue that goes on that generates the Tyler Cowen view at the end, but Tyrone’s part of that. Is that a representation of what you are? Is it a version of you or is it something that is just like a spoiler that you like to just sort of play off of or do you believe what Tyrone says in anyway?

[00:06:04] Tyler: Tyrone likes to bang on the table. Tyler doesn’t. If you think, what’s the best way to learn different arguments or points of view or avoid getting trapped? It’s to take points of view you may not agree with and simply write them out. I think it’s the single best thing you can do whether or not you blog. In the course of doing this, sometimes you may decide like, Hey, I actually agree with this, but it will be a diverse set of responses.

Sometimes you move away from it. You write it out, oh my goodness now I see what this implies, that really must be wrong. Engaging with Tyrone I would say it pushes Tyler’s views in all kinds of different directions. It’s not that Tyler really agrees with Tyrone or Tyrone is the opposite of Tyler. You could say Tyrone increases the variance of Tyler in any different directions and keeps him open minded.

[00:06:52] David: I liked that phrasing. Now, I’m going to go a bit deeper on Tyrone still, I’m not done with him yet because–

[00:06:57] Tyler: Nor is he done with you.

[00:06:58] David: I think not. I learned that you’re from Bergen County.

[00:07:02] Tyler: New Jersey, correct. Northern Jersey.

[00:07:04] David: That’s right. During our correspondence and I live right now. I’m from Canada originally, but I live in a town called Ridgewood, New Jersey. There are a few towns over from the town you grew up. What interests me about that particular area where you grew up; it’s a little bit country? It’s a suburban area of New York, but it’s not manicured gardens. It’s a little hilly, there’s little rocky, there is more of that.

Then there is a lower socioeconomic level there than you’d think, being that close in New York City. When you grew up there it must have been very much more like that, I would think for 30 40 years ago. Am I right on not being an important feature of that part of the country, because I know I know Tyrone’s? I grew up in a small town myself. I know people who are really smart, smarter than you think they should be in some way, and who are giving opinions about things that are irritatingly difficult to push back on because they are kind of right.

It’s hard to actually defend call it a more sophisticated view which might be more correct, but in a way it beat them on their own terms, and actually beat them on their own terms. I think it’s a very frustrating intellectual process. My working hypothesis on Tyrone, there might be a real person that you’re modeling Tyrone after. Could there be somebody that you grew up with or met or knew when you were a child or a young adult?

[00:08:25] Tyler: Well, a composite weight. Think of my background this way. I was born into Hudson County which at the time was completely working class. As my father was upwardly mobile, we moved into the wealthier Bergen County, but my town Hillsdale was still part like Irish-American working class, Italian-American working class and Jewish which tended to be more intellectual. I had those diverse influences. Then this is quite working class background. My father hadn’t gone to college. I too grew up with many Tyrone’s or if I hear Donald Trump speak, it sounds very familiar to me. It’s not strange or disorienting. It’s like, I heard that 40, 50 years ago.

[00:09:01] David: When did these guys made it?

[00:09:02] Tyler: Correct. Tyrone is somewhat of a throwback to that time and place. I like to say all thinkers are regional thinkers. Tyrone himself is indeed a regional thinker.

[00:09:13] David: His region is a working class Northern New Jersey.

[00:09:17] Tyler: I would say Tyrone’s region is a bit to the south of Tyler’s region. Tyler’s region is Bergen County intellectual not too far from New York City, New Jersey. Tyrone’s region is much more Hudson County, closer to the heartland Soprano’s territory, Bruce Springsteen land.

[00:09:34] David: I think Tyrone, the way I think that he gets integrated into real view, I think of that as being really I don’t know instructive as a way to diversify your own thought process I guess. There is a lot of thread in a lot of rethinking to the point I made earlier about the word I was using was an emotional mentor. Although this is the first time we’ve met, so you don’t know me or know what kind of person I am. I like your attitude and the openness you have to these different kinds of view, and actually accepting them on their own terms and saying, there’s something here.

This isn’t just you being less educated than me or speaking with different jargon or wrong and wrong is just wrong and I can now dismiss everything that you say. There are good parts there and I think there’s openness. The word you use in your book which will touch on now maybe a little bit as pluralism which I think, is evidence of this phenomenon in your own personality. Maybe you can tell me what you think of that assessment and maybe define what pluralism is, and then how it works in Stubborn Attachments.

[00:10:35] Tyler: Well, first maybe Tyrone needs a sister, but since I plan to keep on writing the blog there’ll be time for that. Pluralism I take to be the view that everything is not just what utilitarianism suggests. Human well-being is very important but other values matter, they are human rights. The arts can have an independent value above and beyond. How much people are willing to pay for them. There’s such a thing as beauty as justice. Our assessment of a good society, it’s a kind of weighted average of many different things. We always need to be viewing a question from multiple perspectives.


[00:11:11] David: Valuing those perspectives even if well, I suppose maybe overvaluing them in some sense because deliberately, so you might not agree with somebody’s view, but you recognize and respect that it has some value even though you yourself don’t assign any value to it.

[00:11:25] Tyler: You ought to weigh it with some probability. So let’s say you mostly think the arts don’t have any value above and beyond what people are willing to pay for them, but it might be true with 5%. Well, in your calculations for a good society, you should put it in with right 5%. So you have to worry about many more things than you might actually think are true. That’s a huge burden. People don’t like it. They like to push that stuff away, keep things neat and easy to deal with. What I call the philosophy of once and formalism. They want to be done with stuff once and for all, but that rarely works. It’s always tempting.

[00:11:58] David: One of the things that another idea I associate with you is actually being pretty okay with the messiness of the world in some ways.

[00:12:05] Tyler: Or celebrating it.

[00:12:06] David: Right, and that’s related. It might surely that’s related or there’s some link there between being able to acknowledge that other people’s perspectives. There is a Tyrone inside of you and there are people who have views that you don’t agree with, but still value with some probability and it’s a mess and that’s okay.

[00:12:21] Tyler: Absolutely.

[00:12:22] David: In the book I think that there is a way that manifests itself is in this idea of I think and I may be drawing this line properly between radical uncertainty. Maybe you can define for us what radical uncertainty is and how that works in your philosophical view or your framework?

[00:12:41] Tyler: Any action you take now to bring about a better state of affairs in the world is subject to extreme uncertainty. It will have many long run ramifications you can’t forecast partly just policy science or policy analysis isn’t imperfect. If its foreign policy are ways of modeling those decisions, they’re really not very good. We don’t have systematic data and easy models to measure. Then there’s the deeper philosophical point that even small changes they will influence which people meet each other, which people marry, the timings of their conceptions, so they remix the future identities of everyone in the world.

The general point is even if you’re doing something that you think unexpected value terms are the best thing to do, the chance you will be pretty wrong is likely fairly high. You may favor what you were doing like 52 to 48 or 53 to 47, but rarely is it like 99 to 1 or 98 to 2. For most reasonable disagreements with none totally evil people, the chance you might be wrong is really pretty high even if your arguments to you seem much better, and you don’t see why the other people don’t get them.

[00:13:51] David: That’s related to pluralism, is it?

[00:13:52] Tyler: Absolutely. That pluralism and this epistemic uncertainty there are really two sides of the same coin.

[00:13:58] David: There is a twin idea in the book and we’re going to kick it into the book, as a book idea.

[00:14:03] Tyler: This is the book.

[00:14:03] David: Yes, that’s twin idea in a book which is about rights. They are actually still absolutes.

[00:14:08] Tyler: That’s right. There are some activities we should not do even if it will bring great gain to civilization. Killing and torturing large numbers of innocent people would be an obvious example. It’s not the main topic my book is about, I simply want to point out there are constraints on the calculus of utilitarianism.

[00:14:27] David: I think of those two ideas, so this idea of call it relativism maybe, you can push back against my use of that word, and rights as being conflict, being an intention always inside of you and inside of other people, or did you always have both or did you have started hasn’t been more of a pluralist and you drifted towards a bit more of, I’m not sure whatever the opposite of pluralist is, over time.

[00:14:51] Tyler: I started more as a rights theorist, but the space of decision making open for utilitarianism has gone up in my mind with age. I would say this. Here’s the surprising thing I learned writing the book. A meaningful notion of rights has to be pretty close to absolute, because if your rights are weak wishy-washy rights, over a long enough period of time the well being from the utilitarian calculus will overwhelm those rights. Rights are either not very important or they’re strong and absolute. I hadn’t really understood that until I tried to write down this book.

[00:15:23] David: Interesting. What part what parts of this book existed in Tyler Cowen age 16?

[00:15:30] Tyler: Probably a lot of it. This is an unusual book. I’ve been working on it for 20 years, but not the whole time. Every year I would take a month or two and just try to improve this book. I thought well my views on these topics will change. This book needs 20 years but it’s too short a book to have just worked on it straight through for 20 years. Some of the 20 years I spent taking out parts of the book. I had a lot in an earlier draft on existential risk which I still agree with, but enough other people published on that topic. I narrowed down this book and it took me a year and a half just to basically do control C and delete.

[00:16:08] David: In terms of the younger Tyler, so you mention that you’re bit more of a rights theorist was that really pre college high school Tyler.

[00:16:18] Tyler: Like 14 year old Tyler.

[00:16:19] David: Was the rights guy?

[00:16:20] Tyler: Was the rights guy. Back then I believed in capital…

[00:16:24] David: Who influenced you in that?

[00:16:24] Tyler: Sorry.

[00:16:24] David: Who influenced you in that to get you to that opinion do you think? Was your dad a rights guy or it was something?

[00:16:29] Tyler: He was not very philosophical. You might say he had an inchoate view similar to our right’s view, but I in the end I read when I was early. I was influenced by that libertarian thinkers people like Milton Friedman who was not himself a rights thinker. You read Friedman; you start thinking in terms of rights even though he claimed to be a utilitarian. The real Milton Friedman in fact was also a rights thinker, our early exposure to a lot of libertarians mostly Rothbard.

[00:16:56] David: What was the most important thing your father told you?

[00:16:59] Tyler: To get up every day and work, and be responsible, and don’t complain, and don’t feel the world owes you a living.

[00:17:06] David: Do you think about that?

[00:17:08] Tyler: All the time of course

[00:17:09] David: As part of his teaching you think about your dad, and you think about doing that every day.

[00:17:14] Tyler: I don’t know, every day but very often some days more than once. He didn’t pay for my college, I should add. That was very good for me. When I was an undergraduate, I started my own business like writing and editing and doing things. I supported myself. Maybe now that sounds outrageous to people like an upper middle class father wouldn’t pay for his kid going through college. It’s one of the best things anyone ever did for me. I’m very grateful that’s how it was.

[00:17:38] David: How about your mom, what did she teach you?

[00:17:40] Tyler: Kindness, compassion, openness and tolerance. My father was more dogmatic, my mother was very open. She loved to read about Eastern religion. Jonathan Livingston Seagull was one of her favorite books. A kind of–

[00:17:55] David: Pluralist.

[00:17:56] Tyler: -pluralist, absolutely.

[00:17:57] David: Right, versus pluralism in the county household.

[00:17:59] Tyler: Correct.

[00:18:00] David: How true is that as a characterization of your upbringing? Are you actually just the synthesis of your parents force of use implicit or they might be?

[00:18:11] Tyler: Probably. Sure.

[00:18:13] David: Here’s another thought that I actually asked this people in job interviews. You’ll be interviewing for a job now Tyler. How does the relative strength of your intellectual capability, your personality change over time? You’re in high school and you’re probably pretty good high school student I would imagine, so but you had a relative strength say against your peer group and then in college that changed.

Now everybody is smart now. Now I’m going to adapt a little bit and there’s a feedback mechanism, you’re right. Then maybe as a graduate student, maybe as a professor and over time it involves what your marginal contribution is. How would that have changed over your life?

[00:18:49] Tyler: In relative terms, I’ve become much worse at math relative to my peer groups with age.

[00:18:54] David: Having you started out pretty good probably?

[00:18:56] Tyler: Right, in a much better at the humanities and doing and integrating theory and practice and judging talent. I’ve worked hard at trying to better myself in those areas. I’ve gained a lot in those areas. In terms of how rapidly I can multiply two numbers in my head, both have gotten worse at it absolutely. I keep on meeting people who are way better at it than I am. Not to mention topology and differential equations

[00:19:21] David: Is there a lesson there in kind of a value statements embedded in that because you could have chosen to work more at math, but you’ve chosen instead to work more at these other things. Does that mean they’re more valuable, those skills?

[00:19:32] Tyler: You always need to change what you’re doing as you age, because your peers are changing what you’re good at. Change isn’t what the world demands changes. If you’re just doing the same thing you get into a right. You either tend to burn out or you become bored. Waking up every day and asking myself what should I be doing next? How is it different? It’s something I’ve tried to live know from the beginning pretty much.

[00:19:54] David: Here’s another thread to a lot of your writing and thinking and I share this with you where a there’s an appreciation of respect for religion and them same of what you read a quote a lot of what you write.

[00:20:04] Tyler: I’m not religious myself.

[00:20:06] David: Likewise, and yet, but man it does a lot of good for the world for the most part, right?

[00:20:10] Tyler: Correct. Even if some of it harms the world, we should seek at the margin to move toward having more constructive religion and less destructive religion. It’s one of the main forces that move people. A lot of secular intellectuals, they might pay lip service to this but it’s not internalized as part of their worldview.

[00:20:31] David: I think of religion for those who choose to be critical of it, they see it as a set of constraints against people. They say there’s a rule, you can’t do this, you can’t do that and people find that confining. I think for outsiders find that confining. I think the experience of people within religion is some really think it is, is that its restraint not constraint.

Restraint is more about I’m choosing to not do these things because I think it’s good for me. Whether I totally understand why it’s good for me or not, restraint is actually almost a liberating feeling as opposed to constraint which is a confining feeling. What do you think about that distinction?

[00:20:59] Tyler: It’s true when religion can tie people together and give them opportunities the secular don’t necessarily have. They feel related. They would call it God, but whether or not you think it’s God to some notion of creation the universe in a way that may well be harder for secular people.

[00:21:15] David: You don’t drink, right?

[00:21:19] Tyler: Not at all. That’s right.

[00:21:20] David: That’s a restraint that you’re choosing to adopt in your life. What’s interesting, so I had this experience when I was in high school, I sat through class and these women came from alcoholics anonymous? They said to me, they said to the class anyway, they referred to themselves in the present tense as alcoholics. They hadn’t a drink in whatever 20 or 30 or whatever number of years, but it was a personality characteristic whereby they had to impose upon themselves this extraordinary restraint.

They needed to because they had this problem of addiction. There’s an interesting kind of point there about I think once you let something in, it can take over. Then you have to be more extreme in your removal of it after the fact. I’m wondering if you’ve ever felt you’ve been addicted to something before where you need to have extraordinary restraint. It could be work; it can be all kinds of things. Whether there need to be something necessarily destructive, actually?

[00:22:15] Tyler: I think I’m addicted to work, but I’ve never accepted the restraint on that. I’ve been drunk twice. I used to drink red wine reasonably often a few times a year. I enjoyed it. I still think it’s a very fine pleasure. At some point I just stopped realized I don’t miss it. I work enough if I have like a meal out with people, I actually go back and odds are I want to do some work.

If I’ve had some alcohol, I can’t do that. I think it’s a positive for other people just to say you can live a life without alcohol. There was a study on my blog Marginal Revolution this morning, an estimate that one out of 20 deaths in the world result from alcohol. It may be a mismeasurement but that it’s even plausibly the right number.

To me it’s stunning, and it’s hardly ever discussed the early 20th century notion that prohibition was like a major social issue has fallen off the table. I think we should think about it much more. I don’t want to throw people in jail for drinking but people I think should voluntarily abstain and become social examples that it’s possible not to drink at all.

[00:23:17] David: In language you’d use raised the status of none drinking.

[00:23:20] Tyler: Correct. Mormons have done this as well. It’s another way in which religion can be a big positive.

[00:23:26] David: I’ll want to turn now back to the book and talk about another I call them I think it’s in a pair of ideas which I think are really related. I actually think of the first set of ideas there is sort of them, I don’t know the moral core of Tyler. These are the urges maybe you have and you’re acting to a bit more emotionally perhaps.

The next set of ideas I think of as actually being much more intellectual ideas and your studios are time preference and economic growth. Maybe you can talk about some interesting thoughts. The first time I’ve ever seen something like this on time preference. Can you define what that is and then explain your view on it in a book.

[00:24:00] Tyler: Time preference is the preference that many people have to think what is coming up soon is significantly more important than what’s going to happen later. From the social point of view, I argue that time preference is not rational, that we should care just as much about the distant future.

We should discount if we’re not sure something will happen, but we shouldn’t discount it simply because it’s more distant in time. Imagine that if in the days of antiquity Cleopatra had taken an extra heaping of dessert and said, well, this may lead to 5,000 people dying a horrible death in the year 2000, but that’s more important.

When the year 2000 comes, it’s just as real as the time of Cleopatra for the people in it. There’s not some kind of waiting in the meantime that anyone has done. Morally we usually at the social level should think of time as an illusion and worry more about the future. That has an interesting implication that it turns out the best social policy will be the one that maximizes the rate of sustainable economic growth because that will make the future much better.

[00:25:07] David: What I think is especially powerful about these ideas, powerful might not be the right word here, but they are countering instinctive, let’s call it. Particularly the idea of zero discount rate that values an outcome in the future the same as you value it today. That is not something that humans naturally do. We prefer the bird in hand as opposed to two in the bush. That’s not an exact metaphor of mapping what you’re talking about.

[00:25:34] Tyler: Put off going to the dentist.

[00:25:35] David: Right. I’d rather have something today that’s more real and you deal with some of those arguments. It’s not something that instinctively somebody would just come up with probably.

[00:25:43] Tyler: You’re an actuary, so the notion of taking advantage of the power of compound returns must be quite familiar to you.

[00:25:49] David: Of course

[00:25:50] Tyler: What I’m saying is society should in essence be organized around this principle. It’s the strongest principle we have. People in finance, insurance, people who are actuaries understand this. They live and work it every day, but it’s not really a part of political philosophy. If you read the great political philosophers, it is mostly absent from their thought. What I’m trying to do is bring the idea of compound returns into philosophy. I might add also into education that the way to train yourself to be smarter is to be along learning curves that have compound returns and not just one off learning.

[00:26:23] David: Again, I think the idea of compounding is something we struggle with intuitively. Something you have to learn.

[00:26:29] Tyler: That’s right.

[00:26:30] David: You have to deliberately learn. Observe in the data in order to convince yourself that it’s true, and probably.

[00:26:34] Tyler: People will borrow money at crazy rates of interest. They think of it as a onetime fee, but when you compound that return year after year after year, it’s a terrible bargain for them, and just teaching people to think that way does not come easily.

[00:26:48] David: What I was wondering about as I was reading this, and I’m harkening back to a conversation you had with Agnes Callard where you talked about philosophy and reading the ancient texts. There’s a point she made I think it might have been an article that you referenced not necessarily the conversation itself, but this idea was there which is that we read the ancient philosophers because they’ve—

I’ll use my word, infected our thinking and it’s the roots of quite a lot of philosophical thought. They wouldn’t have had a chance to think about compound growth and zero time preference right. It seems to me this is actually a philosophical innovation, the likes of which the world hasn’t seen in millennia. Could that be the case? Big words.

[00:27:26] Tyler: Yes, Agnes has one of the deeper understandings of ancient philosophy because she also has a Ph.D. in ancient history and has studied ancient philosophy. The view of many of the early Greeks was there’s something retrogressive about history or sect like. You advance for a while and then you move backwards.

It’s hard to rip a lot of compound returns, was probably correct for them to believe that in their time. We’re now in a world where at least say Great Britain since the 1620s or so has mostly had positive compound returns for centuries. That’s a practical innovation and our theories need to adjust accordingly.

[00:28:04] David: Is this the beginning of that adjustment? Have people talked about this before or has this been unconsumed by the philosophical community for the most part?

[00:28:14] Tyler: If you look at the classical economists Smith Ricardo, John Stuart Mill they were at least toying with the idea of compound returns, they’re still living in an age of relatively slow growth. It’s not until fossil fuels that industrialization truly picks up. As far as I know those are the first glimmerings of it.

Before the industrial revolution, the cyclical model you do well for a time but someone conquers you or there’s an environmental problem and then things fall into decay. That was the rational and common view for much of human history

[00:28:46] David: There’s another problem that’s actually framing things in terms of economic growth being the ultimate goal. I know you actually define it not just as… Can we talk this for a minute? It’s not just economic growth, GDP growth, it’s wealth plus. Maybe talked about what wealth plus is.

[00:29:02] Tyler: While I talk about the notion of maximizing the rate of sustainable economic growth, but I don’t think we can quite just use current GDP numbers. They’re missing some important features. There is generally an overall decent guide, actually somewhat underrated, but they don’t count leisure time, they don’t in every way count the quality of the environment. We need to tweak them a bit if we’re going to use GDP numbers as our guide. I don’t think it’s very hard to do, but I call it wealth plus instead of just taking GDP as measured for granted

[00:29:30] David: What’s an example of something that’s in wealth plus but not in GDP.

[00:29:33] Tyler: For instance if we are releasing too much carbon into the atmosphere, and maybe 30 years from now this will have a terrible consequences, but we don’t see it quite now. We need to worry about that or a country that is growing at a higher numerical rate, but everyone is unhappy because all people do is work, you need to count that leisure time.

[00:29:53] David: The problem that this idea solves, it’s also a really nasty one. Maybe a few interlinked problems are something that you call the aggregation problem which is so let’s say the alternative to call it a numerical aggregation. In numerical this is a case of economic growth something you can measure. Now, there’s actually a value we’re assigning to things because they have a number and you add those numbers up and you get the total amount of economic growth which occurs.

The alternative to that is if you were to say talk about goals and it’s hard now to say, my objective is to maximize peace, maximize happiness, where you need to define these things for one. Then you have to determine tradeoffs between them for another. How do you add them all up together, an aggregation problem is almost insoluble in that kind of philosophical world.

[00:30:35] Tyler: My answer to the question like when can we say one choice is better than another, it’s when the better choice gets you compound returns and the other doesn’t. That’s the one judgment you can make. If the time horizon is long enough the compound returns will pay off for you.

[00:30:51] David: Maybe it’s worth talking a bit about what I think might be some downsides to that. I was struck again by your interview with Elizabeth Gelfand. You were talking about tight and loose cultures.

[00:31:05] Tyler: Michelle Gelfand.

[00:31:06] David: Michelle Gelfand, sorry. When you’re talking about that, you asked her whether there was a relationship between tight and loose cultures. Maybe we can define that for a second, if you are right with that. That it wasn’t necessarily related to economic growth. Tight cultures don’t tend to do better or worse in terms of wealth or economic growth. That seemed to be disappointing to you in a certain way. Am I right on that?

[00:31:28] Tyler: A tight culture she defines as one where the norms are fairly strong and people are fairly constrained. A loose culture is one where there’s more of choice and tolerance and openness, but also maybe people will be free to make too many mistakes. She argues in her work, there’s no correlation with wealth. I’m not sure I agree with that judgment. It seems to me there are some cultures more conducive to producing wealth than others. Maybe they cannot be well described along the axes of tightness and looseness.

If you look at the well-off countries in the world today they do have common features. The places say from East Asia that has become wealthy Singapore, Japan, South Korea have done so by importing or copying at least some particular practices from outside. I think there are common norms behind prosperity.

[00:32:18] David: Let’s just take the counterfactual then and say that there wasn’t. How would you fit what it seems to be an important distinction between human experiences in different countries that doesn’t map on economic growth? Does not just fall into the pot of the uncertainties saying that these are the sort of things are boiling away in the world they don’t actually matter, actually in the end.

How do you fit the discussion of tight loose cultures into your value system as it’s? How would you in this book or something else that didn’t necessarily affect economic growth, but it feels like it should matter but it’s not a right. It’s also not effecting growth. Is there another category or are these things actually that don’t matter?

[00:33:00] Tyler: Partly I interviewed Michelle Gelfand because she has this other axis of culture tight versus loose cultures that I hadn’t thought about enough and I thought well I’ll learn something by talking to her. What I see is a critical norm for instance is that what age do women have children and that if that’s pushed off somewhat in time you have a much better society. It seems to me that’s close to universal. You look at a country like Niger, where really a very high percentage of women have children before 18, and the human capital transmitted from the mother to the children is low.

That tends to lead to bad political outcomes, much lower standard of living. It’s not on the loose versus tight axis necessarily. It gets back to the why do the cultural axes that explain the world best. One of them is that.

[00:33:49] David: It seems to me that– I did interview with Robin Hanson on his podcast and one of the questions I asked him was what he thought was going on by– he has this distinction between farmers and foragers. This is better than me. They’re more organized society farmers, organize is the right way of putting it, but you have stronger norms, you have tight cultures. Then I think that’s the right way of mapping that. Then you have foragers societies which are much looser, I guess.

He describes it I feel like it made sense to me of this progression of our own societies, call it North American society, have going from tight to loosening over time. I asked him what he thought was going on there and he’s ever just get richer. Whereas we’re getting richer, whereas behaving more like rich people have always behaved. It’s more of a transition as opposed to a progression. Am I getting that right? What do you think about that?

[00:34:38] Tyler: That’s a good description of what Robin thinks. I’m not convinced by. Everyone has their own set of cultural distinctions or the cultural axis that matters. In my view we don’t really know it foragers societies where like. There’s a few of them left in the world today, but we’re watching highly corrupted versions of them, that are that also have had a lot of contact with agriculture and a small sample. Even then they seem to be highly diverse. Pigmies tribes found in the Amazon tribes found in the Philippines.

From what little I know about them they don’t seem to be all the same thing, the notion that values necessarily get looser as we become richer. It’s mostly been true since World War II. I’m not convinced it’s a general pattern it’s like people who think well liberalism is inevitable. Tolerance is inevitable. We’re all going to be secular.

I would just say those are hypotheses. They’ve appeared mostly true for about 40 or 50 years. If you just think we’re going to play out the clock and keep on waltzing along that line, you’re probably in for some huge surprises. Just we’ve seen like Brexit trump happen, to me suggests the standard view of; you’re sliding along these curves of ever greater liberalization is probably not right.

[00:35:46] David: The cyclical?

[00:35:47] Tyler: I would say we don’t know. Cyclical means well on average you tend to move in the opposite direction. That may just be a random walk. It may depend on say technologies which are not cyclical, but not just always moving in the same direction. The foragers, I don’t know what hunter gatherer societies really were like or are like now.

[00:36:07] David: What would your story be for their cultural, let’s not call it progression but transition over the last 50 years. You have things that appear to be called liberal changes of our society, think about gay marriage, and think about various other kind of social constraints which existed 100 years ago which don’t look so much now. What is going on or was going on, maybe?

[00:36:27] Tyler: Maybe there are two stages to the pattern. The first would be earlier in the 20th century where people go from living on farms and not graduating high school to basically car in every garage, chicken in every pot, that’s bringing us up maybe through the 1960s. You go from pretty poor to actually pretty well off. Then after that there’s still economic growth. A lot of life looks the same. Like this table we’re the bottle of water, it’s not that different from the 1960s other than the Smartphone.

Then there are stories like greater tolerance. Most of all elevation of women are social changes, changes in health. Retirement is much more pleasant. People are less likely to beat their children. In the last 40 years those seem to be maybe more important than just piling more prosperity on top of the heap. What’s coming next? We don’t know how I feel we’re at another break point. It’s making many people uncomfortable, they’re flipping out.

[00:37:23] David: Are those in wealth plus, those things?

[00:37:24] Tyler: Yes, those are in wealth plus. A greater tolerance if you’re born gay today, your prospects are really much better than would have been the case in the 1970s, in the United States at least.

[00:37:35] David: Does that result this the idea of being born gay being better off and wealthier societies, does that hold statistically across the world?

[00:37:43] Tyler: Certainly for the Western world it seems to me there might be some African countries where that’s not the case.

[00:37:49] David: The richer they get the better it gets for the gay population.

[00:37:53] Tyler: I would say I’m uncertain, but it could be wealth is also greater surveillance in some ways. If you have anti gay norms in a society, you can have periods maybe also in Jamaica, where greater wealth is going with inferior treatment of minorities, people who are gay, people who are different in other ways. It’s not always all pointing in the positive direction.

[00:38:13] David: Again back to my original thinking here is these are things which in the strict reading of your value framework matter then in the sense that they are related to economic growth, and they are a part of wealth plus.

[00:38:24] Tyler: Absolutely. If today you’re born and you end up being gay, you will be probably more productive. There’ll be less discrimination against you. You’ll get a better job; you may have a better chance of founding a company. That counts than regular GDP, but you’re probably happier, you have a greater chance of finding a partner or building the kind of life you want to have. Not all of that’s in GDP but it’s very important.

[00:38:48] David: Another thought that I was having, this is more in your wheelhouse of the world of public intellectuals. Here’s the question, should academics or people who seek to influence the world, and according to your value system should they try and boost economic growth more? I’m thinking of in your podcast, you’ve had venture capitalists. I think of these in some ways as public intellectuals who are trying to boost economic growth.

[00:39:12] Tyler: They think very conceptually venture capitalists.

[00:39:14] David: They do.

[00:39:15] Tyler: They’re generalists.

[00:39:15] David: They are. Are they similar to university professors?

[00:39:19] Tyler: Well, they’re much better.

[00:39:20] David: Better at?

[00:39:21] Tyler: Almost everything. They’re smarter than we are. They’re playing with real stakes. They understand more different things, they’re better at judging people, they’ve created better for the world in most cases, and so we should feel ashamed of ourselves if we sit down with venture capitalists.

[00:39:35] David: Yet they don’t win a Nobel Prize, and they can’t become call it historically famous or much less so. Obviously–

[00:39:41] Tyler: I think they will become historically famous.

[00:39:43] David: Do you?

[00:39:43] Tyler: Well, they already. Well, like Mike Moritz or Marc Andreessen or Sam Altman Y Combinator. I think they will go down in history as major figures of great import.

[00:39:53] David: Would there be an analogue? Is it like a Rockefeller kind of thing or is there a higher level of status associate of you get they’re achieving, that is achievable for them. Something like, I think between let’s say a Rockefeller and Albert Einstein. Similar levels of achievement. Einstein’s way more revered and more famous, I think. What in the future would today’s Einstein actually pale in comparison to Peter Thiel let’s say or Marc Andreessen or one of these guys.

[00:40:17] Tyler: I don’t know that we have an Einstein today. There’s plenty of science but particular contributions are more doled out into parts. There’s more division of labor. Maybe Craig Venter or someone would be something like that but you don’t even hear his name as much anymore.

[00:40:30] David: You don’t.

00:40:30] Tyler: Which is odd. Someone like Mark Zuckerberg Peter Thiel in relative terms I think a lot of us are underestimating how much fame they will keep. They will be like symbols of an era, people behind Google.

[00:40:44] David: They will build a point to something because I feel like you need it. You need a trinket. I think you need some cool in the water if that is.

[00:40:49] Tyler: Because the internet is that trinket and the internet may be replaced by something better, but it will still be seen as an extension of the Internet. These will be like the Einstein’s of the internet.

[00:40:57] David: It’s not too diffuse because I worry about their status. I worry about the future status, future perception of the current status of a Peter Thiel because I feel like he had a great return on equity or whatever the percentage that some assessment of the economic contribution that he made, but those seemed to be such dry statistics. That is not inspirational to people. I worry about that. Do you think I’m right on that or?

[00:41:19] Tyler: I think there will be 10 to 15 people seen as essential behind the development of the internet. Peter Thiel and other venture capitalists and CEOs will be on that list. There’s still time for others to displace them, but they were in there at the early stages and people in the early stages they who wrote the first novels or the first symphonies, they tend to keep those positions I think.

[00:41:41] David: I think I distinguished, so let’s call it the Venn diagram of intellectual life you have academics obviously explicitly dedicated to that. You have venture capitalists. The circle covers academics but also covers some of this business; you may call more prosaic kind of business thinking how to manage people, which are important skills. I spend a lot of my day job thinking about those problems and there are problems underappreciated problem. There’s another part of that Venn diagram which doesn’t really overlap as much as with venture capitalists, and that’s journalists. Things surprise me a lot of what journalists actually how damn smart they are.

[00:42:13] Tyler: Of course.

[00:42:14] David: Remarkably so. They are also I think of as another world academics in a lot of ways. There’s a lot of overlap to what academics do and what journalists do. It seems to me that venture capitalists are just eclipsing them as couch potato or sorry like armchair academics and are not adding maybe as much value. What I’m wondering about is in your philosophical framework, do you think that journalists are overvalued because are not necessarily contributing to economic growth.

[00:42:40] Tyler: I think journalists contribute a great deal to making politics better by enforcing accountability. I can’t think of individual journalists today who I think will remain famous for long periods of time. There are simply very many good ones. It’s journalism that’s adding value. If you said Well who’s the Einstein of journalism or even like the Peter Thiel, Mark Andreessen of journalism. Mark Zuckerberg of journalism whatever you might think that to mean, it’s much harder to come up with the names. You would just say well, the whole ecosystem.

Whatever happens with the Trump administration I don’t have a prediction at the moment. It seems under all scenarios journalism will have played a major role in the final outcome there and that’s significant.

[00:43:23] David: It may be tying it together with the book, you mention it was interesting actually you said, one of the ways in which you recommended we synthesize it, is actually that we should have undervalued East Asia. Can you explain what that means? That’s an interesting comment.

[00:43:41] Tyler: Well, I’m not sure that East Asians undervalue East Asia.

[00:43:44] David: Fair enough.

[00:43:45] Tyler: Americans were certainly all familiar with the fact that a number of those countries have grown at a rapid pace. To me there of special moral importance that’s like the one case in world history where countries did everything possible to grow at its rapid pace as possible, and basically succeeded. We should revere those experiences as a kind of central principle, a world historical principle that East Asia got right so far and nowhere else has.

[00:44:15] David: Do you know why? Why would they have gotten that right because I think if they had come a longer history of these ages is being a little bit more depressing and cyclical?

[00:44:22] Tyler: Of course.

[00:44:22] David: Things like China, they’re closing off in Japan and those countries actually being to reference another book of yours, “incredibly complacent.”

[00:44:29] Tyler: At least recently, relatively recently they’ve grown at rates approaching 10%. For the most part they have stayed quite stable or even become more stable. Of course growth rates fall at some point. They had wise leadership, often good policy, in many but not all cases well-educated population. If you look at Chinese education or even Chinese IQ, while China was still poor, IQ and education were pretty decent in a way that was not true for Western Europe in the year 1500 or 1600. They had that Headstart. They understood how to build on it.

Singapore were probably has had the smartest economic policy maybe of any country ever. Those are impressive achievements. I’m glad there’s this movie out now, Crazy Rich Asians, there are objectionable features to the movie don’t get me wrong. The mere fact there’s something on the screen Americans can look at the screen see Singapore and say Oh my goodness these people live in a much nicer place than we do, ought to be like a slap in the face and a wakeup call. I’m delighted that it’s out there for all of team perfections.

[00:45:35] David: The word you actually used when you described that was the Straussian reading of the book. Listen, I’ve been reading your blog Tyler for 10 years, and it was only a couple of years ago I figured out what Straussian means, should you just define that for us quickly, and we’ll talk about that again for a second.

[00:45:48] Tyler: Well, I often use the phrase Straussian reading or I refer to Strauss. The single question emailed to me the most often is what does this mean? I think the point is there’s not quite a single meaning and if you Google what is Straussian

[00:46:02] David: I tried that a few times.

[00:46:03] Tyler: It doesn’t necessarily help that much. Leo Strauss himself was a deliberately obscure writer. I think of Straussian and thought as a method, not a single conclusion. That’s why it’s hard to define. You try to read things that ever deeper levels and pullout ever richer layers of meaning, and that’s the Straussian and method. It’s useful for making you smarter and see different perspectives. It is the like much more specific view the belief that older writers wrote in a form of code. They didn’t always say upfront what they thought. I agree with that. When I say Straussian I mean the broader approach to Straussian and as–

[00:46:39] David: As a close reading, deep reading. There’s a hidden messages maybe it’s deliberate, maybe it’s not.

[00:46:44] Tyler: Always probing more and more. Then you meet actual Straussians, ask them what Strauss means, you get all these different answers, but like the thing they embody is this passionate commitment to always trying to read think at a deeper level. That to me is very impressive.

[00:46:58] David: I have a Straussian reading of this book and this Strauss in reading is that actually—

[00:47:02] Tyler: I’m happy already by the way.

[00:47:04] David: It’s actually a sequel to average is over. I know it’s not. This is how I think of it, is actually averages over. We’re listening to your podcast with Russ Roberts. In that he made the point and first but you were agreeing about the fact that averages over which I’d like you to summarize that if you don’t mind in a moment.

I’ll give it my shot which is about how there’s this in society there is going to be a big difference between people who are very good at the development, the technology that society is producing. Then you have people who are not and you’re going to wind up with what Ross calls a bi-modal distribution which as you have a whole bunch of haves and a bunch of have-nots and sort of hollowing out of the middle of society.

In that conversation you were talking about how really the book was, as you put it there are, not normative in the sense that you were make really bettering opinion on it. You weren’t saying whether this is good or bad, this is what’s happening. I think that the Straussian in reading of Stubborn Attachments is that that’s not true. It actually, this is a message to the have-nots, a room averages over and saying, just do it for your grandkids.

[00:48:06] Tyler: I agree with that, but see your bid and raise your feel. I think there is a consistent Strauss in reading of all my books starting in 1997 with In Praise of Commercial Culture. In Praise of Commercial Culture what price fame my early books on culture. They’re mostly positive and optimistic about commercialism, but they see some ways in which it’s alienating and they raise the question of whether commercialization, capitalism creates sufficient mythology or religion to be self-sustaining.

The optimistic books are in fact a bit pessimistic. One thing Stubborn Attachment is trying to do is fill in the boxes of what that mythology has to look like. There’s extreme valuation of the future attachment to compounding returns, sustainable economic growth. I also understand that’s not enough to inspire most people. You need a lower level more religious version of that idea. Stubborn Attachments read between the lines indicates that I think suggests that rather strongly.

I think I don’t know like 15 books or so however many I’ve written, they more or less all tied together with this consistent message. Each one has a kind of flipped Straussian in reading the optimistic books are a bit more pessimistic than they look. The pessimistic books are more optimistic than they look. It’s all part of this big long story, but I’m not allowed to say that anywhere else only on your podcast. I’ll never say it again.

[00:49:32] David: Boy, you very much. I’m always switching to some more general topics I guess. One of the things that you’ve done for me actually is and this is probably not as early Strauss in reading of your own advice which is to lower the status of books, so you read a lot of books?

[00:49:47] Tyler: I read a lot of books.

[00:49:48] David: You throw books away?

[00:49:50] Tyler: Correct, it’s become a problem for me. I get so many review copies not a complaint. By the way if you’re a publisher listening, but simply carrying them away from the house is become a logistics issue.

[00:50:01] David: They’re heavy.

[00:50:01] Tyler: I give a lot of them away. I don’t throw them all the way by any means. The good ones I give away. I’m very careful to give it to the right person. Some of them I feel well if I give this to a person they might read it and they should be reading Moby Dick instead. Unless I think it’s the very best book for someone in particular to read I won’t give it away.

[00:50:18] David: You don’t finish books, most your books.

[00:50:20] Tyler: Correct. I just read parts of them.

[00:50:22] David: As much as you feel like you want to.

[00:50:25] Tyler: A lot of books I reread, my favorite books the most important books I try to read three four times in the course of my life.

[00:50:30] David: You’ve mentioned many times that you reread Shakespeare frequently. It’s something that I’ve struggled with because I can’t get through the language. Any advice for me?

[00:50:42] Tyler: It’s very hard. I find for instance if I see a Shakespeare play on the stage, I literally cannot understand what they’re saying. If I read a Folger edition with notes and follow the notes, I can do fine. I’m a slow reader of Shakespeare. To get the right edition for you, Folger is one place to start. Without the notes, it’s maybe not going to work. I worry that 50, 100 years from now, no one will be able to really read Shakespeare. The sense that hardly anyone can read the real Chaucer today.

[00:51:12] David: What do you get from it then, if you can’t really read it? Could you still get something from it? What do you get from it?

[00:51:19] Tyler: I can read Elizabethan in English well enough with notes. I think Shakespeare is the deepest most profound observer of human nature and the diverse condition of humanity, the nature of political power, the differences between the sexes, tragedy, comedy everything is in there in a way that’s not the case for any other thinker humanity has produced. Maybe only two thirds of them require study. Some of them are not necessarily that good. Merry Wives of Windsor, you should you read it once. Probably should you study? Probably not.

Something like the Henriad or King Lear or Hamlet or Measure for Measure, Midsummer Night’s Dream, my goodness you could like read these every year for the rest of your life and always discover more.

[00:52:03] David: Is Tyrone kind of Shakespearean? What does he emphasize intellectually relative to you? Is it more about the kind of the darker side of human condition; is that an appropriate reading of Tyrone?

[00:52:15] Tyler: Think of Tyrone as one of the Shakespearean, “Fools or buffoons,” who Very often speaks the truth and says things other people won’t say or can say are afraid to say. He’s a particular kind of Shakespearean character.

[00:52:28] David: I think sometimes of when I see somebody making a mistake or doing something that’s wrong or appears to be wrong or probably is wrong, I often get it. I know why you did that. I feel like that because I’ve experienced similar urges in my life which are the wrong thing. You don’t always do it sometimes you do have made mistakes, of course. I feel like that I’ve an appreciation maybe an over appreciation for that and a little bit too much sympathy to people who make mistakes because I just kind of get it, and I understand how you could easily do that.

I for some reason get the feeling that people when they have those feelings, they forget about them for some reason. They load up with negativity or opprobrium on people that make mistakes. Don’t seem to me to understand feeling in the right kind of way. Tyrone seems to me to be an indication that you do understand feelings in people, is that you feel them yourself? Do you do you introspect about that and do you like I get why somebody made those mistakes?

[00:53:26] Tyler: I Sure. I have a phrase I call it devalue and dismiss. You can always look at what other people are doing find the mistakes and play a strategy of devalue and dismiss, this person said that or they had this outrageous moral view, they forecast that incorrectly. You still want to learn from them. It’s often the people who offend you the most at least at the margin; you can learn the most from. I’m not even saying they’re the wisest but they’re probably the people in the past you’ve learned last from, because they offend you. Try to learn more from those people.

[00:53:58] David: I want to switch your podcast a little bit. I was Straussian reading of your podcasts. I love your podcast.

[00:54:03] Tyler: Thank you.

[00:54:04] David: What’s interesting to me is the variety of guests. Podcasts tend to be tend to be variety shows. I think that your style is really interesting because you have obviously a broad range of interests. In some ways I find that that description of you to be a little silly because I feel like everybody has broad reaches of interest, you’re just more public about them. The more the people are maybe, you’re putting yourself out there a bit more.

You’ve interviewed Kareem Abdul Jabbar, Martina Navratilova, Dave Barry and what amazes me about some of those interviews in particular Dave Barry one it struck me. As you’re coming to it actually as an economist, and so the jargon you are using and the kind of questions you’re asking, to me the Strauss you’re reading of your podcast, incorrect Strauss reading in my mind is saying to I guess the world isn’t it cool how economists are, and how we can actually ask people these questions. I’m a variety show, one man variety show, and that’s neat and academic.

Raising the status of academics, but actually in the real Strauss you’re reading is the message the audience for conversations with Tyler is academics and saying here’s the things you should be interested in. I’m interpreting the rest of the world in a language that you can understand, and I don’t care if you don’t know what Straussian means.

You don’t use that word and you’re being more kind on that of course. You’re not actually sacrificing what I see it as your intellectual style, as a certain region you’re from. You’re interpreting the world explicitly as an academic economist and showing everybody that it can be done.

[00:55:31] Tyler: Well, I think both of those are true. You called one the real Straussian in reading-

[00:55:34] David: Or my own.

[00:55:35] Tyler: -that makes me a little nervous about possible Straussian readings. Then the other Straussian reading is I want to do these interviews so I can focus my own reading. I learned more when I read if I’m preparing for someone or something. I’m not in any way paid to do it. The notion that it improves the quality of my reading as what it’s really about in a selfish way. That’s yet another quite significant; you could call it Straussian in reading. I don’t know if it’s even that but it’s a big motive for me.

[00:56:05] David: Do you listen to podcasts?

[00:56:06] Tyler: No not at all.

[00:56:07] David: Really, interesting.

[00:56:09] Tyler: I find them to slow, often boring. I don’t like how most people do interviews. There are too many questions. Could you tell us what your book says? Then you get some kind of drone like answer, where I could read it like 13 x speed. Even you do one point 5 x on podcast why should I listen. I will listen if I’m about to interview a person as a prep but I never feel it’s like what I want to be doing. What I want to be doing is reading.

[00:56:33] David: I listen to a lot of podcasts reason I’ve started this podcast. I get a couple of things out of it. One, I can do it on podcast time which is when I’m doing something else; I actually tend to listen to a podcast. Cleaning the dishes or walking the dog whatever I’m doing, commuting. A little less than I’m commuting because I feel like I have too much attention energy when I’m commuting, I’d rather be reading or writing or doing something else. I think podcasting is maybe the one the most significant educational innovations since the printing press, because I think that.

[00:57:03] Tyler: I agree.

[00:57:03] David: This one particular way because I think that what’s great about conversations is that there’s misunderstanding in a conversation. You can get worked out in real time. I think writing is a little bit too perfect and in the sense that you can actually express an idea very efficiently and a written word but it isn’t understood efficiently because you read it over and over again sometimes only a complex idea. Necessarily you don’t have an audience to kind of react to what you’re saying. I think in podcasting in conversations you have this interactive element to it.

In listening I think that Russ Roberts’s podcast is one of the things that taught me maybe more than anything else I’ve ever encountered in my life because it’s two experts talking about something for the most part. They skipped through all the intro crap because that’s boring for the most part to them into me.

They go right to the hard issues. Through the hard issues you can actually get enough feel for what the underlying principles are leading to enough of them. Hearing experts converse about a topic I think is really I think the best thing I want to do with my spare time. I want on particular to learn about a new topic.

[00:58:03] Tyler: I like reading transcripts of podcasts.

[00:58:05] David: That is interesting.

[00:58:06] Tyler: Here’s the thing in my life. I write every day. In my downtime things like driving, commute, I listen to music first of all I love, but I feel I need to keep my mind open for what I’m writing on. The podcast fills me up too much. I don’t want to hear it in the car. I don’t want to be trying to learn Spanish in the car or whatever else I might do. I want that to be a free open time and music does that for me. Then I get more in.

[00:58:32] David: I find that sometimes I can have some of my most interesting thoughts or when I’m listening to a podcast and my mind wanders a little bit into some other topic that it’s almost a subconscious wonder. I actually stop the podcast and I’ll just sort of think that thought for a little while and I might write something down.

Once that being a kind of catalyst for other thoughts which are like– There’s one podcast episode which is I think my favorite podcast episode. I’m wondering if you’ve heard of it. It is Ezra Klein and Sam Harris debate, have you heard of that?

[00:58:56] Tyler: I’ve heard plenty of it. I’ve heard many people email me and ask me what I think of it. I haven’t ever heard it. I’ve heard it was a kind of train-wreck though no one can quite agree like who is at fault or what went wrong. I certainly know what you’re talking about.

[00:59:10] David: It’s my favorite podcast episode of all time. I agree with the assessment that it can be considered a train-wreck. I think that the people who came out most disappointed that were probably Ezra and Sam, because I think that they didn’t resolve their tension and I don’t think their minds didn’t meet.

It’s almost as though that the product they created was a phenomenal educational tool for everybody else. I think the rest of us really benefited from it because I think it shows how two well-meaning super smart caring people; people who wanted to get there and figure something out couldn’t do it.

To me there are all sorts of Straussian readings hidden messages but also just sort of naked displays of the limits of some inquiry can be. I listen to it again. I’ve listed to it twice. I’ve listened three times. I don’t like hearing it. I actually find it uncomfortable, but I found it to be educational. I think that it’s almost I think the Strauss reading of that debate is actually whether politics matters.

You think of like Sam’s point is he’s against the extreme criticism, the ostracization of public intellectuals for associating with Charles Murray’s ideas. Ezra. I think his point there are certain topics which should be off limits, and because of the social destruction they can wreak and empowering other people who will do bad things with those ideas.

That’s kind of my assessment of it. Ezra might not agree with that or Sam. Really it comes down to is I think of whether if you’re influencing a debate publicly in some ways do you have to consider that when you are writing something or when you’re conducting research.

It’s not just about the objective question you’re asking or they were things which are unrelated or should be taken into consideration. I think Sam disagreed with me. What do you think about that? I know you haven’t listened to it you’ve heard a lot about it, about that idea?

[01:01:03] Tyler: Maybe I deliberately choose not to listen to it, but I suppose I’d like a controlled experiment to rerun that podcast but switch out no one time Sam and one time Ezra with other people and see what the result is and compare. Maybe we’d learn something more from that.

[01:01:19] David: That’s interesting. Here’s the other pitch for podcasts. My favorite podcast is a podcast called heavy hands which is about mixed martial arts.

[01:01:27] Tyler: Who runs it?

[01:01:28] David: These two guys called Connery Bush and I used to be named Patrick Wyman, now it’s Connery and Phil McKenzie. It’s independent and I don’t even watch anime. What is amazing about it is that technical analysis of the sport. These two guys who are really smart guys just talking about something that I’ve learned by listening to the podcasts and don’t actually directly enjoy it myself, I’ve had a history of doing this because I’ve read Bill Simmons blog for years and you’re a basketball fan.

[01:01:56] Tyler: Sure, I love Bill stuff.

[01:01:57] David: I don’t even like basketball but I love reading and writing about basketball.

[01:02:00] Tyler: It’s just the analytic.

[01:02:01] David: That’s right.

[01:02:01] Tyler: Informationally dense.

[01:02:03] David: I don’t really watch movies but I loved reading Roger Ebert when he wrote movie reviews. He was such a great writer in movies. I actually enjoyed the reviews and liked Bill’s articles more than I enjoyed the actual product itself. It’s a kind of consumption, it’s a medic consumption of an actual product which itself can be enjoyed which to me is counter intuitive.

[01:02:22] Tyler: One of the things we learned from podcast I think is how often the audience doesn’t mind when they’re completely clueless about what’s going on. My podcast with Garry Kasparov, there’s a part where he and I talk about chess quite intensely and rapidly.

[01:02:35] David: I loved it.

[01:02:36] Tyler: A lot of people love that. They’ve written me, they’ve told me and they don’t even play chess, but they feel something about the connection. I think podcasts could go further in this direction of realizing look, what the audience actually wants from the podcast isn’t quite what the producers might think, it’s something more ineffable.

[01:02:55] David: I think of the quality as you’re looking for people who are real. I guess that’s what charisma to me is. It’s something that you can be coherent and articulate and interesting at the same time is really actually speaking from the heart.

[01:03:07] Tyler: My podcast with Callard has the same whether or not people know a lot about ancient philosophy or Plato, somehow that dialogue felt real to them I think.

01:03:16] David: It did. It’s a personal expression of your interest is to do your podcast and overlap with some parts of your audience and not others. It amazes me when I talk to people about it. Everybody likes a different episode, listens to different episode. It makes it very hard to track how many people it listens to the stupid thing.

[01:03:29] Tyler: That it’s not too professional. The sound quality should be good. It shouldn’t be obviously unprofessional, but at the same time you don’t want to package the way say a TV show would be.

[01:03:41] David: We’re running out of time, but I wanted to touch on one of the idea which is your own audience. You recently you were writing a New York Times column for many years, and you switched over to Bloomberg. You do write popular works, right?

[01:03:54] Tyler: Popular is a tricky word, you can continue.

01:03:16] David: It did. It’s a personal expression of your interest is to do your podcast and overlap with some parts of your audience and not others. It amazes me when I talk to people about it. Everybody likes a different episode, listens to different episode. It makes it very hard to track how many people it listens to the stupid thing.

[01:03:29] Tyler: That it’s not too professional. The sound quality should be good. It shouldn’t be obviously unprofessional, but at the same time you don’t want to package the way say a TV show would be.

[01:03:41] David: We’re running out of time, but I wanted to touch on one of the idea which is your own audience. You recently you were writing a New York Times column for many years, and you switched over to Bloomberg. You do write popular works, right?

[01:03:54] Tyler: Popular is a tricky word, you can continue.

[01:03:56] David: I’m wondering why you do that, is it just because you find it fun to try and constrain yourself in a certain way to speak because your blog is the popular voice Tyler, right? You use more jargon, you speak about kind of over esoteric things. I think that I definitely when I flick through your links and read the Bloomberg columns, it’s definitely for a popular audience and it’s edited, and there’s a different feel to it. Why do you do it?

[01:04:22] Tyler: My Bloomberg editors don’t in general change my voice. They may improve certain things, but they don’t try to make it sound not like Tyler. What you read on Bloomberg is like the Tyler Bloomberg voice. It’s this idea of multiple perspectives that you should try to write some things through blog posts, other things through Bloomberg columns, New York Times columns, other things through tweets and you’ll understand it better. Writing for the Bloomberg audience which has a fantastic audience, I meet people who read them all the time is another way to learn things. It’s also a job too, right?

[01:04:59] David: Sure, that helps. Let’s close on one last point which is the proceeds of the book Stubborn Attachments, you want to talk a bit about when and why you decided that because you did publish a version of this book a little while ago. Then now, you actually this is a proper publication and something changed your mind. What was that?

[01:05:14] Tyler: I put it free online about two years ago I think. I just wanted people to read it. Then there was a new project called Stripe Press which comes from the payments company, the tech company Stripe. I thought this would be a great place to publish the book with a company that’s actually doing things and trying to maximize GDP of the internet. It’s part of the Stripe mission. I just thought that would be perfect. The book is idiosyncratic and of the mainstream New York publisher probably wouldn’t even consider it. It’s too philosophical. It’s not like the normal length, it’s shorter than average.

Stripe was interested but I thought like this shouldn’t be a book for me to profit from. I was traveling in Ethiopia, I guess this was in June and I met a guide in Lalibela who I will call him Yonis. It’s not his real name to preserve his privacy. I thought it would be neat to send all the proceeds of this book to him. One of the themes of the book is the wealthy countries being wealthy helps the poorer countries. I believe people should actually try to live their work. If they write something and mean it they should incorporate that into their lives to be consistent.

I’m saying well, the wealthy countries help the poor countries; I should do more of that. I argue in the book people should be more altruistic at the margin. I thought here’s my chance. Yonis’s yearly income is really quite low. The proceeds of this book in terms of him buying a house, taking care of the 10 people he is responsible for, he wants eventually to start a travel business in Lalibela. He struck me as a man of high integrity and intelligence. He taught himself good English all on his own. Of all the people I met, I thought he’s the one I should give this money to.

[01:06:57] David: My guest today, Tyler Cowen.

[01:06:58] Tyler: Thank you very much.

[01:06:59] David: Thank you very much.

How Arbitrage is Like Specialty Insurance

This episode (mp3, youtube) is about diving deep into a comparison between stock market arbitrageurs and specialty insurance underwriters. The idea for the show came from the guest, Rich Derr, an actuary at Nationwide Insurance Company’s specialty division and I love nothing more than falling down a well with someone comparing financial and insurance markets.

The original paper that inspired Rich is called The Limits of Arbitrage and doesn’t really contemplate insurance. That’s our job! I learned a lot in this conversation, actually, and some of the insights will stick with me a long time.

The paper has two really important ideas. The first describes what I’ll call ‘ironic opportunities’, which are situations where failure actually emboldens you to further action.

David Wright: It looks riskier and that’s the real core insight, isn’t it? When the position goes farther away from where you think it should be, it looks scarier.

Rich Derr: Yep. And especially if you don’t have that specialty knowledge, you’re looking at that position and as the investor, you’re going, wait a minute, you’re telling me everything’s fine, but you’re, you’re recognizing a loss and now you’re coming to me for more money. And where it gets even more fun is the arbitrageurs are saying not only that, but the opportunity is actually better right now. And so we need more capital to go heavier into that position. Um, and that’s, that’s the difficulty of the arbitrageur.

The second idea is that monitoring a specialist is incredibly hard, so capital providers can understand these that ironic opportunities exist in principle but you need to have limits to your ability to trust an arbitrageur. The solution is almost cruel in its simplicity: just look at their track record.

David Wright: So how do the capital providers decide whether to give you money or not?

Rich Derr: So that’s one of the key assumptions of this paper and it gets into the performance based arbitrage, sorry, performance based allocation. What they do is how they decide who gets the capital as they look at the historic experience of the arbitrageur because the strategies of the arbitrageur is so difficult that they don’t really understand it. So they’ll look at the historic results and say, hey look, historically you’ve done great, you’re going to get capital. Historically you’ve done.. meh.. you don’t get a lot of capital, but that kind of provides a disconnect, right? Because what you should be looking at is the expected results.

It’s fantasy football time. So just using that as an example, like if you just used the last year to judge what the players are going to do next year, you’re gonna you’re going to lose. You need to. You need to look at what’s the expected results are and that’s how they’re making the capital decision.

Both of these ideas map to insurance: you have ironic opportunities all the time in insurance and extremely opaque measures of quality. It’s so hard to know who is good!

Listen to the whole thing for more including on some issues I have with this including the point that long successful track records might not be so great and deeper dives into what this framework can teach us about insurance.

Thanks for listening!

Are you an actuary? Someone you know? Check out the Not Unprofessional Project, for the price of a CAS webinar you get unlimited access to content dedicated to Continuing Education Credits for Actuaries, especially Professionalism credits. CE On Your Commute!

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Joshua Gans on AI

How are we supposed to think about Machine Learning? How are businesses going to change? This week I interview Joshua Gans (youtube, mp3), Professor of Strategic Management at the Rotman School of Business at the University of Toronto and the Chief Economist at the University’s Creative Destruction Lab. Joshua is the co-author, along with Ajay Agarwal and Avi Goldfarb, of Prediction Machines: The Simple Economics of Artificial Intelligence.

Links for this show:

Prediction Machines Book

Benedict Evans on AI

Mind as forecasting machine

Genotypes vs Phenotypes

Capitalism without capital

AlphaZero learns chess

On why economists are joining tech companies?

Joshua Gans: ..we’re talking here about artificial intelligence and if there’s ever a place where, academics and business of sort of fused together, it’s in that field, you know, all of the main pioneers of artificial intelligence, almost, almost all are, um, not now purely academics… I think there are situations in which maybe always has been more integration versus others..

David Wright: and maybe you identified an important idea there which is a lot of technology emerges from academia as well from engineering departments and computer science departments and so they sort of naturally dragged along a few of their friends. Maybe instead you should join us, you’d have something to say here…

Commenting on Benedict Evan’s conception of Machine Learning as data processing:

David Wright: So there’s an analyst who works for Andreessen Horowitz: Benedict Evans, you’ve probably heard of him. And he has a framework for evaluating AI. He wrote a blog post a couple months ago where he said, really, there’s three ways of thinking about the applications.

  • The first is do the things we’ve already do, but doing them better.
  • Then: Do you ask new questions of existing data that we already have.
  • And the third is bringing new data to analyze.

The third one is the most advanced one, the ones that’s the most sexy, let’s call it. And that’s you spend your time second ago talking about but the first two are really probably where we’re generating a lot more of the value I would argue. And so how should we think about that? As a kind of evolution of the ability of AI to do things we already do but a little bit better..

Joshua Gans: I mean the issue that I have with that setup of, you know, what is it doing, it’s not that it’s wrong, but it’s like hard to see. Interesting because you know, we’re going to learn stuff from data and this is true. And so, you know, that data, more data, new data, the whole thing. It tends to put an emphasis on finding the data. But the way we see it, *it’s more finding the problem.*

The bottom line:

Joshua Gans: I think in the next let’s be more interesting in the next five years, there’ll be a startup somewhere who manages to reformulate what, what wasn’t a prediction problem as a prediction problem. Solve that. And it impacts broadly on our lives. The one thing I know about these radical innovations is how they actually ended up manifesting themselves, was always different from what people were imagined at this stage and you know, and I think the same is going to be true of AI.

All that and much more, including a theory of the mind, a discussion of physical intelligence and of course applications for the insurance industry!

Are you an actuary? Someone you know? Check out the Not Unprofessional Project, for the price of a CAS webinar you get unlimited access to content dedicated to Continuing Education Credits for Actuaries, especially Professionalism credits. CE On Your Commute!

Subscribe to the Not Unreasonable Podcast in iTunes, stitcher, or by rss feed. Sign up for the mailing list at notunreasonable.com/signup. See older show notes at notunreasonable.com/podcast.

The Not Unreasonable Book Club-Episode 1

Today I’m kicking off a new series tentatively called the Not Unreasonable Book club to be co-hosted with Steve Mildenhall (who is running for the board of the Casualty Actuarial Society, so vote for him!). Steve is an assistant professor at St John’s University’s school of risk management and former head of Analytics at Aon Re. Steve’s an all-around smart dude and I’m looking forward to learning from him and hopefully disagreeing once in a while!

Books and papers discussed in today’s show (youtube, mp3):

On Radical Markets: Uprooting Capitalism and Democracy for a Just Society by Richard Posner and Eric Glen Weyl

Steve: The basic idea was that you have a wealth tax that would be a self-assessed so you would post your reservation price on assets you own particularly property and you would be taxed according to that to that value but if someone else came along and they wanted to buy it they could buy it at the value that you had posted it

David: that’s your sell price

Steve: yes, it’s kept you honest in your assessment.

David: if you put your too high your tax bill goes up and if you put your price to low somebody will buy your property

Steve: It’s a way around eminent domain problems and hold-outs against construction. If you’re bought every other house along the Train or the right of way or whatever and you know this would be a way of ensuring that those projects that would maybe have a greater of social value would be able to proceed.

David: what do you think about the argument?

Steve: I mean it’s I like it’s concept it sounds great

David: it’s cute

Steve: it is cute. As someone who lived in the same house for 25 years and had an unreasonable attachment to, I didn’t like the idea that someone could come along and just move me out of my house. I did think they missed a couple of points. Presumably if I could post a low price, they could post a price and I could just buy it back. It would be like sniping on eBay auctions where you’d have your listed price and in the back you’d have an actual price you’d bid up to. So it would be a more complicated market than they described. The piece that I struggled with was that they identified the use with the highest value as the use to which the use to which the person who’d be willing to pay the most would put the property and I don’t think that actually is true.

Capitalism without Capital: The Rise of the Intangible Economy by Jonathan Haskell and Stian Westlake

David: one of the ideas that I just love thinking about is the idea that intangible assets have increased as a share of total assets.. insurance companies are maybe not a great example because they’re entirely made of intangible capital..

Steve: Well I’d argue that they’re entirely made of tangible capital

David: Cash

Steve: The cash is the only capital. This is an interesting discussion. It comes down to when a you set up an accounting standard which is what we’re talking about here is what is the objective of the accounting standards and therefore what should I count an asset. And if you think about insurance companies, statutory accounting is around ensuring that claims are going to be paid and so can only count assets that can turn into Cash. If that asset that is not going to turn into cash it shouldn’t be on the statutory balance sheet…

David: Let me go back and try and defend my view that insurance is entirely intangible assets…

The Theory of Risk Bearing: Small and Great Risks by Ken Arrow

Steve: Arrow’s paper has a number of implications for how risk should be shared and what is paper says is risk will end up being shared through a large number of bilateral contract and the net effect of it is that all risk will be thrown into pool and then everyone will Quota Share the pool. And if you do that all of the diversifiable risk has gone away because all the risk is in the pool and you’re just left with the systematic risk ‘what’s the size of the pool’ is the only risk variable that’s left.

David: the only variable that should inform pricing.

Steve: Risk, and people.. sort of the share can come back is inversely proportional to my risk aversion so if I’m more risk-averse I’m prepared to accept a smaller share back in exchange for having gotten rid of all of the risk, right. Less risk averse people will take greater share of volatility. And this was Arrow’s theory that risk was implemented through Arrow-Debreu securities which you may have heard of, which pay $1 in one particular state of the world. So that’s the most fundamental insurance contract if you will and from that I can price any security because any Security is just a combination of these fundamental Arrow-Debreu securities. So this is a wonderful theory when it all works kind of nicely.

David: Except it doesn’t

Steve: It works nicely in theory, I should say. So Ken Arrow’s observation around this is well there should be a lot of risk sharing going on and we also noticed that there’s no place for an insurance firm is in this Arrow-Debreu world… and yet we see them everywhere.

The Nature of the Firm by Ronald Coase

David: An interesting paper that won the Nobel Prize I think in economics which was amazing really for another really short paper and easily readable paper written in 1937 still resonates today. And the question is why do we have firms at all in any industry because if the market mechanism allocates things efficiently to your point there I think but I don’t know if arrows theorem had been.

Steve: It was afterwards.

David: It was afterwards, but we’ll just take it for granted that the economic economic allocation of resources is efficient because of market transactions because you have the price system that governs the value and Ronald Coase says why the heck do we have companies then because companies are not markets they are command and control organizations where you have a CEO telling somebody else what to do and they do it and there’s no price transaction between them.. why? Steve, why don’t you give us the answer.

Steve: [laughs] So the argument against command and control is a sort of amusing everyone looks at the government and oh, the government is necessarily going to be inefficient and stupid at doing things it is so amusing to me or ironic maybe the better would that the theory that sealed that came about just after the second world war that was won entirely on a command-and-control basis.

David: Sure, militaries are the original corporation.

Steve: Governments get this bad rap, but what’s the difference between working in a government and working in a firm…

Do listen to the whole thing!

Many thanks for Steve and feel free to email me with ideas for books we can cover in future episodes at david@notunreasonable.com.

Are you an actuary? Someone you know? Check out the Not Unprofessional Project, for the price of a CAS webinar you get unlimited access to content dedicated to Continuing Education Credits for Actuaries, especially Professionalism credits. CE On Your Commute!

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Analyzing Lloyd’s results with Rob Johnson

Greetings from Canada!

Every year we head back to the motherland for a couple weeks to unwind, reconnect with friends and my wife’s family, tow the kids around on a boat and… talk about the financial results of the Lloyd’s marketplace!

Rob Johnson (youtubemp3) returns (here’s the original!) to the Not Unreasonable Podcast for a deep dive into the financial results of the Lloyd’s market. Rob almost always has a contrarian view of insurance company results. Usually when an insurer is lamenting their results they’re much better than they seem. And when they’re pumping up their performance, that’s a warning sign!

Rob has taught me that insurance companies are remarkably resilient institutions and amid all the hand-wringing of the Lloyd’s market’s results he remains more sanguine than you’d think!:

First comment would be that the underlying loss ratio is a phenomenally good. Across all those 17 years that the gross loss ratio is about 65.. that’s gross. I should warn you I always talk gross, and deal with reinsurance as a cost. So the gross loss ratio is 65 and it’s been down under 50 for quite a few years. Last year it 85. I think 2005 it was 112. It’s actually a good figure.Then there’s expenses, net expenses are declining, that’s masked a little bit by the way insurers and Lloyd’s account for quota share reinsuraces. I reverse that out.. if you reverse that out, the acquisition costs have gone from 19-20% to 26-27%. that’s a very big increase and the cost of administering the business has been 6% or 7%.

It’s clear that the original brokerages and commissions have gone up. The originators of the business have a lot of market power and it’s in their interest to push up the rate of brokerage. The other comment I’ll make there is that up until recently Lloyd’s did not specifically report on brokerage it is just netted off. It was in the bottom line but it was not there as a line item and I personally think that’s been a mistake over the long term. If you don’t measure it and report it you won’t control it.

Thanks for listening!

Demotech is The Disruptor with Joe Petrelli

My guest this week is Joe Petrelli (mp3, youtube), the founder and CEO of Demotech, a rating agency based in Columbus, Ohio. This interview was a particular delight for me, folks, because I’ve finally found a real example of classic Clay Christensen Disruption in Insurance. Demotech has been quietly disrupting what he calls “the legacy rating agencies” for decades.

THIS is what real disruption looks like:

JP: We were actually the first company to review and rate independent regional insurance companies. The Legacy rating agencies back in the late 80s, the Legacy rating agencies would rate a small independent company if it was part of a large group but there was no one reviewing and rating independent Regional and specialty companies. And we heard that from Fannie Mae and Freddie Mac about smaller companies that they had been doing those sorts of analysis on their own to qualify a company for offering homeowners insurance coverage in the in the secondary mortgage Marketplace selling off the the mortgage of the home that was insured [DW: the mortgages needed homeowners coverage from a “rated” insurance company to qualify for the secondary mortgage market]

JP: and at that point in time they contacted the Legacy rating agencies who would not rate the independent Regional and Specialty Company so we got to talk..

DW: So these companies had no rating.. like a small Mutual company.. because you know what’s amazing because I think of that these days as being kind of the bread and butter for let’s say an AM Best, a Regional Mutual insurance company that’s all they’ve got and they’ve been around for a long time but they’re very small I mean were those guys also excluded from this or is this mostly newer organizations?

JP: No, it was, ah, the smaller independent companies all of them were not rated and actually after we’ve been approved by Fannie and Freddie I actually had a conversation with Arthur J Schneider the president chairman CEO and largest shareholder… the conversation I had with the Arthur J Schneider II was they never wanted to rate the smaller companies.

DW: because you’d think that’s where the rating agency would offer the most value, right, because the smaller companies are the ones perhaps are a little less certain..

  • Underserved, low end market? Check.
  • Looks like a ‘toy’ product that no serious player should consider? Check.
  • Slowly creeping upmarket against all odds? Yep.

That’s disruption kids. And he did it at least two more times with Florida Homeowners and Title insurers. Astonishing. Joe should be an insurance innovation celebrity.

Another amazing point is Demotech’s track record, a much under-publicized fact.

JP: So for A” [DW: called double prime] we said for A”, a hundred percent of the companies we rate A double Prime will survive at least 18 months after we withdraw that rating. At least 99% of the A primes, at least 97% of the A’s at least 95% of the S’s and at least 90% of the Ms after if we withdraw the rating and it goes from rated to unrated you got at least 18 months and those are the survival percents. In terms of what we do to show people that we have confidence in a rating, we have self-published our record from 1989 to date annually updating it.

And this last year year end 2016 and getting a 2017 update, we retained two distinguish professors both of whom had worked with the National Association of insurance Commissioners. Robert Klein was their Economist for years and he’d been at the Michigan Insurance Bureau, he’s a Georgia State University, Dr. Robert Klein and Dr. Michael Barth is I think assistant Dean at the at the Citadel, he’s another PhD, he’s also CPCU. He was at the NAIC and developed was actively involved in the development of the risk based capital framework.

So we got two distinguish Insurance profession we gave them every one of our ratings from 1989 to date and said check our math and they did it and they publish the report in February of 2018 and they basically said we hit our marks every year from 1989 to date.

Here is a link to the latest version of the report. And another to some graphs. Demotech is one of the most fascinating and underrated stories in insurance innovation and in the insurance market in general. Thanks to Joe for his time!

Are you an actuary? Someone you know? Check out the Not Unprofessional Project, for the price of a CAS webinar you get unlimited access to content dedicated to Continuing Education Credits for Actuaries, especially Professionalism credits. CE On Your Commute!

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Todd Hart on Managing Hedge Funds, Reinsurers and Insurers

Todd Hart (mp3youtube) has had the following jobs: political campaigner, investment banker, hedge fund trader, hedge fund portfolio manager, private equity investor, reinsurance company CEO, insurance company CEO and stay at home dad. I’ve seen Todd in action in all kinds of capacities from the lofty heights of deal finance to the gnarliest systems issues in personal lines insurance and I’ve always admired his level-headed attitude in what otherwise might be very difficult situations.

You can be smart and hard working, and Todd is both those things, but to me he is more of a model for *how* to be smart and hard working. In the interview I want you to listen for evidence in the more universal qualities that set Todd apart: curiosity, optimism and a fundamental decency especially towards people that work for him and with him.

One of the things I really wanted to ask Todd was whether management is different in hedge funds, reinsurers or insurers. It is not:

TH: It’s not just capital. You think about your resources. You’re doing resource allocation period. Whether it’s time, it’s people. Attention. Money. A lot of what you’re doing as a manager of anything is you’re allocating. What do you think the most probably outcome and most beneficial use of those resources.

So yeah I guess there is a universality across those things. If you’re running a fund, your biggest resource you have, besides time, which is always your biggest resource. Capital is a huge one. But it’s no different than if you’re running a reinsurance broker, how are you going to spend your time and whatever precious resources you have and not spend and increase your margins.

DW:  How about Risk Management capital allocation and those kinds of functions, those kinds of domains of expertise. Any thoughts on contrasting those between the capital markets and the insurance/reinsurance world?

TH: It’s all basically the same principles. Measure. Keep it simple and measure. I’m sure there are folks who are doing very sophisticated jobs you know when we were putting together our own tools it’s really simple stuff, what are your PMLs what are your limits.

DW: What’s the worst that can happen.

TH: What’s the worst that can happen. I think one of the big differences between the insurance and reinsurance world is the sum of limits you write relative to your capital. You do not want to be publishing that.

DW: a definition of Leverage.

TH: but then if you turn that around equate it to you know you own the Equity slug in a CDO it’s not dramatically different just a question of what capital do you have ahead of you. So we had a lot of conversations around you know what is your limit and that’s why reinsurance works pretty well for a fund because they want to know what the absolute downside is. I do too, and everybody should. For an insurance that’s really the amount of capital you have provided but the leverage is pretty dramatic. It’s actually quite dramatic at a reinsurer as well but in insurance it’s just off the charts.

Todd on systems:

DW: is there a example to come to mind where you know like I made this mistake and then this was the outcome and now I would make a decision later. I don’t know how specific you want to get.

TH: I think as an executive you know we made mistakes around not being firm enough on staying in that customization and configuration zone.

DW: What’s the temptation to leave it. Why do you not? Because everybody probably realizes that on some level right?

TH:What seems to be the interaction that I saw and I would push back on if I saw it again is that ‘we’ve always done a business flow this way we’ve always done it this way and I want the system to mirror our business flow right’. In some circumstances I saw, with a modification of business flow which would have made no material difference you don’t have to redo everything. Part of that is that a system implementation is as much a cultural issue as anything else.

When I walked in to the company we’re in the process of transitioning one system to another and I thought it was not going well and a lot of.. I think I was probably more sensitive to making sure the business Parts the business users were happy and then the technology people were making them happy and so when we went to the second question around technology and I think that lingered through where is I probably should have pushed back a lot harder on the business folks say look, the technology can’t do that and it would be too expensive to create that way.

It’s all about a balancing act. A lot of lessons to learn but you don’t learn these things until you actually make mistakes.

DW: this reminds me of high school football. So my coach.. he was alright, our team was not that good. One of the things he said, which was good, was he said to design the playbook around the team you have as opposed to take the team and force them onto some plays they can’t execute. You have limited talent.

I think what’s interesting about this is that sometimes truths are universal and sometimes they’re not. In this case they’re not because in this case of a system that you actually do want try to redesign the team around it. Swapping a play out in a football playbook is cheap. Changing a system is not. And maybe if there’s a weakness in insurance executives or any executives is that they don’t understand the cost of system changes and so they underestimate them.

TH: Yeah, I think that’s universal.

Folks, there is so much more. I haven’t even given you any quotes on management! Todd is probably the best manager of people I’ve ever witnessed in addition to being one of the best negotiators and strategic thinkers in insurance. And in the show we hear about his strategic thinking and management style but also why American Airlines called him to see if he was ok, what it was like failing in a hedge fund, what a good business opportunity looks like.

You will learn from Todd Hart!

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Why Systems Are So Hard to Build

My guest this week is Bill Jenkins (youtube, mp3). Bill is a technology specialist in the insurance industry. I like to joke that the customer satisfaction rate for insurer systems is 0. But does that need to be the case? I’ve finally had the chance to ask these questions of an out and out expert. Bill has headed up internal technology projects at insurers, he’s run the technology at brokers. He’s been a consultant. A Board member. An industry standards advocate. If there is a puzzle in insurance technology, Bill has probably thought about it and here he is today to help us all better understand why we struggle with technology in insurance.

First, the classic question. Why so many systems? This one always puzzled me. It’s not just about acquisitions. It’s because it’s actually easier that way! Such a satisfying answer (for me) since it aligns with the idea of hidden and underappreciated costs as being the main reason why some problems persist in the world.

BJ: some carriers have multiple and duplicate systems so I worked for a large/ medium sized carrier and we had a eight billing systems.

DW: why, acquisitions?

BJ: Partly Acquisitions partly because it’s one system than address one problem with the other system did so they decided that they needed that this additional functionality that the old system didn’t provide. We just want another one. We had three Bop systems. I was listening to a talk that the chief technical officer at the Hartford was giving and he said every year that goes through the examination and review to determine if they should replace all their legacy systems they had over 330 system. I said to replace all these are they that they projected out would be in 50 years or so and the cost would been astronomical. So all they did was just add systems.

Bill on how project management can achieve great things:

BJ: we also use the project management discipline that we called black hat white hat. Black hat was a hired gun. A project manager who comes in and his or her and only charge was to make sure that the specifications for the system were done and was going to be followed for the requirements of the system and that the time frame that was said would be adhered to. The white hat was an internal project manager who basically made sure the right people were on a project to do the work and also did all the reporting to the Senior Management and navigated the political Waters.

BJ: We built the entire system in 9 months.

DW: Wow, so these things can be done.

BJ: let me tell you the antithesis. Next time around we went with an internal project manager, kept the same skunkworks: 22 months…

DW: So what’s the difference?

BJ: Project Management

DW: So what makes a good project manager?

BJ: well first of all the problem with an internal project manager, and I argue this all the time even when I sit on boards and people are having project problems, a project manager for internal may know all the project management disciplines but they pretty much don’t have the personal characteristics to do the work. You have to be a pitbull.

DW: Put the black hat on

BJ: Put the black hat on.. and you go native too quickly so therefore your scope creep becomes scope leap and you’re fitting more and more into the project and doomed to failure.

And we cover so much more, including how legacy systems are defined by what data they capture and how the information technology industry is perhaps 150 years behind other infrastructure industries. We have a long way to go but things can (will!) be dramatically better!

By the way Bill recommends a book In Search of Excellence, which will hit my reading list soon.

Thanks to Bill for his time. And thanks for listening!

Are you an actuary? Someone you know? Check out the Not Unprofessional Project, content dedicated to Continuing Education Credits for Actuaries, especially Professionalism credits. CE On Your Commute!

Subscribe to the Not Unreasonable Podcast in iTunes, stitcher, or by rss feed. Sign up for the mailing list at notunreasonable.com/signup. See older show notes at notunreasonable.com/podcast.