Political speech is about respect

I’m just working through my thoughts on the recent Supreme Court decision to strike down limits on campaign contributions. My thoughts came together in reaction to a recent “tweetstorm” by Marc Andreesen, the famous venture capitalist.

His framing of the debate was essentially that we should trust people to make the best voting decisions for themselves regardless of who’s controlling the information flowing through various media

I’ll let you work through his interpretation if you want; I think his interpretation flattens, and isn’t really representative of, the real debate so I won’t elaborate on it or critique it all here, but I will focus on one thing: his focus on influence as the key point. When I worked through how I thought about the issue, that wasn’t what moved the needle for me. For me, leveling the playing field in political speech is about respect.

The way I think about it is this: imagine you’re part of a small community that makes decisions collectively, by a simple vote, with the opportunity for everyone to speak their mind around a table before votes are cast.

Could it ever be fair to allow the wealthiest among this group to speak for more time than the others? Obviously not. In this sort of gathering, it would be disrespectful, and would never be allowed in the room. This illustrates why political speech (the debate before the vote) as a whole ought to be protected, and we should not allow single groups to utterly dominate the conversation. It’s disrespectful to those who don’t have the means to participate, regardless of whether or not there is any unfair influence.

Now, obviously national debates are not the same as boardroom-style conversations. But I believe the argument still holds by the same logic that Warren Buffett uses when thinking about his relationship with other owners of the businesses he invests in, as well as Berkshire Hathaway.

In many ways, fellow stockholders in a public corporation are a lot like fellow citizens; you don’t know each other, but you have a common interest in the health of the company (or country), and you make decisions through a form of representative democracy.

So what’s the best way to think of these anonymous people? As Buffett says, in his “owners manual”:

Although our form is corporate, our attitude is partnership. Charlie Munger and I think of our shareholders as owner-partners, and of ourselves as managing partners. … We hope you visualize yourself as a part owner of a business that you expect to stay with indefinitely, much as you might if you owned a farm or apartment house in partnership with members of your family.

This “scaling down” of how you think about interacting with anonymous groups of other people is enormously helpful in properly attaching human values to debates about how large, anonymous societies interact with each other.

Why are markets bipolar?

I think most people would agree that the stock market is bipolar – i.e. that sometimes it prices stocks way too high, and sometimes it prices stocks way too low. But yet it’s very hard to make more money than the average in the stock market? How can these two seemingly contradictory statements be true?

It turns out that you have to just make a few simple assumptions and you can build a model with these characteristics: i.e. prices that are impossible to beat systematically, but that seem in retrospect to have been very very wrong.

The following is all adopted from Benoit Mandelbrot’s work. See here for more.

Let’s assume we have a company that has a discounted stream of earnings worth $1. Every day, the earnings can go up by $1, stay flat, or decrease by $1.

Let’s assume that there is some “momentum” to these earnings movements. For every streak of X days the earnings go up, let’s say that the expected value of the number of future days the earnings will go up is also X.

So, let’s say this company starts with $1 worth of future earnings, and the next day they have built that up to $2. Earnings may continue to grow, or fall, but the expected value of future earnings is now $3. This expected value is the price of the claim on the earnings, or in other words, the price of the stock.

There are lots of reasons an increase in earnings would portend a further increase in earnings: the company has more to invest in sales, marketing, or equipment, or could buy back stock (increasing the earnings per share).

If this is true, we’d then expect prices for future earnings to rise (and fall!) much faster than the actual earnings streams themselves. What this looks like, in graphical form, is this:
Screenshot 2014-03-31 15.11.30

Screenshot 2014-03-31 15.11.09
You can see the spreadsheet I used to put this together here [there is not much in the way of detailing the math, but if you’re interested, comment below and I’ll walk you through it].

Now, this is not a complete model by any stretch. It’s just an illustration of how prices can always be “right” in that they represent the current best guess about the value of a stream of earnings, and then appear wildly wrong a short moment later.

The four types of incertitude

This post was inspired by a recent tweet:

Which reminded me of one of my favorite lessons in grad school at LSE. The lesson is simple: we think about how many different ways there are to have incomplete information about the future.

A very simple way to think about it is to think about foresight is it having two dimensions: knowledge about what the potential outcomes are; and knowledge about how likely each outcome is.

Pulling a random card from a normal 52-card deck is a great example of perfect knowledge about both what the range of outcomes are and how likely each outcome is. Even though the outcome is uncertain, we have great mathematical tools for figuring out how we should behave in advance of knowing what the outcome ends up being. This is called “risk”.

But many situations are not so favorable. Asking a lady out, for example, has a few canonical outcomes (she says no, she says yes, she demurs, etc.), but the asker will in many cases not have a clue what the likelihoods are. This is called “uncertainty” – where you know what the outcomes are, but not the odds of each.

So now that we have the two axes – outcomes and likelihoods – we can define two more “perfect” endpoints on this two dimensional spectrum of incertitude.

“Ambiguity” is where you know what the likelihoods are, but not what the outcomes would be. As a contrived example, consider that you were dealt a hand that you weren’t allowed to look at. You would be dealt one more card that you’d be allowed to see. You’d have perfect knowledge about the likelihood of each card coming up, but, crucially, not how it would affect your hand. This type of incertitude is common in very complex situations where you can’t parse out the impact of any given outcome.

Finally, “ignorance” is where you have knowledge neither of what the outcomes are, or what their likelihoods are. These are the “unknown unknowns” that Donald Rumsfeld made famous.

Visually, the layout of different situations looks like this:


Different methods for handling the different forms of incertitude are listed in italics.

The most important thing, though, is to know where you are in this space. If you think you’re in “risk” space, but in reality you’re in “uncertainty”, you’re setting yourself up for a bad day, as the tools you’re using may rely on a probability distribution of outcomes to guide decision-making.

In my view, the bottom half of this matrix (as presented in the graphic) is significantly more common than the top. It’s very rare that we ever have a real distribution to work with; at least not one that we haven’t simply contrived or guessed at so that we could use friendlier, more comforting mathematical models.

In any case, “risk” is actually a very special case in this space, but most of the models you see for decision-making (i.e., the ubiquitous excel spreadsheet) are built around the “risk” case.


Another update to “Conflict”: Bangladesh

Bangladesh worries me. As I wrote here,

Bangladesh is the most densely populated country in the world, with 150 million people crammed into an area the size of New York State. It also lies in lowlands, and a 1 meter rise in sea levels would flood about 10% of the land. Clearly, with so many people in such a small area, this would create problems. In addition, many people don’t know that Bangladesh used to be “East Pakistan”, or the eastern of two predominantly Muslim regions of the former British colony, and it shares with modern India (Bangladesh’s neighbor) and Pakistan in their violent history. It’s not hard to imagine a scenario where sea level rises (among other negative climatic changes) cause massive displacements of people in a context that cannot support that other than violently.

There is a great story today in the New York Times about how climate change is affecting Bangladesh. Read it and let me know what you think.


What I’ve been up to

February was a crazy travel month. I packed trips to Casablanca, DC, Tahoe, London, and Venice (and not to mention the airports of Chicago, New York, Paris, Brussels, and Frankfurt) into the span of 31 Jan to 2 March.

Lately, I’ve been thinking about insurance and risk. It’s funny when things you’ve worked on a while ago and since discarded pop back into your life. Three and a half years ago I wrote my master’s thesis on the relationship between insurance, climate change, and capital investment. Somewhat randomly I was asked to put together a short paper on this topic for New Climate Economy, where I am a Senior Programme Officer, where I’ll get the chance to show off some of the ideas that I developed.

The gist is that since insurance markets clear annually (a little bit longer for some reinsurance contracts), exposure to long-term risks (like climate change), can’t be traded with existing insurance instruments. Weather is a draw from a distribution, whereas climate is the distribution itself.

So in many regions there is an acute risk that premia will rise substantially in the future. This already happened on the East Coast of the US after Sandy. But this risk can’t be transferred, since no forward / futures markets exist for insurance.

In the end there are two reasons this is of concern: First, the lack of a market for this risk means that those holding it can’t dispose of it directly, and may be unequipped to handle it. The premia for, say, windstorm insurance for a residence could rise so substantially that it becomes unaffordable, or that this rise in prices causes a substantial hit to the home equity value.

The second concern is that a lack of pricing for this risk causes a distorted investment picture, and not only will there be no risk cover for those ultimately affected, but the absence of a signal on future risks causes even more people and property to be exposed to them.

So that’s what I’ve been doing and thinking about. À bientôt!

Energy efficiency finance

I posted this yesterday as a comment on Hacker News:

For two years I ran a company called Building Hero (www.buildinghero.com) that marketed and financed LED lighting retrofits to commercial locations in New York City and San Francisco.

Here are a few things to consider when wading into energy efficiency finance:

1. Returns to energy efficiency upgrades accrue out of negative cashflow (money not spent), which means its hard/impossible to put a legal “box” around the financial returns to the project, contra solar investments, where there is a meter and it’s usually possible to slice and dice who gets what.

2. Energy efficiency upgrades also pose a problem with respect to collateral. In our case, although we had the right to take back our LED lamps, the value of what we got back, even in the best case, would have been negligible. Most EE upgrades are even less inviting as collateral, like insulation or HVAC upgrades.

3. There are simpler, but more balkanized (i.e., different not only from state to state, but even utility to utility, or city to city) financial incentives for energy efficiency upgrades. This poses a challenge for finance as a differentiator for energy efficiency. Simpler incentives mean the value of a third-party financier who abstracts away these problems is less valuable; and more balkanized incentives mean that is harder in any case for a third-party to offer solutions that scale geographically. Again, contra solar, where the federal tax incentives mean that it’s almost necessary for a third-party with tax equity appetite to finance a portion of the investment, and since it’s at the federal level it scales across the US.

My advice would be to do some careful thinking about how and why your financial offerings are better than what you could do financing them on a credit card or through a normal bank loan.

In addition, I would put some serious thought into whether or not finance is the true barrier for energy efficiency projects. Again unlike solar, these things are inside the home/office/whatever, not outside, so bring up aesthetic concerns as well as comfort concerns. Other things, like HVAC systems, are usually replaced when they break.

Anyway, I hope this is useful and that you get a lot of projects done!

How to write

Could have used this before writing 16 business school essays:

As for how to write well, here’s the short version: Write a bad version 1 as fast as you can; rewrite it over and over; cut out everything unnecessary; write in a conversational tone; develop a nose for bad writing, so you can see and fix it in yours; imitate writers you like; if you can’t get started, tell someone what you plan to write about, then write down what you said; expect 80% of the ideas in an essay to happen after you start writing it, and 50% of those you start with to be wrong; be confident enough to cut; have friends you trust read your stuff and tell you which bits are confusing or drag; don’t (always) make detailed outlines; mull ideas over for a few days before writing; carry a small notebook or scrap paper with you; start writing when you think of the first sentence; if a deadline forces you to start before that, just say the most important sentence first; write about stuff you like; don’t try to sound impressive; don’t hesitate to change the topic on the fly; use footnotes to contain digressions; use anaphora to knit sentences together; read your essays out loud to see (a) where you stumble over awkward phrases and (b) which bits are boring (the paragraphs you dread reading); try to tell the reader something new and useful; work in fairly big quanta of time; when you restart, begin by rereading what you have so far; when you finish, leave yourself something easy to start with; accumulate notes for topics you plan to cover at the bottom of the file; don’t feel obliged to cover any of them; write for a reader who won’t read the essay as carefully as you do, just as pop songs are designed to sound ok on crappy car radios; if you say anything mistaken, fix it immediately; ask friends which sentence you’ll regret most; go back and tone down harsh remarks; publish stuff online, because an audience makes you write more, and thus generate more ideas; print out drafts instead of just looking at them on the screen; use simple, germanic words; learn to distinguish surprises from digressions; learn to recognize the approach of an ending, and when one appears, grab it.

Nouns are not necessarily agents

It’s not uncommon to see statements like “Wall Street needs to give this company a break” or “Silicon Valley should fund more cleantech firms”

These statements, in some sense, make perfect sense. They are shorthand for, respectively, “investors in this company need to be more patient with it”, and “partners in venture capital funds based in Silicon Valley should fund more cleantech firms”.

But they are nonsensical in another interpretation. Because both are nouns, they can be the subjects of a sentence, so they are the “something” undergoing or causing an action – a verb. But grammar makes no distinction between those verbs that require agenthood or not, so they can be used in a seemingly meaningful way in sentences that could never be realized and have questionable meaning, like “the painting should [decide to] walk across the floor.”

So these sentences can look, and be interpreted as, phrases that are not shorthand. The twisted interpretation is that an abstract concept or representation can “decide to” do something.

Both the named cases, Wall Street and Silicon Valley, are representations of collections of things, but the relationship between the representation and its constituents is not symmetric. The constituents of each (the VC, or the Mutual Fund, for example) are agents of the representation, but not vice versa.

The long story short is that this confusion causes a lot of sloppy thinking, and leads people to go down “garden alleys” of logic that assume that a group can coordinate its actions or otherwise be treated as a decision-making unit. Much (if not most) of the time, they can’t, and statements or arguments that contain that implicit assumption are flawed from the outset.

Language and Discrimination

I just finished reading The Language Instinct by Steven Pinker. Amazing book. Among a lot of reactions to the book, I had a thought about language and discrimination. It proceeds along the following lines.

First, humans evolved in small communities. So it’s natural to assume that at first glance we perceive a lack of intelligible language as an indicator of poor intelligence or something “wrong”, since the small groups we evolved in would not be multilingual, so they would have no a priori reason to expect anything else.

But all normal humans have language that is equally expressive and sophisticated, since language is literally “invented” de novo by each generation with the existing language around them as mere ingredients into their invention. Ostracized or marginal groups won’t share the same inputs, and so will invent a different language. For instance, African American Vernacular English is just as “sophisticated” as Standard American English, it’s just different. But for whatever reason it has been natural to perceive it as a failure to be able to speak “correct” English and so to assign those speakers a lower intelligence / ability.

Languages change so rapidly that it only takes one generation to start speaking differently. So if a group gets marginalized, they will speak a new language almost instantly by historical standards, and then the fact that the speak differently will be a wedge between them and other groups.

The book also got me thinking about how we teach language and our respect for different dialects. It seems that curricula should explicitly say, for example, that AAVE and Standard English are different languages, rather than put down AAVE as corrupted Standard English. I remember that in my junior high and high school, which were both over 50% Black, that AAVE was not appropriately respected in this manner. This changes the dynamic from “’He be walkin’ is wrong” to “‘He be walkin’ is right but in a different language, and not correct in Standard English”. It’s a more complicated conversation but more correct.

Vladeck is a nom de guerre

I posted this on facebook, but I wanted to make sure it existed somewhere else too.

I included a few facts about my great-grandfather in a business-school admissions essay, and got something wrong. My father, reviewing it, supplies some facts:

A few facts about grandpa that are hard to find on the internet. One is that he used the name “Vladeck” in Russia as his revolutionary name to protect his family during the 1905 Revolution, which was unsuccessful. Vladeck was his nom de guerre. When he came to the US and wanted a public life, Russian and Jewish immigrants knew him as Vladeck, and so he took that name formally when he arrived in the US. I think you can say that we believe that the name is unique and that anyone with the same last name is a direct descendant of grandpa. Two, as I understand it, more than 1/2 million people lined the streets to watch, not “follow,” his funeral process. I am not sure that the turnout has ever been equaled in NY. Third, during the La Guardia administration, grandpa was actually the majority leader of the city council because the Socialists (the American Labor Party) caucused with the Democrats to give them a majority, and one concession the ALP got from the Dems was that grandpa would be the majority leader. At grandpa’s funeral, Gov. Herbert Lehman, Sen. Robert Wagner, Socialist leader Norman Thomas and of course Mayor La Guardia spoke, as did many, many others. My grandmother, who was a sourpuss, complained bitterly that the funeral service went on way too long. Fourth, the Vladeck houses were named after grandpa because he fought to create the NY Public Housing Authority; his brother Bill was actually the architect for the project. Grandpa believed that the city had to get people out of the overcroweded, disease-ridden teniments they crowded into and that public housing would be a vital public service. He died before they were built and they were named after him for his leadership on the issue. This was the first housing project built by the New York City Housing Authority. Finally, grandpa is probably better known for his role in the Jewish Daily Forward, which at the time the largest non-English language publication in the US, with a huge circulation. During his tenure the average daily circulation was over a 1/4 of a million. He was active too in Jewish affairs, forming the American Jewish Congress in the early 1930s and trying to persuade companies early on to boycott German goods.