Variations on a theme

Anyone that knows me has probably noticed that over the past year-plus, I have gotten into photography in a major way. But as much as I post photos, I spend about as much time ogling the photos of more talented and able photographers. One thing I noticed is that the best photographers tend to have a very specific style – for Randy Martin, it’s a perfectly centered subject in a larger scene; for Michael Goldberg, it’s close-ups on the street using flash to illuminate his subject’s imperfections; for Nguan, it’s warmly-lit subjects lost in a moment of ennui.

I guess this shouldn’t be too much of a surprise, as variations on a theme are the rule in other forms of art, like music (bands have a sound that cuts across their songs/albums), movies (wes anderson), paintings (dali), etc. I want each photo to stand on its own and be considered in its own right, and I want the ability to take any photo that I think is compelling for whatever reason. But that’s not how it works; your audience (whoever that is and however many people that is) wants something familiar as well as novel and interesting. Perhaps it’s the commonality between your works establishes a common ground with your audience and without a familiar “vocabulary” they would lack the basis to appreciate the work – but I’m just speculating. 

I don’t (yet) have a style. Or at least not one that I’m aware of. Perhaps it takes time to find what you like. Perhaps it takes time to develop the skills that allow you to impose your style on the scene in front of you. I really don’t know! But it’s on my mind this morning.

Fossil Fuel Divestment

There was a great pair of articles recently in the New York Times discussing Stanford’s recent divestment from coal companies; an op-ed stating the case that divestment would do little, and a few responses to that argument. I think these articles really capture the debate. I agree with both sides: i.e. that the partial equilibrium of divestment should lead to absolutely zero impact on the targeted companies’ share price, profitability, or behavior. But divestment is a powerful political statement, not unlike a boycott.

Let’s back up: one can make roughly three arguments in favor of divestment:

  1. That it will reduce the share price of the targeted companies, increasing their cost of capital, in turn both reducing investment in the sector and increasing their cost of doing business.
  2. That the sector targeted for divestment is very high risk, so exposure needs to be curtailed. With respect to fossil fuels, this is the “carbon bubble” argument, which goes roughly like this: the current share prices of fossil fuel companies reflects a level of profitability they would only have if they burned more carbon than we can burn without frying Earth. So, the argument goes, eventually policy will step in and their valuations will crash.
  3. Finally, there’s the moral argument: you do not want your money invested in companies that do something you disagree with or find objectionable. Divesting, as Stanford has done, can be a powerful political statement. These political statements in turn can change the political environment.

Let’s take on these arguments in turn: first, the argument that divestment on its own will reduce the level of activity by increasing the cost of doing business. The fundamental reason this doesn’t work is that for every seller, there’s a buyer. And there are many, many, many buyers that don’t give a fuck about anything moral, and will buy these fossil assets on the cheap and drive the price back up to where it was. But let’s even say you DID succeed in impacting the cost of capital and drive up the cost of doing business; this would just raise the marginal price, helping these companies finance new investments internally. And even if you made a few more heroic assumptions about the shape of the supply curve, etc. – most energy assets (especially in the oil market) are owned by governments, so capital market prices aren’t nearly as much of a factor.

On to the carbon bubble: I certainly hope there is a carbon bubble. I’ve devoted my young professional life to climate change, and it saddens me to think how little progress we’ve made. I hope that global policy comes around and puts fossil fuel companies out of business. But, – so the question goes – what about our financial system – don’t institutional investors depend on these companies to stay afloat? Well, yes and no. Exxon is the largest component of the S&P500, so it’s certainly going to be a part of many investment portfolios. Wouldn’t it a Bad Thing if it went bust? Well, not really. Here’s why: (a) if Exxon goes bankrupt, it’s because some other company is getting rich supplying the same energy services (i.e. Tesla), and (b) institutional investors are so widely diversified that they’ll own the “other side” of the energy transition. Exxon’s market value won’t disappear, it will be replaced. 

Finally, the moral argument. This argument resonates with me, and I support those that make this decision. There is a tricky side to it, though, because if you’re selling for non-financial reasons (and therefore at below-market prices), you’re just creating economic opportunity for less-savory people. Think the Koch brothers buying a refinery on the cheap because you were divesting – you make a below-market return, the refinery doesn’t go offline, and the worst people ever make more than the buck they deserve. Not a great outcome.

The point to all this is that there is no substitute for policies that address the underlying value of fossil fuel use. If it’s more expensive to burn gasoline and coal, we’ll do less of it. Attacks on the share prices of companies is the tail wagging the dog.

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 ( 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.