Archive for the ‘Markets’ Category
Society According to Kevin: Part 1
How Our Moral Compasses Fail Us
From the comments on my Introduction to this series, it appears I have discovered a controversial topic. Good. My first objective will be to illustrate why we cannot rely on moral compasses to guide society. After some thought, I have decided to break the topic of moral compasses into two posts: how they fail and why they fail.
Society According to Kevin: Introduction
I was recently having a conversation with a mutual friend of Rafe’s and mine. Like the two of us, he’s quite smart, well educated, and socially aware. I respect his thinking a lot. However, during the course of this conversation, it became clear to me that he holds what I think of as an overly moralistic view of human behavior.
From my perspective, it seemed like he thinks that people’s behavior is governed primarily by an internal moral compass rather than incentives. So if you want to change their behavior, you should redirect their moral compass rather than adjust their incentives. People who don’t adjust their behavior are defecting from society and should be sanctioned.
I encounter this view quite often in my social circle and this instance inspired me to write a series of posts to explain how I think things actually work. You’re free to disagree with me, of course. In fact, I expect most people to disagree with me. But I’ve thought rather hard about this issue and I’ll put my model up against the moralistic view when it comes to predicting a population’s average behavior or choosing an effective policy prescription.
Poetic Justice in the Financial Crisis
Bloomberg reports that Credit Suisse has decided to pay managing directors’ and directors’ bonuses in the form of an ownership interest in the bank’s toxic mortgage-backed assets. The value of these assets will emerge over the next eight years as the assets mature or default. This is outstanding! The executives have to lie in the bed they made. Of course, this would have been better if they did this prospectively back when the executives were the making decisions that created these securities. But perhaps banks will adopt some sort of similar long term performance measurement mechanism going forward.
Via Volokh Conspiracy via Megan McArdle via ClusterStock.
Required Reading on Financial Crisis
Remember Liar’s Poker by Michael Lewis about 80s Wall Street excess? Well, he has a terrific article on some guys who saw the subprime meltdown coming and bet heavily on it. It’s great narrative and a reminder that whenever someone’s model departs substantially from reality, there is an arbitrage opportunity. Hey, maybe we should rename this blog “Reality Arbitrage”.
What I’m Working On: Supercharging Innovation
[EDITED 05/08/2009: see here] If you’ve been following my posts on the financial crisis (here, here, and here) and Singularity Summit (there, there, and there), you might wonder, “Uh, but how do we get there from here?”. It’s pretty obvious to me that the the road to economic advancement is paved with innovation. So we have to innovate our way from here to there.
I’m pretty sure I’ve figured out a way to supercharge what I call the “Innovation Economy”. My thinking was catalyzed by reading Nassim Taleb‘s The Black Swan. The basic idea is simple: if we want more groundbreaking firms like Google to come out of the Innovation Economy, we have to shove more startup feedstock into it.
Don't Cop Out on Knightian Uncertainty
I apologize for the posting lull. I actually spotted an issue than I wanted to address a few weeks ago, but I’ve been pondering how to approach it. It’s pretty complicated and subtle. I even ran a couple of drafts by Rafe to refine my thinking. So please bear with me.
As I’ve mentioned before, I am a fan of Dave Zetland. When I saw him propagate what I think is a fundamentally false dichotomy in this post, I knew I had to take on the concept of Knightian uncertainty. It crops up rather often in discussions of forecasting complex systems and I think a lot of people use it as a cop out.
Possible Insight 