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20 августа, 20:22

How to Set Up Your Own Bitcoin/Ethereum IRA

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For the past couple of centuries technology empowered the state, put more things under its control. They have ultimate custody of all your financial assets, and custody is nine-tenths of the law. You simply can't hold $1M in financial assets in a form where 'The Man' can't grab it if he finds you an enemy of the state, which in many states includes righteous men.But like so many things the effect is not linear, in that now technology is putting power back in individuals. We can now take classes online, and be evaluated objectively via tests, making Universities less important. We no longer have a handful of news sources, but a spectrum that allows us to choose among vastly different interpretations of the same data. And we have digital currencies, which exploit cryptography innovations aligned with processing power to create ways of assigning credits more efficiently than fiat currency.The essence of money is not that it is backed by something intrinsically valuable we can hold. Once  we severed its link to gold and silver, it still 'worked.' I would not have predicted that in 1900. Money works because people accept it, and the large network effects of everyone accepting it make it indispensable, because it avoids the 'double coincidence of wants.' Bitcoin was created by geeks who were incented to invest their technical skills into mining and developing the network, and as these highly productive people began to accumulate these assets, they appreciate its value. Since highly productive people appreciate these assets, they are valuable because they can be translated into purchasing the services of such people. Thus, initial coin offerings (ICOs) allow people to fund new businesses focused on blockchain technology because the same people creating these businesses are fine with getting paid in 'tokens', something that would be hard to convince for your average person.Long term, I see much wealth going off the fiat grid into cryptocurrencies, because as we've seen throughout history, governments eventually run out of other people's money, leaving only expropriation via inflation or outright takings (see 'Fragile by Design'). Anticipating this, getting your money into something the government can't seize is important, and cryptocurrencies allow you to do this. If a government tries to prohibit bitcoin, those with large bitcoin accounts will simply move to someplace that accepts it, like Singapore, and a country filled with those who appreciate and have a lot of bitcoin will tend to prosper. So unless the world governments can enforce a worldwide compact with over a hundred players, bitcoin will succeed, and I'm sure most smart countries will ultimately allow general digital currency use reluctantly, to avoid such a brain drain.While I love Bitcoin, Ethereum is better because it builds contracts into the same blockchain, which creates greater functionality. If you go to Reddit, you'll see more development in 'Go', a cutting edge software language, in Ethereum projects, and there are already more wikis on GitHub for Ethereum projects than Bitcoin projects, so I'm confident that Ethereum will surpass Bitcoin in market cap someday, especially once they move to proof-of-stake (sometime next year).Since 2014, one has been able to put Bitcoin into IRAs (see here), though IRAs are so highly regulated, finding how to do this is non-trivial. So I thought I would move some of my 401k into cyber currencies such as Ethereum (you can do BTC too, but I'll use ETH as the example).  Most 401ks and IRAs do not allow you to do this directly, and BitcoinIRA charges 10% to set up a Bitcoin IRA. I don't blame them for charging this much, as it's difficult, and as there's an 80% premium to NAV with the Bitcoin Investment Trust (GBTC), investors are clearly willing to pay extra to avoid the complexities involved in directly owning them (eg, try to explain this to your parents).The problem is that no IRA custodian can translate USD into ETH the way they can move your USD into a mutual fund. You have set up an account at a cybercurrency exchange to do that, and most exchanges do not handle IRA transactions. The new regulated bitcoin exchanges have very small staffs relative to the number of customers, and so have automated most of their support function. Thus, if you have a question ('how can I buy BTC for my IRA on your exchange?'), you'll get an auto-bot answer using an algorithm that finds the best fit your keywords. These are irrelevant to unorthodox questions, and follow up questions just lead to more pointless autobot answers.The humans, alas, are rarely better, basically doing the same thing with their meat-based neural nets by looking at their FAQs and copy and pasting answers from there. At Coinbase, if you follow up your question after not hearing anything for 3 days, they will assume you have changed your question, so it moves it to the back of their queue. Thus I had an issue where my question was never answered because every couple of days I would write, 'is anyone there?' which would put me back at the bottom of the queue, and my question was thus unanswered (and funds frozen) for 3 weeks.It took me a while to find the companies that allow this directly. It's not straightforward, however, as Kingdom Trust clearly stumbled into this capability, and they gave me a bunch of contradictory information, all standard confusion.  I'm sure they and others will figure this all out eventually, but by the time it becomes easy to invest in digital currencies, the incentive will be a lot lower.  So, be patient, it will happen, but just about every step takes at least a day.Here's how you set up a cybercurrency IRA:1) Go to Kingdom Trust, an IRA custodian based in Kentucky.  Rollover your IRA/401k there, informing them you plan to hold ETH or BTC in your IRA.2) Set up an account at Genesis (not Gemini). You will need a clear picture of your driver's license you can email them, and a digital photo of a recent utility bill (w/in 3 months).3) Once approved at Genesis, you to open a BitGo account, as this exchange stores your initial wallet after the Genesis trade.4) Ask Kingdom Trust for an "Investment Directive For Digital Currency" form.5) Once you have this form, request a trade at Genesis, so that if you have $100K USD, ask them to buy as much as possible with that (it's called RFQ--request for quote--on the Genesis portal). You will get back a confirmation with the amount of USD paid for X units of ETH. You then 'accept' that on the Genesis site.6) You then immediately fill out the Kingdom Trust "Investment Directive" form, which includes wire instructions to send your IRA money to Genesis's bank account at Silvergate Bank (see here), and your trade terms from Genesis, which includes how many ETHs were bought and for what USD price. You will need to sign the Kingdom Trust Investment Directive digitally, so add the PDF plug-in that allows digital signatures. Do this early in the morning, as even then it takes a day for them to instantiate the wire.7) Kingdom Trust then gives you a wallet address from your BitGo account. You then go your Genesis portal and click on your earlier RFQ trade. Click on the blue box to the left of this, and under Buyer Actions put in the ETH address that Kingdom Trust gives you. Send your ETH to the BitGo wallet address Kingdom Trust gives you.For Bitcoin, this is ultimately put into a multi-sig wallet. For ethereum, they do not have this capability yet but are working on it, so your money stays at an address at BitGo under Kingdom Trust's control.  After that, Genesis is basically out of the picture.Fees: Genesis charges 1.5% for their service, which is implicit in the price paid relative to the market price. You have to pay Kingdom Trust $50 to open the account, $40 for the wire, and a $250 annual fee.It should be mentioned that while getting off the grid is one of the reasons cryptos will do well in the future, your crypto holdings within an IRA are all on the grid. 

26 июня, 05:05

Maxims

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My son is going to college this fall, and I wanted to give him a set of my favorite quotations. As his name is Max, I titled the book 'Maxims.' With only a little work in formatting, I was able to create a paperback and ebook on Amazon, so that I basically did this for the price of the New York Times.  I made it for him, but you can buy it on Amazon for $5, or $3 for the Kindle version (see here).Obviously, we want our kids to appreciate the things we think are really important. Whether our kids will agree with us is up to them, but we can hope. But as I'm starting to lose him to the real world, I wanted comfort that if I get hit by a truck, he'd have access to some quotes that can help him even if I can't. So, I put a bunch of quotes (around 710) I've been compiling for decades into a book, in 7 sections: Wisdom, Purpose, Virtue, Life, Psychology, Science, Politics. About 15% of the quotes are unattributed, because when I wrote them down, I lost the source, and it doesn't show up in a Google search (some obscure, some probably my artistic license).Here's a sample:WisdomGood judgment comes from experience, and experience comes from bad judgment. ~ Barry LePatnerKnow thyself. ~ Delphic OracleOnly the simplest mind can believe that in a great controversy one side was mere folly. ~ AJ KaneThe art of being wise is knowing what to overlook. ~ William JamesThe beginning of wisdom is this: Get wisdom. Though it cost all you have, get understanding. ~ Proverbs 4:7PurposeSeek, above all, for a game worth playing.   ~ Robert S. de RoppThe best use of life is to spend it for something that will outlast it.   ~ William JamesThe deepest principle in human nature is the craving to be appreciated.   ~ William JamesPurpose is what gives life a meaning.  ~ Charles Henry ParkhurstIf you buy the why, the how is infinitely bearable.   ~ Friedrich NietzscheVirtueIt’s easy to have faith in yourself and have discipline when you’re a winner, when you’re number one. What you got to have is faith and discipline when you’re not a winner.   ~ Vince LombardiLove is joy accompanied by the idea of its cause.  ~Love is the only virtue that is an end in itself.  ~It has been my experience that folks who have not vices have very few virtues.   ~ Abraham LincolnGratitude is the healthiest of all human emotions. The more you express gratitude for what you have, the more likely you will have even more to express gratitude for.  ~ Zig ZiglarPsychologyMany can bear adversity, but few contempt.   ~ Thomas FullerWe all have the strength to endure the misfortunes of others.   ~ Francois de La RochefoucauldAll anger is self-righteous anger. There are few cynical opportunists, more often ideologues and moralists.   ~Anything you're good at contributes to happiness.    ~ Bertrand RussellMen need sex more than women, and this gives women power over men.   ~ Midge DecterLifeFirst one must live, then one may philosophize.  ~ Latin ProverbCriticism is always a kind of compliment.   ~ John MaddoxEverything ends badly, otherwise it wouldn't end.   ~ Koglan the BartenderEverything is always decided for reasons other than the real merits of the case.   ~ John Maynard KeynesWhat is said when drunk has been thought out beforehand.   ~ Flemish proverbScienceWhen a debater’s point is not impressive, he brings forth many arguments.   ~ The TalmudReal thinking is that which can force you into an answer whether you liked it or not, and fake thinking is that which can argue for anything.   ~The best way to have a good idea is to have lots of ideas.   ~ Linus PaulingLaymen feel that facts are easy and theory is difficult. It is often the other way around.   ~Bayes' theorem suggests that given two persuasive speakers, you will find those which most agree with you as most persuasive.   ~ Richard PosnerA little inaccuracy sometimes saves tons of explanation.   ~ HH MunroPoliticsTo be free is to be subject to nothing but the laws.  ~ VoltaireOur country's founders cherished liberty, not democracy.   ~ Ron PaulJustice is Equality…but equality of what?.   ~ AristotleThe more corrupt the state, the more it legislates.   ~  TacitusThe most melancholy of human reflections, perhaps, is that on the whole, it is a question whether the benevolence of mankind does more good or harm.   ~ Walter BagehotNever forget that everything Hitler did in Germany was legal.   ~ Martin Luther King Jr.

12 апреля, 05:33

Jordan Peterson's Business Cycle Theory

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University of Toronto psychologist Jordan Peterson has gained YouTube notoriety recently for speaking out against social justice warrior lunacy. However, it should be noted that his book, Maps of Meaning, is a very profound one. I heard him give a talk in which he mentioned initially that he was interested in economics, but was put off by the undefended assumption that people want to maximize their wealth. Most people want to be wealthy, of course, but they also want to have a fulfilling life, which is much more complicated. The larger existential question is, “How do I invest my time now to have the best life?” This does not lend itself very well to mathematical expositions.His basic premise is that we develop maps of meaning to identify our best life. The world appears to us not in the form of objects, but rather things with an inherent valence or meaning according to how well they help us thrive. Thus, a cliff-edge does not represent a mere vertical descent, but rather, physical danger. Our world is filled with things, people, and ideas that all have meaning to us, and we arrange them in a map according to the way in which we see they have interrelated effects on our lives.Human life is a narrative quest, focused on a story we find useful and true, an arc that leads to something profoundly good and beautiful. We attend to things we believe will lead us to this objective most efficiently, and thus, all of our tactics, strategies, and summum bonum are tied in a speculative endeavor. This conscious mode of thought is grounded in a metaphorical language that derives from narratives that use universal archetypes in the way that a good fictional character can describe a universal existential problem better than dry prose (e.g., Job, Holden Caulfield, or Anakin Skywalker).Eventually, our maps develop anomalies, events that do not fit, because maps are always simplifications of reality. A sufficiently large anomaly is similar to finding that your microscope is out of focus: everything becomes a blur, chaos, and it is not obvious in which direction to adjust the lens. It is difficult for people to improvise solutions to their problems, as failure cascades through a complex system. In such a scenario, the first response is to freeze, as rats will freeze initially when moved to a new cage, because all they know is that their current environment is unmapped. Gradually, they begin to sniff around for predators, food, and other rats. Once they perceive that the danger is diminished sufficiently, the rat begins to explore the cage and do normal rat things.Thus, when you learn that your partner is unfaithful or you are not good at your job, you have to rethink some fundamental assumptions about the meaning of your partner and job, and adjust your life accordingly. This happens until death, hopefully less frequently as one becomes older, but certainly at least several times. Alas, many ignore anomalies using cognitive dissonance, but the cumulative cost of not facing one’s errors leads to frustration and existential angst (which explains many angry bloggers).What is interesting is the way in which this epistemological process is akin to Gould and Eldridge’s punctuated equilibrium theory, in which evolution consists primarily of stasis, but occasionally of significant change. The maps people use to understand the world do not change in a linear way, as if they were updating their Bayesian prior daily, but rather people update only when their prior fails massively.Peterson and Business CyclesThis seems relevant to business cycles. Previously, I riffed on Batesian mimicry, the idea that business cycles focus on new things each recession because idiot imitators and outright frauds are drawn to businesses that seem most bulletproof to pointy-headed bosses. Thus, just as colorful poisonous snakes imitate colorful non-poisonous snakes (who then save on metabolic resources with the same benefit), putting “dot-com” after your company’s name was a great strategy circa 1999, and giving mortgages to anyone with a pulse was a great strategy in 2005. Failure is endogenous in humanity’s crooked nature.However, a problem remained; why does investment decline across industries in each recession? Why do industry-specific problems spread into disparate sectors such as consumer, electronics, housing, etc.? Using the Peterson theory, when something sufficiently anomalous happens, investors see chaos because it portends a major epistemic flaw in their maps. Thus, it is best to wait and see where their maps are wrong before investing more. Finding a new paradigm takes time. One rarely understands an anomaly fully, even in hindsight. Even today’s economists disagree about the essential cause of the Great Depression of 1929, or the more modest 1990 recession.Thus, in real-time, anomalies reach tipping points that halt investment, because deferral is not nearly as costly as is a bad investment. Recessions last approximately 12 months on average, so eventually, people determine the anomaly’s essence or at least become comfortable with a new, imperfect map of the business landscape in which chaos is contained, and activity resumes. Contractions are not equilibriums, because people naturally want to explore the uncharted, as exploring is one of Jaak Panksepp’s instinctive mammalian affects. The breadth of a business cycle is the result of the catastrophic nature in the way in which we update our worldviews.Yet, every 10 years, economists develop a new model that the next cycle does not fit. Consider the recession in 1975, which focused on oil, in 1982, on interest rates, in 1990, on commercial real estate, in 2001, the internet bubble, and in 2008, residential housing. Each one is sui generis, as the prior indicators fail to work. In the most recent crisis, when mortgage indices began to falter in early 2007, no economist thought it was a major problem because these had not led to recessions in the past. A few funds failed, but everyone thought it was contained.Then, larger mortgage-related firms continued to fail, and it became clear that the problem was bigger than anyone thought. In the fall of 2008, it seemed that the sky was falling, as people were unclear whether the problem was centered on residential housing, all securitizations via some arcane math error (copulas), or some unknown financial positive-feedback loop. Even now there is no agreement on the genesis of the 2008 recession, and like the fall of Rome, the list will probably remain forever long, even though I believe the only necessary and sufficient condition was the flawed assumption about diversified housing prices (no one thought a nationwide nominal housing price decline was possible).Interestingly, the government caused another anomaly by trying to make things better. In an effort to help solve the problem, the government instituted many new rules that made it easier for delinquent homeowners to remain in their houses without paying, and required a costly legal process for lenders to evict anyone (foreclosure now averages over 600 days). Further, the government filed numerous lawsuits that punished banks for making the same loans it had encouraged previously, but such is politics. Thus, mortgages went from a 90% to a 20% recovery rate assumption, and half of total bank profits in this recovery went to pay fines, so that banks have had one of the weakest post-trough recoveries of any expansion. This has contributed to our anemic expansion, and highlights that one also must foresee the clumsy government response to any anomaly, which makes the problem much more intractable.At some point, the initial mortgage bond anomaly was seen as evidence of a substantive flaw in people’s business models, but it was unclear what that flaw was. They saw chaos and turtled in, froze like rats in a new cage, and investment declined across the board, which is the essence of a recession. When bad information arises, this causes all investors to put less weight on their Bayesian prior about the future, so expectations shift more as new information arises, which is why volatility increases during incipient downturns.The Maps of Meaning business cycle model highlights some key characteristics of recessions that standard business cycle theories do not:The anomalies were real, and exposed profoundly flawed assumptions in certain common business practices. Specific business models were not viable, evidenced by large sustained exits in key sectors after each recession. This is important, because some economists believe recessions are caused by self-fulfilling, but groundless shifts in expectations; many Keynesians lie here (see, sunspot theories of recessions).After 1990, commercial real estate remained depressed for several years After 2001, many internet companies exitedAfter 2008, mortgage companies and housing suppliers exitedAnomalies arise in different parochial aspects of the economy. A macro model that looks at aggregates will miss the essence of the shockAttempts to counter business cycles via aggregate policy never work.Simply lowering interest rates, or increasing government spending does not address the issue, which focuses on a particular business flaw, not an aggregate oneOnce the shock is understood and contained, investment resumes, not because of any top-down stimulus, but rather simply because of cognitive adjustmentWhen investors perceive a large anomaly in their Weltanschauung, their natural reaction is to stop investing in new things, because regime shifts take place after every cycle and if one occurs in your business, you are toast if you build a new plant or keep those workers you hired in anticipation of growth in your now-discredited map.The Next Big OneIt is difficult to predict the future, but I would suggest several large areas that seem unsustainable, yet have witnessed fantastic growth over the past several recessions.• Municipalities are accumulating large pension deficits because it is easy to promise future retirement packages and allow the next generation of politicians to deal with it. Historically, muni bonds have been rock-solid investments, but if they become risky and all municipals face a new default premium, how much would they have to cut back their expenditures?• College tuition has outpaced the inflation rate for two generations, and the number of people going to college also has been increasing, creating a massive increase in college revenue. Yet now, many graduate lack skills for which people are willing to pay (e.g., journalism), so that many students will never recoup their tuition and opportunity costs. When prospective students begin to realize this, an unprecedented downsizing will occur.• The Fed has increased the money supply at an unprecedented rate over the past 10 years, and 8 years into an expansion, the US federal deficit is 4% of GDP. European nations are no better, and several, such as the PIGS, are worse. This portends a government bond collapse and rampant inflation.• 40% of US corn is used for ethanol, a low-octane, corrosive fuel that exists only because of federal mandates, and 15% is used in high-fructose corn syrup, which is inefficient and less healthy than are other sweeteners, and is propped up by federal mandates as well. The effect on our aquifers is unsustainable.When one of these starts to blow, people will believe at first that it will be no problem, because none of these areas has been key in any business cycle since WWII. However, when firms continue to fail, panic will ensue across the board, because if one of these areas goes down, another, or all of them, might, and the most sensitive businesses related to these areas are not obvious (land for farmers? computers for students?). Further, municipal debt, colleges, and corn could be accelerators rather than instigators of the next recession, in the same way unprecedented US state defaults prolonged the 1837 recession until the mid-1840s. Eventually, as the effects are contained in certain sectors of the economy, the economy will recover; again, recession is not an equilibrium.Unfortunately, this time it all will occur with a banking sector that is precluded from backstopping obvious market overreactions because of the Volker rule. This will enhance the downturn, but unlike the May 2010 flash crash, it will last much longer.The take home lesson? Buy cybercurrencies.

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10 января, 06:39

Robeco's Pim van Vliet has a new Low Vol book

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Pim van Vliet runs one of the oldest and most successful Low Volatility funds in the world, which has now flowered into Robeco’s Conservative Equities brand of funds. It is noteworthy that it is not referred to as “low volatility,” because when he began this strategy in 2006, low volatility was not a ‘thing.’ High Returns from Low Risk is targeted at airport readers and casual investors, and is a quick read—36k words—that makes a profound point: objectively, high volatility stocks are bad investments.  In contrast, students are taught that expected returns are an increasing linear function of risk. If investment in riskier assets generates a higher return, the only reason to focus on low or high volatility is one’s risk preference. When combined with the idea of efficient markets, this implies that investing is actually very simple: choose how much risk you can tolerate, which dictates your expected return, and diversify accordingly. Alas, within most asset classes, highly risky assets generate consistently lower returns than do those with average risk, and, after transactions costs are included, risky asset classes, such as options, are horrible investments for individual investors, the more so the riskier the option. Risky assets attract excessive interest from investors, and academics help them rationalize this adverse preference through their extensions of the Capital Asset Pricing Model (CAPM), all of which are very rigorous, but wrong. On the other hand, these same investors are skeptical about market efficiency, which causes them to burn money by trading too much and realizing too many short-term capital gains (which are taxed at higher rates than are long-term capital gains).From High Returns from Low RiskAristotle noted that courage is a virtue situated between the extremes of cowardice—a deficiency of courage—and rashness—an excess. Courage is a good thing, and a good life requires a modest amount of it, but it is foolhardy to take too much or too little risk: so too in investing. Yet every year, new investors enter the market and are attracted to highly risky assets, and because they are taught that this should generate higher-than-average returns even if they have no alpha, they are emboldened. Yet investing in high risk assets is ill advised for two reasons: they generate higher wealth volatility and have a lower expected return.Pim was introduced to the benefits of low volatility investing when he read Robert Haugen, who indicated in several papers that higher risk stocks do not generate higher-than-average returns. As I was researching this before it became popular, I have a strong opinion on the unimportant issue of who discovered the low vol anomaly first. Haugen did not know what he had discovered until approximately 2008, when he kept seeing his 1991 and 1995 papers referenced by the growing low volatility crowd. Haugen always emphasized that markets were inefficient, so he was an early proponent of the “factor zoo.” After all, George Douglas (1969) and Richard McEnnaly (1974) found no risk premium, yet no one mentions them.In contrast, Bruce Lehman’s Residual Risk Revisited (1990) noted how strange it was that everyone was convinced the market index’s imperfect proxy of the “true” market was obscuring the CAPM, yet this implies residual risk should generate a sizable risk premium, which it did not. That was a big dog not barking. Then there was Ed Miller’s 1977 paper, where a greater diversity of opinions generates a lower return for high volatility assets, and that diversity of opinion correlates with volatility. In 2001, he wrote in the Journal of Portfolio Management that one should invest in low volatility equities, full stop. This is really the first academic publication to champion low volatility, and the fact that he was influenced by his earlier theory is important, because without a story that one really believes, any particular correlation becomes one of many, as with Haugen. That is clearly a rabbit trail quibble, however, as Pim is a gracious fellow, and is quick to give credit when he can. Another example of this is that in which he credits his colleague, David Blitz, for noting that relative rather than absolute performance affects investment manager: underperforming is a greater threat to a long-only portfolio manager than is losing money. That is, if you lose 10% in a market that is down 10%, you did average, and your assets under management will probably not be decreasing. However, if you make only 5% in a market up 15%, assets will go down. Risk is symmetrical: it can be too great or too little, because if you take too little risk, you will underperform in bull markets, which is just as bad as those who take too much risk and underperform in bear markets.Pim noted his dismay at this finding: it would not be an easy sell to tell investors that his low-vol tilt generates better returns merely because they have lower volatility, because they would have higher relative volatility. Yet this could be precisely why the strategy presents an opportunity, in that, for a portfolio manager, low risk is actually average risk, so risk averse professionals do not invest in low, but rather in average beta stocks (aka, closet indexing).One of my ideas that Pim highlights is that envy is more important than greed. That is, the relative risk preferences peculiar to investment professional contracting exist in individual investors themselves, as they also are not maximizing returns subject to volatility constraints, but subject to relative volatility constraints. This makes the low vol effect more fundamental and less ephemeral. If greater low vol performance were merely an institutional inefficiency, we should expect mechanisms to circumvent that, such using a Sharpe Ratio rather than total return. Yet over time, the end-of-year lists of best managers are ranked invariably according to simple raw returns within their focus, which always encourages risk-taking via the convex rewards of being at the top.The most prominent methods used to explain the high returns on high beta assets are partial equilibrium results, ignoring the implications in a more general setting: 1)      Frazzini and Pedersen (2010) relied on a leverage constraint, as investors reaching for the equity premium try to grab more via a higher beta with the same dollar investment.2)      Harvey and Siddique (2000) focused on people’s preference for stocks with high co-skew, which are like lottery preferences, or risk loving preferences.3)      Ed Miller (1977) showed how the winner’s curse implies that assets with a high diversity of potential outcomes have lower returns.There is some element of truth in these approaches, yet they are all deficient as definitive explanations, because they imply very counterfactual things. Academics focus on rigorous solutions because general solutions do not lend themselves to the type of clean models that journals like to publish (and not coincidentally, what academics like to work on), and science is all about simplifying things to identify fundamental laws. This is a salubrious division of labor, where academics do their thing and practitioners then implement these findings in a more ad hoc way given all the realities academics assume away. Yet here these models are profoundly inconsistent with other stylized facts that suggest a deeper problem, in the same way Bruce Lehman’s noting that idiosyncratic risk having no risk premium highlighted a deep problem to the standard model.If we take the following three empirical facts:1.      The equity market return premium is positive (3-6% annually)2.      High beta stocks have lower-than-average returns 3.      Average investors choose to be long—not short—high beta stocksYou then need all of the following non-standard assumptions to generate such a result:1.      There must be systematic factor risk for both high and low beta equitiesa.       If high beta stocks did not have a systematic risk exposure independent of the market,  arbitrage would ensure any beta premium is a linear function of beta2.      Some investors must be maximizing relative riska.       If all investors were maximizing absolute risk, no rational investor would be long in the high beta equities, because they have strictly dominated Sharpe ratios.b.      If all investors were maximizing relative risk equities would not have a return premium.3.      Some investors should exogenously prefer high beta assetsa.       Without such investors, the high beta assets would have higher-than-average returns, even with relative preferences, because of the effects of the absolute risk preference investors.Now, this is a messy result, but such is reality (I show this in a paper here). Frazzini and Pedersen’s model implies beta arbitrage (there's only one 'factor'), but a zero-beta portfolio long low beta stocks and short high beta stocks will generate considerable volatility. If that is anticipated, their pricing formula would then include this factor, and the high beta assets would have a greater-than-average return because of the high residual, yet non-diversifiable, volatility in high beta assets. In Harvey and Siddique’s world, for skewness to have a strong effect (e.g., 3% expected return reduction for high vol assets), either investors are risk loving globally, or the equity risk premium should be 15% (Pim published a paper on this here). In Miller’s world, there is a massive arbitrage available to those sufficiently hyper-rational to see this behavioral bias, in that they will adjust their ex ante estimation in light of their knowledge of the subjective valuation prior distribution, which implies massive inefficiency. As it is very difficult to make money in asset markets, assuming that the market is patently irrational is not very compelling.It is important to note that the current situation is really less of a low volatility than a high volatility puzzle. It is easier to explain why the low volatility stocks have higher returns than expected by the CAPM, yet remain lower than the mid-volatility stocks, than it is to explain why the high volatility stocks have lower-than-average returns, yet people clearly are generally long them (e.g., popular broad indices include these positions). Most importantly, because high volatility stocks have such low returns, low vol targeting actually outperforms the market as a whole.The flatness of the risk premium, when combined with the incentives to go long in the volatile stocks above, creates higher-than-average low volatility returns. With respect to the reasons why risky equities draw individuals or fund managers outside of a mean-variance or mean-relative variance approach, the list of potential reasons is quite long:·         Information cheap. Risky stocks such as Tesla are in the news a great deal, and their large price fluctuations are indicative of new information (i.e., news). That makes it easier to generate an opinion, long or short, and because of difficulties in shorting stocks, most long investors are looking at those stocks they want to buy.·         Lottery preference. This could be called the skewness preference (Harvey and Siddique). They are simply lottery ticket preferences, in that, just as the most extreme lotteries with 100 million payouts generate the highest revenues because they offer the greatest upside, stocks that generate large upsides offer the most interest to investors. Robert Sapolsky has noted that monkeys generate spikes in dopamine when they perceive random rewards, highlighting the addictive quality of gambling, and the convex nature of the human brain’s preference for “more” in stochastic contexts.·         Long bias compliment. As most long equity investors tend to think equities will rise—otherwise they would be out of the equity market—it then follows that the higher beta stocks will do better in those environments. Indeed, if you invest only in high volatility assets during up months for the market as a whole, your Sharpe dominates a low volatility tilt.·         Alpha overconfidence. If you have alpha, it makes sense to focus on stocks that can go up 40% rather than 20%; the bias towards high volatility stocks is rational contingent upon this assumption.·         Alpha signaling. Recognizing that those who know they have alpha are investing in highly volatile stocks, investing in them—and getting lucky—is a way to sell yourself to potential investors. Investors see one’s focus on high volatility stocks as a consistent signal that the asset manager knows he has alpha.·         Alpha discovery. If you wonder whether you have alpha, it is best to buy some volatile stocks, as it will be obvious after a year whether or not you do.·         Winner’s curse. People will tend to buy stocks for which they have the highest relative expectation. Stocks with the greatest disagreement will tend to have the greatest volatility, and their owners will be those who are most biased (Ed Miller’s paper).·         Agency problems. Portfolio managers often receive a quasi-call option on their strategy. To take an extreme example: portfolio managers are fired if they lose money, but if they make money, they receive 10% of the profits. Such a payoff is maximized when the underlying strategy has the highest volatility. A fund complex also faces this payoff, in that fund inflows are convex, so have many risky funds within every style category, some of which will be category winners.·         Representativeness bias. To get rich, you have to take risk. Some faulty, but plausible, logic then implies that taking a lot of risk will make you rich. ·         Leverage constraints. If you are constrained by regulations or conventions (e.g., 60-40 equity-bond allocation), and think the market is going up, then you can increase your return by allocating your equity in the higher beta stocks (Frazzini and Pedersen’s “betting against beta” model).·         Ignoring geometric return adjustment. People should look at the expected total return, which is reduced by the variance. People should anticipate this by making this adjustment, but often do not, which favors the higher volatility stocks.In summary, there are many reasons other than the standard model that draw people to high volatility stocks, which then hurts their returns on average. Pim discusses his introduction to stock investing and highlights how the biases above directed his interest into a particular volatile stock, one that he could readily form an opinion upon and that could potentially generate out-sized returns.Back to Pim’s book: he presents a “law of three”—omne  trium perfectum—all good things come in threes. In this context, the law of three is low vol, momentum, and value. His value metric is a form of price-to-income ratio, such as dividend yield or P/E. I am skeptical of a law stating 3 is the cardinality of attributes for Platonic forms, but agree that, in this case, it is a handful and not a factor zoo of dozens.His basic formula for generating a good long equity portfolio is first, to look only at those stocks with lower-than-average risk. He uses volatility, but one could use beta as well (they give similar results), and the benefit of using beta is that, because it is normalized cross-sectionally, one merely has to remember to target stocks with betas less than 1.0, rather than knowing the current median stock volatility (in the US, 30%).  A simple filter of excluding stocks with betas higher than 1 is great advice: it lowers risk and increases returns, and helps you avoid getting sucked into the biases listed above. If you constrain your stock picking to low risk stocks, you are swimming with the tide.His portfolio formulation is refreshingly clear. First, normalize momentum and value using percentiles, sum them, apply to the “low vol” half of stocks, and viola, you have a darned good portfolio. He shows you can even do this using Google’s stock screener. Alas, or fortunately for Pim, this is difficult, and so if you really want to do this, it would be better simply to pay Robeco a fraction of a percent to do so, as they will be more diligent in monitoring the portfolio and adjusting for many issues not mentioned merely because they distract from his presentation. Pim notes that this “low vol” anomaly is not restricted to developed country equities. He has found it in emerging markets, and within equity industry sectors. He notes it has been found in corporate bonds, equity options, movies and private equities, but he could have added penny stocks, IPOs, real estate, currencies, futures, and sports books.Investors would be wise to follow simple rules for investing. Those with the humility that comes from wisdom will be relieved to know that they can optimize their investments by merely focusing on lower-than-average risk stocks that make money, generate dividends, and have performed well. Those who need the advice most—average equity investors—are least likely to take it, so I am not worried that a regime shift is in play.Personally, I am not a big fan of momentum, as while it works over time, it fails massively on occasion, as in 2009, when we had an adverse 4-standard deviation event in the US. Nonetheless, I can see how one can look outside this case and find, in the words of AQR’s Cliff Asness, that value and momentum are “everywhere.” I do, however, prefer his method of putting metrics into percentile space rather than a Gaussian variable, in that expected returns are more linear in a percentile z-score. I also appreciate the fact that he does not create a hierarchy of factors, as do many, in which a “value factor” is a combination of 6 metrics (e.g., the Bloomberg Equity Model), which is then added to 5 other such composite factors.If there is no risk premium in general so many seminal economic models are extinguished that it simply will not happen ('no science ever defends its first principles' Aristotle). Further, the fact that people are not so much greedy as envious highlights the fact that economics has a profoundly limited relevance, because while in practice people merely want to out-do their neighbors, this is not something anyone admits they should be optimizing, and certainly is infeasible for a society. Economists can explain behavior using profit maximization or cost minimization, because each is consistent with both greedy and envious utility functions, so it is useful for many parochial applications. Yet this constitutes a partial equilibrium analysis. To the extent that economists want to prove certain macro policies are socially optimal, they return to a utilitarian world in which people do not care about relative wealth. This is simply untrue, and is relevant to why high marginal tax rates are popular regardless of whether they would bring in more revenue: bringing the top down is sufficient motive for most people (why most people loathe the Laffer curve, as it highlights their base interest in a higher marginal tax rate). With this flawed assumption, macro-economists are no more profound than are historians when analyzing a 'macroeconomy', as their fundamental motivator—individual wealth, however broadly defined—is defective and so does not generalize.I used to think it would be good to convince others that the standard utility model is wrong, but now I am happy to let the consensus exist in perpetuity because of both the Serenity Prayer (“focus on what you can do”), and professionally, I am all-in on low volatility. Pim van Vliet is not keeping this powerful economic insight secret, but I am confident that most people will ignore his advice to their detriment. 

12 октября 2016, 06:34

Why Are Libertarians Irrelevant?

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Classical liberalism was the foundation of the American Constitution and is based on utilitarian reasoning that is still popular academically. However, the major parties use libertarian principles selectively: Democrats are pro-choice with respect to abortion, drugs, and gay marriage, while Republicans are pro-choice with respect to business, guns, and schooling. The Libertarian Party, meanwhile, caters to the few who feel very strongly about the gold standard, open borders, or marijuana.In canonical models of economy, maximizing individual preferences is the self-evident goal. Consider all standard models of social welfare:• Individuals maximize the present value of their wealth• Individuals maximize the present value of their wealth and the equity in their society• The top earners form a coalition with the bottom to expropriate the middleIn any case, a libertarian argument seems to be a perennial force, always arguing at the margin for lower taxes and regulation. Even in the latter case, which I think best reflect most market economies, the mandarins at the top and the patronage workers at the bottom need the entrepreneurs to generate enough taxes to subsidize them. Everyone would agree that some level of taxation less than 100% is optimal due to the incentive effects (for example, France’s 2014 75% top rate tax was quickly rescinded back to 45% because of weak revenue). The question is merely what that number is. Politics would be a boring battle between those who want taxes to be 40% and those who want them to be 50%—the libertarians vs. the egalitarians, each acknowledging that their difference of opinion is merely a matter of degree.Strangely, this is not the case, and libertarianism is not foundational within either party.How Libertarianism CrashedDuring the West’s period of tremendous growth prior to World War I, countries consisted largely of aristocratic Republics. Just as Athens only allowed male citizens to vote—approximately 10% of the population—in early America, most states had property and other requirements that limited voters to society’s elite, with the result that less than 20% of the population voted throughout the 19th century. Most Americans then were practicing Christians, which implied they favored moral equality among individuals, but also the idea that the government exists to protect individual free will rather than individuals living to support the government.No one can read the US Constitution without concluding that the people who wrote it wanted their government to be limited severely; the words “no” and “not” as applied to government power occur 24 times in the first seven articles of the Constitution, and 22 more times in the Bill of Rights. This is because the Puritans, Quakers, and Cavaliers who dominated early America all thought living under the others’ ways would be tyranny, and they were right.In such an environment, libertarianism was a strong ideology. John Locke’s liberalism focused on life, liberty, and property, a free economy with minimal government interference (zero government is a straw man caricature). To the extent that people are poor, unconditional charity makes them worse, as poverty is primarily the outcome of a lack of purpose and discipline rather than food and shelter. Thus, workhouses for the poor had codes of conduct and required hard work. Regardless of circumstances, the poor can achieve better lives. The formula is neither complex nor mysterious. The key choices are to work steadily and stay on the right side of the law. For example, if one follows 3 simple rules—finish high school, get a full-time job and wait until age 21 to get married and have children—only 2 percent of such people are in poverty today.Then, two things happened. First, Democratic Republics began to emphasize democracy over republicanism. Universal suffrage occurred in the early 20th century in most Western countries, and more offices became directly elected (e.g., Senators). Second was the death of God, as intellectuals believed organized religion was simply a relic of the past, like our belief in the divine right of Kings. No longer was it sufficient to merely be right with God, but rather, to do good on earth by minimizing suffering. This new progressive ideology was based on the idea that if we apply scientific reasoning to societal problems, as we did to physical questions, we can rid society of poverty just as we eliminated smallpox.In the 1920s, American farmers were suffering because the WWI boom in agricultural exports was reversed, causing agriculture and land prices to fall. Farmers wanted the federal government to intervene in the market by buying crops at high prices and dumping them abroad cheaply, so Congress passed a farm relief package. President Coolidge vetoed it. That was the last time our federal government adopted a libertarian approach to a national crisis. Democrats became a party energized by economic intervention, as there is no limiting principle to ever more 'democracy,' meaning state regulation. Republican doctrine became dominated by conservative Christians more worried about protecting “traditional values” in general than liberty. The net result has been to increase the size and scope of the government consistently.Libertarians Need a TribeMany libertarians, such as business owners or professors, are somewhat successful, and they benefit directly from being left alone. This is fine if you are talented and ambitious, but the majority is not. Either libertarians will have to wait until a poll tax is reinstated in which only the wealthiest 10% vote or they must appeal to people who desire primarily to become part of something larger than themselves. Utilitarianism does not capture this, because if maximizing one’s income is all that matters, one only has to convince a majority that even the unskilled will make more money in a more libertarian society. Yet merely having more absolute wealth is not very energizing for those in the bottom half.The little platoons of life that take us outside ourselves are tribes that protect and promote us. Tribalism makes a lot of sense, in that when you are navigating within an atomistic world, having a set of insiders amongst whom you have influence gives you an advantage in the same way a hoplite phalanx can defeat a rabble. A tribe not only helps us materially but also addresses the universal craving to be appreciated. People want to be part of something larger than them, something they are proud of, that values them. To merely make more money but still be relatively poor, is not an attractive objective because it implies they are not valued. There are many such groups to join, as people are interested principally in doing well among those to whom they relate, groups in which they feel most appreciated. These typically are based on ethnicity, profession, or a common cause.Two of these tribes are toxic. Ethnic tribalism is a scourge, and the best way to stop discriminating based on race is—as Justice John Roberts puts it—to stop discriminating based on race. Encouraging blacks, Hispanics, women, gays, to form advocacy groups that champion their own self-interest, not by changing what they can control (themselves), but rather by changing others (meet our quotas to rectify discrimination), does not help disadvantaged groups and encourages dissension. Top-down attempts to create ethnic equity encourages people to become more ethnically tribal, where people are first judged as part of an ethnicity and then as an individual.Economic tribes, such as trade unions, are simply factions that benefit from state-sanctioned monopolies. For example, when a city sets a cap on the number of taxicabs we are helping current taxicab owners, but not the net of all potential taxicab drivers and their customers. Thus, auto and steel union were very strong in the 1950s, and those 1950s members did quite well, but the cost was fewer such jobs in the future decades; teachers do not have to worry about losing their jobs for poor performance, but then education is the one area of the economy where real costs of educating students keeps going up, while the real cost of making most things (corn, cars, computers) tends to fall. Some think everyone should be able to work in a field that has monopoly benefits like tenure, so people do not have to deal with the anxiety and costs that come with losing a job. Yet, the collective costs of this would be to eliminate productivity growth, as then labor would not reallocate to where it is best needed. The essence of the market’s superiority to socialism is that in market economies capital and labor is allocated away from where it destroys value and towards where it creates the most value.That leaves those with a common cause, and as religious zealots founded liberal America, we should go back to those roots. Since the 19th century, Libertarians have derided Christianity because of its pious tendencies, especially with respect to sex and drugs, while Christians are skeptical of libertarians, who seem to encourage a disorderly, hedonistic, and degenerate society. However, they can compromise, because these fears are overblown and they are more simpatico than they realize currently.Christians should appreciate Libertarians because one’s relationship with God is direct, from one’s heart to God. Libertarianism does not promote sin; rather it allows it. Christians should know they cannot fix the world with laws designed to prevent people from sinning because the world has always been sinful. Protecting people’s right to sin makes a Christian’s conduct more pure because then one is not merely following a rule, but making an authentic choice. In Christianity, it is easy to see how a simple life performing deeds in the humility that comes from wisdom generates the appreciation of a loving God, so merely having this freedom is sufficient to live a righteous life.Libertarians should appreciate Christians because their virtues are synonymous with the bourgeois and stoic virtues libertarians have always prized; it is a simple argument that a small government is consistent with Christian ethics. Honesty, discipline, courage, justice, temperance, and wisdom are all praised highly in the bible, and create a flourishing society. The recent success of gay marriage and the last century’s failure to prohibit alcohol should convince Christians that morality should be the provenance of mores, not law, lest that authority turns around and force its morals on you. Both Trump and Republican convention speaker Peter Thiel highlight that LGBT issues are a distraction from the bigger issues, and they are right: the federal government should not be defining marriage or what drugs people ingest in their homes; that is the essence of liberty and the exercise of our God-given free will.If Christians learned about the consilience of libertarianism and Christianity, they could be powerful advocates for libertarian principles in the public sphere, and this objective would appeal to non-Christians afraid of a crypto-Fabian strategy of converting everyone to Christianity. Most importantly, libertarianism would then appeal to the untalented, in that libertarians offer that demographic nothing that would give them a sense of being valued. The Tea Party had strong support from Christians but seemed almost embarrassed by them, yet “smaller government” as an objective has no traction unless it can appeal directly to those who are not among the talented tenth. Christians see all men as made in the image of God, as moral equals, giving them a status they probably will not achieve economically in their lifetimes. That is, Christians address people’s longing to be appreciated, not merely regarded as necessary unskilled labor.It’s hard to adopt an ideology where you dislike the other people who hold it, and Christians and libertarians are at extreme ends in their lifestyle choices. They should remember that this difference is really similar to the difference they share within their own tribes, in that some libertarians are all about drugs, others gold; some Christians emphasize faith, others acts.  The key, as our American founding tribes understood, is freedom. Posterity in their own lives and, perhaps, the next, will punish or reward those who make foolish choices with their freedom.Another tribe to encourage is the nation, in the case of the USA, Americans. As we are a diverse country, this cuts across ethnicities and , so it is a uniquely inclusive tribe, all the more salutary if we add the objective of minimizing foreign entanglements (aggressive nationalism is bad for everyone). We have enough problems managing our own 320 million people. Yet the key here is helping those on the bottom. Open borders encourages employers to hire immigrants over residents for unskilled labor, because 3 billion people survive on less than $2 a day, and their influx keeps low-skilled wages from rising. This only helps low-skilled immigrants and the rich who employ them. Labor participation rates for those with only high school educations have fallen dramatically since 1970, and this is especially pernicious because such people are especially helped by developing the discipline and soft skills that come from having a job.Lastly, the long-run implications of importing low-skilled immigrants seems certain to move our nation’s away from classical liberalism. Immigrants today are encouraged to retain their culture as opposed to 100 years ago when Henry Ford forced his immigrant workers to learn English and civics. Democrats want more immigrants, taxes, and regulations because they encourage each other. Even libertarians like Milton Friedman believe you cannot have a welfare state and open borders, so this is not hypocrisy, in that every principle at some point runs into paradoxes (e.g., Popper's paradox of tolerance).LiberaltariansBrink Lindsey tried to argue for a left wing Libertarianism, which he called Liberaltarianism. It got nowhere. The top-bottom coalition is the key to the left and the reason that the Democrats have strong support from the poor and the elite. The poor benefit from direct aid, and the middle class Left includes many holding sinecures with average salaries but no chance of losing their job and a hefty guaranteed pension.Then there are the new victim groups. From the book of Exodus to the Civil Rights struggles of the 1960s victims have been portrayed as suffering because they are noble, which gives them a sense of meaning and purpose. Seizing on Bertrand Russell’s observations that all movements go too far, the left has taken its Civil Rights victory to such an extreme that it now sees every disparity as modern day Jim Crow, if not actual slavery, so that any member of a historically disadvantaged demographic deserves its own stakeholder status in every jobs program or regulated industry.The elite left contains the typical collection of baptists and bootleggers. That is, those motivated by principle, and those motivated by hypocritical self-interest. The latter include businessmen who make money off government regulations, especially those regulations practice hurt competition, and thus we should not be surprised that billionaires and Fortune 500 CEOs prefer Clinton over Trump: many capitalists, especially those adept at managing our current regulatory labyrinth, do not want more competition. Then there are simpler rich, like Al Gore or Jose Manuel Barroso, who become big company executives for their political connections.The principled left elites, however, don’t really like the poor—few choose to live amongst them—they just really hate the rich. Since Plato, intellectuals have resented a market-oriented economy. In their formative years, these people did what their teachers asked very well, and thought their intellectual skills implied objectively that they had the highest merit in society. Yet outside of the classroom, lesser students dominate the intellectuals. Money is not the main point; it is the implication that these intellectuals are not appreciated as much as they feel entitled to be. The intellectual wants society to be as it was in school, the formative environment in which they excelled and were praised accordingly. This is why the verbally adept are more liberal than the quantitatively adept, because in general teachers like the verbally adept.The free market resembles the anarchy of the schoolyard, in which jocks and ebullient extroverts have higher status, which is what makes intellectuals’ antipathy so visceral—not because of resentment against an abstract system—but rather against the type of people who have bested them. That is why intellectuals do not mind entertainers and professional athletes making millions, as they never considered these people competition within their social circles.The Left used to be the party of social liberty, but the past 30 years has shown that this principle was merely a tactic adopted when they were in the minority. Democrats are now pushing for more restrictions on speech or forcing bakers to make same-sex wedding cakes because such behavior is not merely an individual choice, but evil. The aggressive moralism of the old Puritans now is the property of progressives, who fight evil motivated by righteous indignation. If you have a higher conception of the good, it seems fine to those in power to push it as far as possible in the public sphere, as most people think their  normative values are objectively good, not mere preferences.Progressives think that more democratic government power is better in every area of our lives; there is no limiting principle to democracy, including liberty. Progressivism is politics under the assumption that every current problem has a top-down solution and that government is pragmatic, its trial and error mechanism no different than the market. They find government solutions better than emergent phenomena because the latter is not democratic. This leads to an ever growing set of democratically implemented state powers.Given the large number of patronage jobs (e.g., the SEIU and Teacher's unions), the envy that motivates intellectuals, or all the money big corporations have invested in satisfying existing regulations, libertarians are not going to get anywhere on the merits of their economic arguments with the Left, as redistribution and regulation are their foundational motivation, and what energizes their intellectual leadership: managing others via decree, not pell-mell competition. The Left  merely contends with the Laffer curve the way a parasite contends with the constraints of its host. Top-down Policy FailsLibertarianism remains our best hope for tomorrow because it works. One might think that minimizing suffering is a humble goal, eminently achievable via policies designed and managed by rational bureaucrats. Yet as Walter Bagehot once wrote, “the most melancholy of human reflections, perhaps, is that on the whole, it is a question whether the benevolence of mankind does more good or harm.”If you give single mothers more money for being single mothers, you get more single mothers, and thus, in 50 years illegitimacy has soared, the effects of which no government program can offset.Prohibition encouraged crime and disrespect for the law, and hurt the majority of Americans who drink responsibly.We put a $1M surtax on salaries in 1992, which gave firms an incentive to generate more stock options, and exacerbated the internet bubble of 2001.Government agencies and regulators encouraged mortgages with no money down and no income verification because home-ownership was correlated with good things, but then the housing bubble burst, leaving the poor no better off than prior to this boom-bust cycle.We created income security for older Americans, but now few have saved for retirement, fewer are connected to family members, and when the social security Ponzi scheme hits the wall it will create an unprecedented disaster.We made it harder for banks to foreclose on delinquent properties, but this increased the bank loss rate, which goes into the pricing of new loans, thus mainly hurting new borrowers for something they didn't doThe Volker rule discourages banks from proprietary trading, so in the next crisis there will be less liquidity (eg, see  July 8 2015) More regulation means higher fixed costs and less banking competition, bigger banks to amortize that fixed costWhen Teddy Roosevelt set up the Park Service in 1903 to manage Yellowstone, they tried to increase elk by eradicating wolves, but then the elk ate all the grasses and trees the beavers used, so the beavers vanished, causing the meadows to dry up, and the trout and otter to disappear. Society is an evolving, dynamic system, and top-down correctives usually make things worse. The inherent weakness of a democracy that elects a powerful government is that the intelligence of half the voters is one standard deviation below that of the average college graduate. To the extent these people are unable to manage their self-interests, they are even less competent to judge who has the best plan to manage the self-interests of others.Further, those in government are not like the altruistic, social-welfare optimizing angels modeled by academics, but rather, just as selfish as any businessman; they simply want government-sanctioned monopolies that restrict competition under the pretext of protecting consumers or ensuring quality. In this environment, a top-bottom coalition built on political patronage has an obvious advantage and inevitably creates a bureaucracy that measures productivity by inputs instead of output.Libertarians have an endless list of anecdotes that make for excellent debating points, cases in which government rules and regulations have been instrumental in the failure of our inner cities, or skyrocketing healthcare and education costs. As regulations have proliferated and sundry overlapping agencies promote vague objectives based on worst-case scenarios, there are no longer any shovel-ready projects (most of the 2009 $700B stimulus simply went to transfers and shoring up deficits, 3% was spent on infrastructure).For the past century, progressives have argued for top-down policies, and macroeconomics has been a major influence because it presumes that if you add up the various components of GDP—consumption, investment, state spending—you can fiddle with the money supply or fiscal policy and get on a “turnpike” to optimal growth. That has never worked. In contrast, Aristotle taught that the primary task of the state was to encourage virtue, as a society of virtuous citizens who interacted freely would create a flourishing society, bottom up, without direction. The focus, again, should be on individual virtue and responsibility, rather than top-down solutions that treat individuals as agentless ciphers. TrumpIt’s clear that at the margin, Trump’s bias is towards lower tax rates and fewer regulations, Clinton’s bias the opposite. As a libertarian, that’s key. Unfortunately, Trump’s cross-over appeal was that he wasn't a prudish Christian like Mitt Romney yet anti-PC enough to imply he'd stop persecuting Christians, which correlated with the remarks that probably doomed his candidacy.Trump dominated Republicans because he combined the libertarian goals of lower taxes and regulation that all other Republicans were for with non-libertarian immigration and foreign trade restrictions. This appeals to the many low-capital wage earners who are worried that cheaper foreigners are usurping their jobs. An immigration policy like those of Australia, Canada, Singapore, or New Zealand would allow people who can support themselves to come here, and thus would protect the unskilled, whose only bargaining chip is scarcity.We need to move away from Libertarians who still believe the key issues are the gold standard and legalized marijuana, to those who will embrace Christians, and American workers over unskilled immigrants. Christians need to embrace libertarian principles because it alone offers them protection against a state that finds their values despicable and increasingly illegal. The key is not to agree on ends, as hard-core libertarians and Christians will always disagree on matters relating to swearing, sex, drugs, and God. The focus should be on what politics should be about: setting up a system in which people with disparate goals can get along and flourish.

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22 августа 2016, 01:22

Finding Alpha pdf

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My book The Missing Risk Premium is a steal at only $15, but my first book, Finding Alpha, is a $65, which is a bit much for anyone not expensing their books. Finding Alpha goes over why the current asset pricing model fails, with lots of evidence, explains why economists still like it, and then in chapters 10-13 shows concrete examples of how investors have actually found alpha.The risk begets return theory is 100 degrees wrong: usually generates a wrong sign, often no correlation. When it does 'work' it's like when the CAPM appeared to work in the 1970s, an omitted variables problem (ie, size effect & bias).The fact that it should work but doesn't implies there's a something really rotten in economics, because it's not like you can add a skew preference and fix this (this is because if the skew preference has a sizeable effect, investors are not globally risk averse, which then turns everything upside down).  There's plenty of wrong stuff people learn in economics or college in general, but most such errors are clearly based on some left-right ideology, and this is not the case here.You can download the individual chapters in pdf form here...Table of ContentsChapter 1 Risk Uncorrelated with ReturnsChapter 2 The Creation of the Standard Risk-Return ModelChapter 3 The Empirical ArcChapter 4 Volatility, Risk and ReturnsChapter 5 Investors do not Mind their Utility FunctionsChapter 6 Is the Equity Risk Premium Zero?Chapter 7 Undiminished Praise of a Vacuous TheoryChapter 8 Why Relative Utility Generates Zero Risk PremiumsChapter 9 Why We are Inveterate BenchmarkersChapter 10 Alpha, Risk, and HopeChapter 11 Examples of AlphaChapter 12 Alpha GamesChapter 13 Alpha Seeking ApplicationsChapter 14 ConclusionReferences

19 февраля 2016, 06:11

An Economist's Rational Road to Christianity

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One bad thing about blogging, or writing a lot, is that it forces one into a foolish consistency. It is hard to really explore new ideas, because tentative steps will be clumsy. In my new position I'm not incented to blog about finance or politics, and that gave me a lot of time to read as opposed to write. Net result: I'm getting baptized this Sunday (note: it happened, see dunk right, video here). That is, I'm becoming a Christian, not just one who occasionally goes to church, but a real one that believes in Christ, loving God with all my heart, etc.Most ex-atheists who become deists turn to Buddhism, so I thought I'd be clear why they are all wrong (Robert Wright!). I'd like to thank Mencius Moldbug, Dierdre McCloskey, Mike Behe, Tim Keller (four names probably never listed in sequence ever), and hundreds more...Below are snippets (top and bottom) from my Christian apology: I came to Christ via rational inference, not a personal crisis. I haven't read an argument like mine for Christianity, though given everything written about Christianity, I probably haven't tried hard enough.A Rational Argument for Christianity (pdf here, w/ footnotes)·         Something created us·         Created things have a purpose·         The New Testament’s consistency with economics and psychology work as if our creator wrote it·         ‘As if’ assumptions are often trueBertrand Russell (1872-1970) was an eminent philosopher, mathematician, and logician, and avowed atheist. In his History of Western Philosophy, he discusses many arguments for the existence of God—first cause, natural law—and finds them all logically defective, except the argument from design. This is the argument that there are things in the known world which cannot plausibly be explained as the product of blind natural forces, but are reasonably regarded as evidences of a purpose. He notes there is no formal logical defect, and the veracity of this hypothesis turns on ‘comparatively detailed considerations.’ He found the theory of evolution adequate to rebut this theory, but a lot has been discovered since then. [Hereafter I denote the ‘argument from design’ aka ‘intelligent design,’ as ID, the theory that life, or the universe, cannot have arisen by chance and was designed and created by some intelligent entity. ‘Evolution’ and ‘evolutionist’ the theory and those who believe in the theory, that all life on Earth descended from some primal organism(s) that arose at least 600 million years ago, via strictly natural processes of descent with modification, mutation, and natural selection.]If you share Russell’s intellectual interests the theory of evolution is the most important argument for the existence of God. That could be any God, and many then rely on miracles, prophesy or historical records, but I am strictly looking at things more inferentially, what actually works. The New Testament reads like an instruction manual by our creator in terms of its helpfulness in this world, consistency with healthful psychology, ethics, and economics.  For these reasons, plus the belief in a creator, I find faith in Christ a purely rational decision.Evolution Just Like AbiogenesisCharles Darwin’s grandfather, Erasmus, speculated about spontaneous generation, that life may have arisen via some “living filament” imbued with “animality,” which subsequently continued to improve, generation after generation, and create myriad forms of life. In her 1831 introduction to Frankenstein, Mary Shelly wrote of him, “They talked of the experiments of Dr. Darwin…who preserved a piece of vermicelli in a glass case, till by some extraordinary means it began to move with voluntary motion.” She went on to speculate that electricity was the extraordinary means, clearly influenced by Galvani’s 1780 experiments showing how frog muscles contract when stimulated with this new force of nature.  Charles Darwin was aware of Louis Pasteur’s recent work that showed that spontaneous generation of anything that looks like a modern living organism was impossible, such that from the beginning, evolutionary theorists conceded that the appearance of initial life forms had yet to be explained. Yet, at that time, the cell and simple life forms were considered trivial, as cells were simply filled with “protoplasm,” some sort of homogenous jelly. Ernst Haeckel, with whom Darwin corresponded and to whom he made reference in his Origin of Species, believed that the first life form was a kind of cell that would be “an entirely homogeneous and structureless substance, a living particle of albumin, capable of nourishment and reproduction.”[1] Later in Darwin’s life, scientists found something that appeared to be the first proto-cell, and gave it the official scientific name of Eozoon canadense. Darwin noted this as a candidate for the first life form in the fourth edition of the Origin of Species. When Darwin’s friend and advocate, Thomas Henry Huxley, discovered a seeming progenitor to this in oceanic mud, scientists spent several years collecting sea mud looking for evidence of early life. Alas, they soon discovered that one was merely a chemical precipitate of lime produced by the mixture of alcohol and seawater, while the other was a product of heat and pressure. Neither was remotely organic.[2]  Just as his grandfather did, Darwin believed that the discovery of the first life form would occur soon. However, despite his initial enthusiasm, the problem of the origin of life has become much thornier. The more we learn about the minimum necessary components of life, the more complicated it gets. For something to be an organism, it needs to reproduce, metabolize energy, and create a cell wall. The most basic cell requires at least a hundred proteins, each of which has approximately 300 amino acids, and all need to be able to work with each other.  To reach this level of sophistication via chemical evolution defies explanation. The famous Miller-Urey experiments in 1953 created some of the amino acids found in all life forms, but this is a far cry from creating proteins. Such experiments do show you can create some of the basic building blocks of life: amino acids, fatty acids, sugars, yet outside the cell, these building blocks make geopolymers, not the biopolymers required. In the cell, amino acids and sugars are sequestered to prevent this, as pre-biotic chemistry generates melanoids and karogen which stops any evolution as soon as it starts.[3] The inevitable conclusion is that showing how a natural process can create a set of letters used in typesetting does not go far in showing how natural processes create words, let alone novels.[4] The origin of life is one of those puzzles that has been right around the corner, for the past two centuries. Interestingly, the thing that happened to abiogenesis happened to the theory of evolution itself: the process is always just around the corner from some obvious demonstration.[5] Darwin wrote about the evolution of the first eye, and stated, “How a nerve comes to be sensitive to light hardly concerns us more than how life itself originated.” Indeed, it did not concern early enthusiasts of evolution, and still does not. When one is unconstrained by knowledge of a process or mechanism, it is easy to imagine that it is simple, although we know now that a light-sensitive spot is as specifically arranged as the eye itself at the molecular level.[6] Thus, the original stories about evolution simply assumed continual transformation. For example, when Darwin noted that black bears had been seen swimming with their mouths open for hours at a time on the surface of a lake, feeding on floating insects, he stated: “I can see no difficulty in a race of bears being rendered, by natural selection, more and more aquatic in their structure and habits, with larger and larger mouths, till a creature was produced as monstrous as a whale.” Imagining such a scenario is not a scientific argument, but simply speculation.[7]Many present all evolution as similar to how wolves changed to sheepdogs, or the way in which bacteria develop resistance to penicillin, but such change will not create radically new protein complexes or new species.[8] Evolution was accepted as true—Darwin was buried at Westminster Abbey near Isaac Newton—before anyone had any idea how genetics constrains evolutionary pathways, and blind faith in the theory has continued to this day. The problem is that natural selection can explain the survival of the fittest, but not how novel tissues arose, or the way in which amazingly precise and complicated biological processes developed. Some mechanism must exist to take the original life form to all life on Earth, which involves millions of new nucleotides within DNA that create proteins working in concert. Currently most evolutionists consider the diversity of life and the fossil record prove this, but that is an inference based on their assumption it is the only way it could happen; in real-time looking at many thousands of generations of fruit flies and bacteria, we see only a handful of minor mutations.From Deism to ChristianityIf evolution is untrue, it changes everything. Something truly awesome created us, and created things have purposes, they are made “for” something, the way we make hammers to pound nails. We do not create our purpose, we discover it. As an atheist most of my life, I never cared about religious arguments, because I considered anything built on a faulty premise not worth discussing (unlike today’s atheists, who methinks protest too much). However, after I accepted that a creator exists, through some serendipity, I found myself attending church, engaging in Bible study, and reading Christian authors. I experienced a strange consilience, as various facts all began to make much more sense. The unique Christian focus on the heart is genius, and the priorities proposed in the New Testament work as if they were an instruction book from our creator.  Things that work as if they are true, are often really true.  To be a Christian, you need faith, yet this faith can be completely, totally, rational. The science behind evolution is essential to understand why it is rational to believe in a creator, and psychology, neurology, and economics tell us about human nature and workable social arrangements. History is important, because there is a dialectic in scientific opinion, and so prior ideas were tenable before we had data that refuted them. Many good Christian ideas are not unique to Christianity, but a couple of significant ones are. In The Blind Watchmaker, Richard Dawkins wrote that Darwin made it possible to be an intellectually fulfilled atheist, in that prior to Darwin, atheists had no idea how life could have arisen without a designer. The tables are now turned, as recent scientific findings now make it possible to be an intellectually fulfilled theist.[9] A little knowledge led us away from God, and now a considerable amount of knowledge has led us back. There is no way a natural process created humans, and the habits of thought and action suggested in the New Testament are highly attuned to our natural instincts, fruitful character habits, and a prospering society.Unlike what the atheists say about God turning one off to science, it engaged me, because it is much more exciting to search for patterns if you think they exist objectively, rather than something I merely might be able to convince someone is important. The mathematician, Paul Erdos, used to become excited about determining not just mathematical proofs, but ones that were beautiful: inevitable, concise, and unexpected; these were the ones he assumed were in “The Book” God keeps for each mathematical theorem. If an intelligent designer creates objective reality, it is more, not less, interesting. Once one solves the basic problems of survival, the search for meaning is the essence of being human. In contrast, an animal’s goals are created by instincts, and thus, the Zen calmness of a resting dog does not reflect enlightenment, but simply that instincts restrict its purpose. Dogs, however, were bred from wolves to be human companions, and as a result, they now instinctively obey and love a good and loving human master, and respond to human cues in a way no other animals do. The serenity of a dog comes from following his purpose well. Alas, this requires the dog to have a good master, as if he finds himself with a bad one, he will suffer. Humans are allowed to choose their master, the thing they love most they orient their lives around. This ability to choose our purpose gives us great potential, whatever our circumstances, but also a responsibility that generates great anxiety. If we worship the wrong thing, we are like a dog with a bad master, destined to suffer; if we worship the right thing, we are like the dog with a good master, content, happy, active: high stakes indeed.Nietzsche wrote, “The why makes the how infinitely bearable,” in that we are primarily teleological beings. A strong purpose is calming, whereas no purpose generates angst, an uneasy fear of nothing in particular. People want to accomplish some good beyond themselves. When we think our life connects us to something bigger than ourselves, something noble and beautiful and great that appreciates and returns our love, we are satisfied. The greatest eulogies of all time, Lincoln’s Gettysburg address and Pericles’s funeral oration, focused on showing how those who died did not do so in vain, as they helped create a prosperous and noble future that would be an example to the world. That gave those fallen soldiers’ lives meaning, as they were serving something bigger and nobler than themselves. We all wish to be eulogized in that way, as if our stay on this Earth was not in vain. We want something we esteem to appreciate us, not just now, but after we die. The existential philosopher Jean-Paul Sartre called it a “God-shaped hole” in our heart...…..15k words in pdf, but not here related to this argument.....The Christian ConsilienceOnce you accept that we were created, it becomes easier to understand our common drive to find meaning and purpose, because it is more likely that we have an objective purpose that gives our lives meaning. Love is the only end in itself, and the love of God is the key to any Christian purpose, the ultimate motivator because, as the creator of the universe, you can be sure that He will always be there. Profound truths should help you prosper, and to the extent that a worldview is based on an incorrect view of human nature or society, daily refutation generates angst. The most profound truth is that some being created us, and that created things have a purpose. Our purpose is hard-wired into our biology, and creates a longing to love something greater than ourselves, and following this simple purpose generates a social optimum via invisible hand. Having one grand objective is a greater virtue than having two, because it constitutes a greater rope to which one’s destiny can cling.    Aristotle taught that the purpose of the state was to encourage virtue among its citizens, which, in turn, would cause humans to flourish. Christianity is consistent with this, because its bottom-up focus encourages decentralized decision-making and individual liberty. Christianity neither legislates nor demands virtue; it merely encourages it as part of a loving relationship with God. By making people sublimate their will to that of Jesus Christ, who represents God on Earth, one becomes more humble, a better spouse, parent, colleague, and friend. The modesty that comes from Christianity is not weakness, but rather, a combination of honesty and intelligence. The Roman Emperor and Stoic philosopher Marcus Aurelius wrote, “A man’s greatness lies in the consciousness of an honest purpose in life, founded on a just estimate of himself and everything else, on frequent self-examination, and a steady obedience to the rule which he knows to be right.”[10] Epictetus (another Roman Stoic) noted that if you want to be good, assume you are bad, which is consistent with the Christian concept of original sin. Christianity in many ways represents Classical virtues with a radically different motive that actually is inspiring (it is not trivial that Nietzsche called Christianity “Platonism for the masses”).[11]All major faiths both sublimate the self to something external, but also concentrate on managing and disciplining the self. We have hard-wired emotional responses and we know that Aaron Beck’s Cognitive Behavioral Therapy is useful in disciplining these deep drives. The focus is on repairing oneself, not others: changing unhelpful or inaccurate thinking, problematic behavior, and distressing emotional responses. This makes us prosperous and happy. While status is a function of talent, effort, and luck, for those of us in developed countries, a small amount of effort affords one more than enough food and shelter to live, and everything most valuable to us, our integrity, purpose, and relationships, are all free. If you and your friends judge each other according to the heart, and not cleverness or status, it is completely possible to have a wholly satisfying life, regardless of the luck or innate ability that we cannot control.Only Christianity is motivated by love of a personal God, and achieving the right will is key to a good purpose. Jesus not only serves as a bridge for humans to achieve salvation, His personal nature makes it easier for humans to love Him—and thus, by extension, God—and His sacrifice highlights the fact that God loves us: if God paid no price for us, it would be difficult to believe that He cares. This esoteric aspect of what Jesus represents, functionally, is necessary when you are trying to appeal to a large group, as Christianity does. The righteous conduct God praises is consistent with the timeless virtues, including such perennials as to know thyself, the golden rule, and an appreciation of the moral equivalence of all men.[12] A Christian purpose aligns with our nature so well that it is useful to believe and behave “as if” it were true, and in the history of science, many assumptions that were chosen because they worked were later found to be true. Thus, assumptions often are used as contrivances, what Milton Friedman called “as if” assumptions that are not necessarily true, but just good working assumptions. For example, if you assume that individuals are self-interested you can explain many things that are otherwise difficult to explain. When Adam Smith introduced this in 1776, it seemed almost Machiavellian, but it turned out to be a better first-order approximation of individual motivation than any other. It is a miracle that Christianity promotes a societal arrangement as counterintuitive as the free market a couple thousand years before theory and data made this clear. Even in the 1950’s most educated economists thought socialism was more productive than capitalism.When the positron and wave-particle duality were both introduced first via “as if” arguments, they emerged from the mathematics used to describe quantum events, “as if” they existed; later, they were found to exist. Scientists believe that dark matter exists because, as happens in our solar system, spiral galaxies move “as if” embedded in some form of translucent matter that keeps the innermost stars from moving much faster than the outermost stars. No one has seen dark matter, only its effects, but scientists are certain it exists because the cosmos move “as if” it does.If you focus first on yourself, next on your family, and then on your neighbors and colleagues, your focus forms a concentric circle based on their proximity. If you focus first on the neediest, that causes your focus to leapfrog out of this concentric circle to groups external to your circle of friends and family. On a purely utilitarian basis, the latter approach seems to dominate because it provides more for those who need it most. Yet the leapfrogging focus demands one truly cares about abstract people more than people one knows intimately, which is counter to our human nature, as the neurotransmitters that underlie pair-bonding are activated by physical contact.[13] Perpetual aid merely increases the population of targeted groups, and does not create the springboard to endogenous prosperity and flourishing. Focusing on those in your immediate circle, including yourself, has the advantage of being more manageable, in that you receive feedback on how well you are doing, and achieve a deeper contextual understanding of what is needed. It is the serenity prayer in action.The very best thing that people can do for the whole world is to make the most of themselves and those close to them. This is why the Axial age religions have provided so many with good guidance, for example, focusing on mundane virtues, because a society prospers according to the virtues of its citizens, in which they take responsibility for themselves. Your attitude towards yourself is paramount because we really love our neighbor as ourselves; we do unto others as we do unto ourselves. Forgiveness, tolerance, sacrifice, if not practiced towards oneself, are just words. It should be remembered those without any self-interest find it much easier to be cruel when acting selflessly. If you don't value yourself highly, how can you value other selves highly (e.g., ants are selfless animals, yet they are also the most warlike and take slaves)?The progressive inspired ‘positive’ rights for healthcare, food, education, and housing, are claims on the resources of others backed by coercive bureaucracies. Top-down charity is helpful in a pinch, but as a prolonged policy it is counterproductive and resented. That is, Ben Franklin noted that if you want someone to like you, ask them for a small favor, it shows you appreciate their talents; if you merely give them things, people find it patronizing (they think you are incapable) or a sign of guilt (which means, you probably took more than you are giving). Goods and services received without struggle—and the sense of insecurity that motivates it—leads to resentment, and this leads to a vicious circle of hating the 1% even more; those most in need of help neglect the person who can help them most, themselves. The Bible is prescient in orienting an individual’s focus in concentric circles from him/herself, to family, etc., all the while avoiding the emptiness of doing it merely for oneself. The first thing a Christian must do is fear, obey, and love God. As God does not speak directly to most people, this means making yourself a better person, not out of narcissism, but rather, in order to look better to someone beautiful who loves you. In contrast,Freudian psychoanalysis centers on fixing oneself for oneself by getting rid of unconscious repressions that often were attributed to religion. This kind of thinking failed because that focus did not soothe, but inflamed us, as the more we thought about ourselves, the more we thought about how others had wronged us. The motivation, the heart, is key. Our relationship with God begins with fear, but this is only an introduction, in the same way you teach virtue to your children first by making them act polite (any great philosophy has to be esoteric; it has to work at multiple levels, both for the ignorant and the intense). In Christianity, the perfect is not the enemy of the good, because it assumes that all people are imperfect, that such is the crooked timber of humanity. A Christian does not expect heaven on Earth, in that people are base, fallen, yet God loves us anyway if we love Him. Compared to his incredible powers, we are incredibly dumb so our greatest objective achievements in science and art are relatively lame, but our moral sense, our ability to choose our purpose given a glimpse of His power, can generate a sublime achievement that He appreciates, why God is more interested in our faith and love than any other aspect of our character. Dan Buettner found longevity hotspots around the globe, in small communities in places as diverse as Costa Rica, Japan, and Italy, and found a strong sense of purpose was common in all of these places.[14] Victor Frankl wrote about how those who survived in concentration camps felt a strong sense of purpose, and this finding seemed to confirm that hypothesis.[15] If you find a community of people with a shared sense of purpose, whose values inspire virtuous conduct, and whose relationships provide support, guidance, and encouragement, your life will be better. Thus it should come as no surprise people who attend religious services on a weekly basis are nearly twice as likely to describe themselves as “very happy” (45%) than are people who never attend (28%).[16] It would seem obvious that it is beneficial to become religious if we judge ideas on what they make of men. Pascal’s wager would be amended from the focus on the afterlife, to one on the current life.  Poor areas tend to be more religious, not just across countries, but across counties in the US, whereas prosperous areas tend to be more educated and less religious (Mississippi, one of the poorest states in the US, has the most churches per capita). Relatively prosperous people are also happier, yet within these prosperous cohorts, religious people are happier. This creates a true paradox: at the margin, an increase in prosperity causes more happiness and more atheism, but given any level of prosperity, religion increases happiness. Educated people today choose atheism because religion seems logically absurd, as it was wrong on heliocentrism and now seems to contradict evolution. Among the academics who teach young people, the proportion of progressives increases the higher you go in those hierarchies. Progressives continue to argue, ever more angrily, that evolution is a fact, and actually ban ID from high school curricula. However, secular humanism is not rational because it does not understand how economics, psychology, and history show the dominance of the Christian-centered life over the progressive approach here on earth. The inconsistency of means to ends for progressives guarantees failure, just as the Soviet Union and Venezuela were guaranteed to fail. Coda In Jerry Coyne’s Why Evolution is True, he writes “the battle [for evolution] is part of a wider war, a war between rationality and superstition. What is at stake is nothing less than science itself and all the benefits it offers to society.”[17] Wars, alas, are not known for their rationality, rather their propaganda to maintain popular support. In the 1930s the mathematical models of evolution thought single mutations could alter genes in such a way to create a new trait, and such changes were normally distributed in terms of ‘fitness.’ We now know such changes are almost always detrimental, and for a gene to acquire radical new function takes hundreds of specific mutations, many in concert. The mechanism to create novel protein complexes is a miracle, its mechanism unknown, whether God or evolution did it.Science and rationality are tools of the will, and become more tendentious and tortured when those applying it assume by definition their views are objective, their opponents characterized by dogmatism and bias. Atheists are preoccupied with convincing people that evolution is a fact because they know that evolution is key to keeping progressive thought dominant. Their hegemony is more important than any other principle because their goal is to accelerate the arc of social justice, and that can only come from top-down state power, which is why American atheists have a more favorable view of Islam than Protestants, even though Islam is much more repressive on all the social positions it abhors in Christianity (Evangelical Christians, not Muslims, are blocking progressive policies in the USA currently).[18]  Like all untrue foundational insights, the evolutionary mechanism becomes more complicated the more we see. As the appearance of design becomes stronger, expect greater division, because doubt breeds anger. That is, no one holds with fervor that 7 times 8 is 56, because it is known that this is the case; fervor is necessary only in commending an opinion which is doubtful. They have reason to be concerned, because as Bertrand Russel noted, evolution as a theory is strictly an empirical issue, looking at detailed considerations, and as with all bad theories, the more data we have, the convoluted the theory becomes (in contrast, true theories become clearer). The contempt and ridicule directed at intelligent design intimidates young people to concede evolution, which is merely expedient; however, given evolution as a fact, it is harder to believe anything in the Bible is true or even useful.I was a secular humanist most of my life, contemptuous of Christianity because I thought it was not merely based on myth, but that it also mislabeled pride as a vice and humility as a virtue. Human science and art reflect our genius, and their successes were built upon bold individuals. Yet, after learning about the incredibly precise nano-machinery in the cell, and how microevolution does not imply macroevolution, and all the failed examples and predictions of evolution, I became convinced that something created us. It was only then that I decided to take seriously the arguments of Christians like Kierkegaard, C.S. Lewis, Tim Keller, and even the Bible itself, and was amazed at the wisdom in these writings. The idea that Christianity was dogma, a crutch for repressed or ignorant individuals, was not true, although that is what my secular humanist worldview told me.The focus on the will over reason, classical liberalism, classical virtues, love as the primal motive, that humans are by nature base, shows that the New Testament is right on all the issues that really matter. At the personal level, and for creating a thriving society, Christianity works. The emphasis on the will, that love of God is more important than what you do, is uniquely Christian, and uniquely profound. The key to Christianity is the heart, to love God, and therefore, to want to serve Him, and you can only love something you are sure loves you as well. The Corinthians 13 verse often read at weddings is not mawkish, rather foundational.[19]  True love, like my love for my daughter, is something about which I am certain—that I love, and am loved by, my daughter—and it gives me intense joy and purpose.The New Testament argues that God is love and from an emotional standpoint, it is our strongest desire and need. When we feel love and express it through compassion, caring, empathy, serving, supporting, encouraging, and much more, the power of God’s love within us creates a sense of joy and fulfillment that goes beyond the definition of happiness. Loving relationships make us feel complete—in our Creator, spouses, children, friends, and even enemies. All the other ends people seek like status, power, wealth, and sex are preoccupations until acquired, then we think about everything else. Love is the only end not like that. No non-human animal understands physical forces, not just animals that have no sense for light or magnetism, but no awareness of the strong nuclear forces in atomic nuclei.  It seems likely that humans also do not perceive or understand the totality of forces at work in the universe. Nonetheless, we can infer transcendent forces indirectly, and most of our knowledge is inferential, not deductive. That is, we see a universal desire for purpose, the benefits in this world of living for the next by focusing on our own virtues and vices and the evidence of a creator; we believe further that it is most likely that a creator gave us our various instincts. It is our duty to recognize that there are things that we cannot understand; as Schopenhauer stated, “Every person takes the limits of their own field of vision for the limits of the world,” not recognizing that they do not see everything. It would be irrational to presume the universe is constrained to what atheist humans have figured out circa 2016 AD.At some level, this requires faith, as something able to create life clearly is outside of anything for which I have direct evidence. Paradoxically, faith can be rational.[20] There is evidence of a creator, and the Christian creator’s message works best in this life, as it gives one a profound motivation for adopting standard stoic virtues and bourgeois morality. If you estimate rationally, there is a sufficient probability (e.g., 73%) that Christianity is true, with this probability it makes sense to act as if Christianity has a 100% probability of being correct. This is because, in any strategy that takes persistence, once you make the choice to do it you should be “all in.” In the words of a famous short green deist, “Do, or do not, there is no try.” Faith motivates us to use our will to navigate life’s challenges. It entails choosing to trust, cling to, and depend upon someone greater and more powerful than ourselves. In that sense, faith is primarily an act of will in which we choose not to allow events or circumstances to drag us down because we have a relationship with God and He is in our lives to help us. Faith strengthens us to face life’s obstacles, and this produces deep peace and inner happiness. Faith is essential for a happy life.My previous attempts to create meaning within the secular humanist worldview were not failures because I did not try hard enough, but rather because you need a lot of luck to do this without God. That is, I have no doubt that there are many, millions in fact, who are happy and contented without God. If you are excellent at something and content in simple virtues, if your friends and family are stable and of good character, life can be very satisfying. In a world of 7 billion people, it should come as no surprise that some are able to find this without God, let alone Christ. The success various local demographics across the world highlight some groups can generate eudaimonia in this world just as well as any Christian community. Their success comes from the fact they somehow got into a positive feedback loop where their community that supported them also championed classical virtues that made them better people, highlighting the importance of loving something beautiful, and a community of thriving, virtuous people who look after each other is that; it will make you a better person. Indeed, all the Axial age religions do a better job of focusing our priorities than does progressivism, and this tempts many who find them attractive to think they all are equally true. Any good practical objective should be robust, in that it should work fairly well if you approximate it. While the Axial age religions, and many subsequent ones, offer a better purpose in life than trying to create one yourself, not all the major faiths can be true, as they are contradictory. They could all be untrue, just correct on, say, the importance of the golden rule. However, if there is a creator, Christianity may work best precisely because it actually is true. Christianity places unique emphasis on the heart, a motivation based on the love of God, and the gratitude generated by appreciating such a God leads to greater happiness in this world. I will not find my purpose by adopting the worldview of some village in Costa Rica. That would not work primarily because I have no social connections in such a village, and without those relationships, the whole thing does not work at all, even if it works for them. Further, if Christianity is true, those close substitutes will not work in the afterlife, which is more important than anything we experience here on Earth. We were given a unique ability to choose our purpose, and that choice alone is important to God, which should make sense, because anything powerful enough to create us is unimpressed by our worldly achievements, which are technically trivial to such a being. Having the ability to understand life a little bit the way God does, yet subordinate our will to glorifying Him, pleases Him. Life is a test, and as Lincoln said, the best way to test a man’s character is to give him power. We all have the power to choose what to serve and to love, and most choose a secular focus out of pride, our greatest sin. The purpose of life is to practice virtue inspired by the love of something transcendently beautiful. The object from which one is seeking esteem should be beautiful, in that it inspires healthful behavior in us—virtue—and we find satisfaction in its appreciation. It must be long-lived, because a beautiful thing that may end soon cannot sustain hope. Love, meanwhile, is the only end in itself that endures and is never sated, though it requires reciprocation, meaning, the transcendently beautiful love object needs to appreciate and reflect love. A good life is a synchronicity of behavior and thought motivated by love that advances something noble, in that achieving one’s higher destiny helps humans flourish. There’s no better example than loving the creator God described in the New Testament. [1]  They knew cells had other parts, like a nucleus, but did not know much about it, and believed that first life was simpler. That is, scientists had already seen how electricity causes frog legs to move (Galvani in the 1780s), and organic compounds could be synthesized (urea in 1828), so it seemed reasonable that life was not that complicated (e.g., why Frankenstein’s monster was not as crazy as it now seems). [2]  Gould, S.J. Bathybius and Eozoon. In The Panda’s Thumb. London: Norton, 1992, S. 236–244.[3] This was the “oily red goo” Stanley Miller created, documented, and ignored in his initial experiment; no biopolymers were formed.[4]  Now scientists are focused on comets with amino acids that, via their impact, create polymers three amino acids long, or hydrothermal vents at the bottom of the ocean, and bacteria that survive deep in the earth’s crust.[5] The theory of evolution, I am referring to the conventional theory of Matt Ridley, Richard Dawkins, Larry Moran, Sam Harris, Steve Pinker, PZ Myers. They disagree on particulars like group vs. individual selection, neutral drift vs. selection, but there is a gist.   [6]  When light strikes the retina a photon is absorbed by an organic molecule called 11-cis-retinal, causing it to rearrange within picoseconds to trans-retinal. The altered protein can now interact with another protein called transducin. Before associating with rhodopsin, transducin binds tightly to a small organic molecule called GDP, but when it binds to rhodopsin, the GDP dissociates itself from transducin and a molecule called GTP, to which it is related closely, but is critically different from, GDP, which binds to transducin. Several other proteins then interact in a cascade, including an equilibrating mechanism to restore the initial state and enable the continued ability to process light. These proteins are hundreds of amino acids in length, and interact with each other in very specific ways. An initial light sensitive spot requires mutations to create this functionality incidentally, a staggeringly complex, but highly specific set of instructions within the DNA to create such proteins and put them next to each other.[7] The change needed for even the smallest change involves many specific proteins, which need specific protein coding genes, promoters, and all the other parts needed to put such parts in place. For example, unlike other animals, in mammals the red blood cell is enucleated, ejecting its nucleus before entering the bloodstream. It takes place 2 million times per second, and involves an elaborate and highly choreographed process where the entire cytoplasmic machinery of the cell is reorganized in order to achieve the result. Some think the evolution of enucleated red blood cells is simple: a red blood cell once split and did not have a nucleus in one of the daughter cells, which gave rise to enucleated cells. Yet the earliest recognizable red blood cell undergoes four or five mitotic divisions to create the enucleated blood cells that humans use to transport oxygen. The shape differences between these cells as they turn into enucleated cells reflect progressive accumulation of hemoglobin and decrease in nucleus. The nucleus becomes dense because of chromosome condensation, and is isolated from the cytoplasm by a ring of cytoplasmic membranes and moves to one side of the cell. In the last step, the red-blood cell is partitioned into two daughter structures and the nucleated one is destroyed by the immune system. The protein mesh encases the cell into a rigid scaffolding framework which reduces cell deformability but ensures that during mitosis both nuclear and cytoplasmic contents are appropriately partitioned in the two daughter cells. The profound changes in structural membrane protein synthesis and loss of microfilament protein synthesis occurring during erythroid maturation destroy plasma-nucleus useful because red blood cells are very flexible, necessary function for travelling small capillaries. This involves enzymes that work in multiprotein complexes with transcription factors, and protein kinases. The several genes involved in this are not fully understood, but clearly involves the creation of thousands of specific nucleotides that create the process above; it is not as simple as a single accident.[8]  The subtitle of the Origin of Species is Preservation of Favoured Races in the Struggle for Life, and Darwin clearly thought this was relevant to humans, with Europeans at the top, and the uncivilized races at the bottom.[9]  I should note that I am not a young earth creationist, nor a fundamentalist. I think the Bible is filled with metaphors, exaggerations for emphasis, and was written by humans. For example, in the NIV, Galatians 5:22-23 says the fruit of the Spirit is love, joy, peace, forbearance, kindness, goodness, faithfulness, gentleness and self-control. The KJV has patience and the ESV has longsuffering, instead of forbearance. As forbearance is a synonym of “self-control,” it seems the NIV authors were objectively wrong to include forbearance in a listing with self-control. Such errors, I find, are not important.[10] Long, G. M. Aurelius Antoninus. (1862). Harvard Classics, Vol. 2, 1909.[11] In contrast, the Epicurean tetrapharmakos is that we should not fear death because when it comes we will not know it, we will be dead. [12] Matthew 7:12. “So whatever you wish that others would do to you, do also to them, for this is the Law and the Prophets.” 1 Tim. 2:1. “I exhort, therefore, that, first of all, supplications, prayers, intercessions, and giving of thanks be made for all men.” 2 Corinthians 13:5. “Test yourselves to see if you are in the faith; examine yourselves! Or do you not recognize this about yourselves, that Jesus Christ is in you—unless indeed you fail the test?”[13] Prairie voles without receptors for vasopressin and oxytocin have sperm donor dads, those with the receptors hang around to raise the kids.[14] Buettner, D. The Blue Zones: 9 Lessons for Living Longer from the People Who’ve Lived the Longest. National Geographic Books, 2012.[15] Frankl, V.E. Man’s Search for Meaning. New York: Simon and Schuster, 1985.[16] http://www.breitbart.com/national-security/2014/12/24/religious-people-much-happier-than-others-new-study-shows/[17] Coyne, Jerry A. Why evolution is true. Penguin, 2009.[18] http://www.pewforum.org/2014/07/16/how-americans-feel-about-religious-groups/[19] 1 Corinthians 13:4-7 Love is patient, love is kind. It does not envy, it does not boast, it is not. It does not dishonor others, it is not self-seeking, it is not easily angered, it keeps no record of wrongs.  Love does not delight in evil but rejoices with the truth.  It always protects, always trusts, always hopes, always perseveres.[20] James,W. Will to Believe, 1896.

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24 сентября 2013, 22:28

Bye

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I've got a new job with Pine River, and I want my new colleagues to know I'm not going to blab about anything that comes up, so blogging is now really over.  Of course, if you bump into me you can always buy me drinks and try to get me spill the beans (about non-proprietary matters) but I should warn you, I can drink a lot of beer. Best.

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18 сентября 2013, 04:42

Historical CBO Budget Projection Highlights Bias

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Recently the CBO issued its annual budget projection, and it's pretty benign for the next decade, then climbs at a pretty measured pace.Yet, note that in the last recession our debt relative to GDP doubled.  Given that economists still don't have a good model for predicting business cycles let alone avoiding recessions, we can expect more of them. I think the odds that we elect a modern-day Calvin Coolidge next term are much smaller than the odds the deficit will increase dramatically when the next recession hits.Consider that in 2007, before anyone saw any hint of the 2008 crisis, the debt was actually projected to fall, but we know how that turned out (black are actual historicals).  That is, they never anticipate recessions, though we all know they haven't been abolished.  I pulled these numbers out of the 2007 'wayback machine' which is a great way to hold large institutions accountable, because for some reason the CBO doesn't keep their historical forecasts on their current site (maybe the NSA can get Google to scrape them away?).  Liberals who happen to be economists  (eg, Brad DeLong) think the latest objective projections prove we have no budget worries.  I guess some people really do think This Time It's Different.

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09 сентября 2013, 05:12

MSCI Quality Index

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I was unaware MSCI had beaten AQR to the punch by producing a boatload of quality indices last spring.  These are applied worldwide, so they are necessarily more parsimonious than AQRs...but jeez, these are really barebones:1) Net Income/Book Equity2) Debt/Book Equity3) Earnings volatility over 5 yearsInstructively, they Winsorize the data, which everyone should do to financial ratios (ie, truncate extremums).  But, book equity in the denominator?  Earnings volatility over 5 years? Those seem like bad choices, and AQR's quality index will be superior. I have a feeling MSCI is a bit confused, as they have another tab noting their 'Risk Premia Indexing', which they noteAn accumulating body of empirical research has found positive gross excess returns from exposure to factors (or risk premia) such as Value, Momentum, Low Size (small firms), and Low Volatility stocks. The studies show that these factors historically have improved return-to-risk ratios. Today, interest in risk premia (also known as smart beta or alternative beta) has been widespread across the institutional investor community.In other words, risk premia are really return premiums, because predictable returns only come from risk (in theory). But then, they also 'improve return-to-risk ratios', because, as we all know, these factors aren't risk in any obvious way, so strangely they all have 'excess return' premia. Indeed, 'value and size were initially thought to be due to distress risk, which would show up only episodically.  Alas, 'quality' is basically an metric of anti-distress, and this generates a return premium, which MSCI occasionally calls a 'risk premium'...so basically whatever asset outperforms over the next 20 year period will ex post be declared risky.   The risk-begets-return model of economics is clearly nonfalsifiable amongst current financial academics and their coterie.  They still say interesting things on occasion, so it doesn't render them useless, but it definitely impairs their ability to see and interpret reality.

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05 сентября 2013, 04:30

de Botton on Status Anxiety

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I find Alain de Botton's approach to philosophy rather refreshing, because one senses his genuine lack of certainty, and appreciation of discovering, in his works.  He's interested in applying virtue for daily betterment, and the search for meaning, two very important goals in my life.  Interestingly he was insightfully quoted in a NYT review of Sophie Fontanel's self-indulgent book on her self-induced celibacy, which highlighted his breadth and profundity (de Botton's quip was basically that 'sex is messy, get over it').  Anyway, here's de Botton on status anxiety. He argues that status anxiety is worse than ever because now we believe we are less constrained by our birth, more responsible for our fate. Paul Krugman agrees with this view of life, but like most economists, can't take this to it's ultimate implication, that this this leads to a zero risk premium, which when combined with the various attractions of sexy stocks, leads to high risk assets have lower-than-average returns (see my book The Missing Risk Premium).    

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02 сентября 2013, 06:02

How to Maximize Lottery Revenue

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As a proponent of the idea that people are oriented towards their relative success, not absolute wealth, I think this lottery idea is fiendishly clever.  Here's a description from TheWeek of a clever way to capitalize on this instinct:A salient example is the "Postcode Lottery" in the Netherlands. Weekly it awards a "Street Prize" to one postal code, the Dutch equivalent of a zip code, chosen at random. When a postal code (usually about 25 houses on a street) is drawn, everybody who played the lottery in that code wins about $12,500 or more. Those living there who neglected to buy a ticket win nothing — except the chance to watch their neighbors celebrate. In a 2003 study, researchers in the Netherlands noted that fear of regret played a significantly larger role in the Postcode Lottery than in a regular lottery. It was not the chance of winning that drove the players to buy tickets, the researchers found, it was the idea that they might be forced to sit on the sidelines contemplating missed opportunity.