Moving!

Hi everybody!  I'm starting a new blog, in collaboration with a couple of friends, and as such will no longer be posting to this one. You can check out the new digs at Poliglut.

The Stock Market Is Evil

Damn. Jon Stewart scooped me. But I'd like to expand on one part of his interview with Jim Cramer in which Jon questioned the very idea of sitting back and making 10% - 30% margin on an investment.

First of all, I'd like to qualify headline. The stock market doesn't have to be evil; it's just its current manifestation is. Most of the market's action is in the secondary market — that is, not IPOs in which you buy from the company in question — and dividends are a minor, or often nonexistent, part of the deal. That's the evil part of the stock market; it's also the main part of the stock market.

When you buy stock in a company, you're almost never buying it from that company. Instead, you're buying it from some third party, and you're probably doing it in the hope that the stock's price will go up so that you can sell it to another third party at a profit.

The problem with this transaction is that you've made money without adding any service or product of value. That's an inherently untenable system: it's a bubble.

The rest of this post is just more ranting; the above paragraph is the crux of my argument. When you get money without contributing anything of value to anyone, there's a problem. It's always a moral problem, and it almost always ends up in a pragmatic one, too.

Like any other bubble, the stock market works great until it breaks. When things are going well, the market has the general understanding that stocks should generally go up; when people freak out, the stocks generally go down. But whether the stock market is losing money or gaining it has no direct affect on its underlying companies cash, operating efficiency, product line or anything else core to the business. That disconnect is a problem.

How did we come to this? Abstraction.

At IPO, stocks that earn dividends make perfect sense. The company needs capital, and to raise that money it offers partial ownership in the enterprise. You buy a small part of the company and are thus entitled to a share of its profits.

Here's where it gets interesting. When a company is young or not doing well, the risk in that trade is high. To make shares more alluring, and to reflect the fact that you're taking a risk, companies offer their stocks at a low price. That makes sense, and it also makes sense that if the company starts doing well and you want to sell your stock, you should expect to sell it at a higher price; that reflects the smaller risk involved in partially owning the company, which is now stable and doing well. After all, its profits are higher and more regular, and that makes it more valuable to have a claim to a portion of them.

But it doesn't take long for that to get out of hand. Soon enough, most of your profits come from buying low and selling high, with the dividends — the share in the company's profits — getting eclipsed in the transaction. Before you know it, companies abstract away those dividends, and the market is now buying and selling shares that are actually virtually meaningless except insofar as they can be bought and sold at fluctuating prices.

Shares have now become a highly volatile fiat currency: they're only worth whatever we consider them to be worth. Fiat currencies are prone to fluctuations in value, and that's usually seen as a necessary evil; most money is fiat, for instance, and governments spend a great deal of effort in trying to keep its value as stable as possible by curbing inflation and the like.

Keep in mind that I'm by no means against all financial systems. If the main value in stocks were their profit shares — that is, if they were really treated as partial ownership in the company — then I'd be in favor of the system. Likewise, I think loans are a great idea: if I have a bit extra cash, and someone else needs a bit of cash, it's perfectly reasonable for me to give him my surplus and for him to not only pay me back later, but to add interest to make it worth my while.

We just need to remember the fundamental value of what we're holding. A share should represent part ownership in a company; a loan should represent one party helping another with the understanding that the backscratch will be returned. When abstraction lets us forget that, and trade on items not based on their intrinsic value but only in the hope that we can trade them again later for a magical profit, that's when we have a disaster waiting to happen.

Hockey fights and the Bruins: a case study

Those of you who know me may be aware of the fact that I am a fan of hockey. Just a bit.

But one aspect of hockey that's never really captivated me is the fighting. I know, I know — fighting's one of the great parts of hockey, it shows how raw the emotions are, blah blah.

Yes, hockey's a very fast-paced, emotional sport. And if you get pissed off at a guy enough to throw the gloves down, I'm fine with that. What I don't like is the staged crap that starts with circling and has as much hugging as punching. If you have enough patience with the guy to "size him up" for 15 seconds before you try to land your first blow, my philosophy is to just forget the fight and give him an extra hard hit next time around.

The pro-fighting crowd always points to how it energizes the players and can give your team the one-up. To test that theory, I looked up all of the Bruins' fights for the season and looked at each one game by game. For each fight, I looked at what the score was before the fight, who scored the next goal and who won the game.

The tabulated results show that fights don't help the Bruins. My guess is that fights don't have much effect either way, but if you want to really nitpick the stats, they seem to show the Bruins at a slight disadvantage when fighting.

The Bruins are 15-10-4 for scoring after a fight. That is: 15 times they scored next after a fight, 10 times the other team did, and 4 times nobody did. The Bruins' overall goals for/against is 197-131, which is almost the exact same ratio as 15-10 (1.500 compared to to 1.504). So, no advantage there.

But it's actually worse than that for the B's. Most fights didn't have an effect on the game's outcome, in that the team that was winning before the fight ended up winning the game. Of the Bruins' 29 fights, only seven could be argued to have ended up changing (or setting) the game's momentum. In all of those games, the score was tied before the fight; four of them ended up as losses for the Bruins. Even if you account for OTLs, a record of 3-1-3 isn't too great when your overall record is 40-10-8.

The lesson: if a guy's getting chippy at you and you feel the urge to throw the gloves down, fine. But don't pretend it's going to help your team, and don't do it just for the sake of doing it.

Multiverse theory and the two die allegory

In my last post, I described an allegory I'd created that illustrates why life on Earth, even if it is extremely unlikely, does not serve as evidence that God exists. (I emphasize "if" because there is actually no empirical data I know of that has established this probability.)

The same allegory can be used to understand a thought experiment which is one of my favorites. I forget where I read it and who it's by, but it serves as a proof of multiverse theory. That's the theory that says that there are infinite parallel universes. At each moment, every decision or random act that's possible happens in one of those multiple universes.

So, here's the thought experiment: Find a reliable pistol, load it, put it to your head, and pull the trigger. There is a high probability that you'll have just killed yourself, but a small probability that the gun will fail. Repeat this several times. For good measure, after you've pulled the trigger a few times, fire it at the wall to make sure that the gun really works; then put it to your head and pull the trigger a few more times.

If the multiverse theory is wrong, you're almost definitely going to die. In fact, you probably died at the first pull of the trigger.

But if multiverse theory is right, then at every pull of the trigger, you die in the vast majority of universes — but live in the very few in which the gun failed. "Very few" of infinity is infinity, so you're still alive in infinite universes. Moreover, you only go on testing out the experiment and analyzing its results in those [rare] universes in which you're alive. (That's where the evolution allegory comes in.)

The result is that, if you're still alive after having tried to kill yourself a couple hundred times, you can be relatively sure that multiverse theory is correct. You'd have a very, very small chance of being alive if it's not correct, but a 100% chance of being alive if it is.

The kicker, of course, is that you can't communicate with any of the other parallel universes. So while you can be fairly sure that multiverse theory is right, that information doesn't help the versions of you that are dead. Also, since outside observers haven't eliminated all versions of themselves in which you're dead, they won't be able to share your knowledge: even if multiverse theory is right, the chance that an outside observer is in the right universe to see you alive is the same as the chance that the gun has failed. So even if they do see you live, there's no way for them to know if that's because multiverse theory is right or if you're just very, very lucky.

Needless to say, for both your sake if multiverse theory is wrong and for your loved ones' sakes even if it's right, I highly recommend not trying this out.

Evolution and chance: to live, perchance two die

I recently came up with an allegory in a discussion over at Economist.com on evolution that I'm a bit proud of. The question it seeks to address is: If God didn't create life on Earth, then how did it come about, given the minuscule chance of life evolving on its own?

For life as we know it to exist, you have to have the right mix of situations — a suitable solar system, a planet with liquid water, atoms that can form amino acids, amino acids that can self-replicate, etc. The chance of any one of these things happening is very small, and the chance of all of them happening in the same place is virtually nil. Only God, the argument goes, could have tipped the balance to create life here on Earth.

I should preface the allegory by stating that although I do believe in evolution (though I also believe it'll have to be amended, and possibly significantly, as any theory is), the following isn't a proof that God doesn't exist. As an agnostic, I don't believe such a proof exists. But I do treat this allegory as an illustration of the fallacy that God must exist for humans to have formed.

So, now: An allegory two die for

Imagine a simple game involving two players and a 100-sided die (hence the pun in the title, for which I apologize... kinda). The players each roll the die, and if one rolls higher than the other, the player with the higher number wins. Otherwise, they both lose.

Now consider a single-elimination tournament with a million players. At each round, you kill the losers and put the winners in the pool for the next round, randomly seeded. For simplicity, let's say that anyone who isn't matched in a given round (ie, the "odd man out") dies before the round starts. There's a minuscule chance that any one person will win the tournament, but a very high (99%) chance that somebody will win.

At the end of the tournament, you interview the remaining player, if there is one (if the last round was a draw, there's nobody left). Sure enough, that player says he's extremely lucky to be alive. There was less than a million-to-one chance he'd live, and it wasn't even guaranteed that there would be anyone alive at all. He's so lucky, in fact, that only the existence of God explains it.

In fact, God doesn't explain it. It's just that by the very nature of the game, you only get to interview the fortunate winner. God may exist and he may not, but the existence of a survivor isn't evidence one way or the other.

It's the same with us coming from evolution, except that the losers (those without suitable solar systems, or who didn't have water, or who didn't create amino acids, etc) didn't die — they never existed in the first place. We're left with us, the fortunate few survivors in a game of chance, who look at our situation and are fooled into thinking that the question was "will humans evolve on Earth" and not "will something evolve somewhere."

When people look out to the universe and ask, "if it's all just luck, how come we don't see any other life forms?" they're missing the point. The winner in our allegory could ask the same question, especially if he didn't understand the rules of the game he just played.

What Obama means to me

My quick thoughts on the inauguration, and what Obama signifies to me.

This election left me feeling very vindicated. Even though I'm obviously not black, I felt that one of mine had been elected: an intellectual, left-of-center pragmatist. For just about all of my (admittedly short) political life, I have been a left-wing nutjob. Between Obama, my Congressmen (who were shoe-ins, but still) and Massachusetts' three ballot questions, I was, for the first time, 100% mainstream on every issue I had a say in. It's nice to know I haven't been taking crazy pills.

I thought Obama's speech was okay. Not great — I'd have liked to hear a specific call to action — but moving. The one word that I loved: "nonbelievers." Okay, so it's probably not the preferred nomenclature, but I was thrilled to see that Obama remembered that we exist. He's also putting his money where his mouth is, in that all signs point to Obama restoring science to the White House.

It got me thinking: will I live to see an atheist or agnostic sworn in? Or will I even live to see an inauguration not kicked off by a benediction and capped with "God bless you, and God Bless the United States of America"? To some believers out there, this may seem like a minor trifel and a harmless tradition. But let's say the tables were switched. What if the inauguration ceremony started with a scientist getting up and saying, "there is no God" and the inauguration speech ended with "we'll get through this without God's help, since He doesn't exist." Wouldn't you be offended?

As a strongly secular, humanist, agnostic-bordering-on-atheist, I can't help but feeling like an outsider when nearly every significant political event incorporates God so closely, and often implies that it's only thanks to Him that we are where we are. To me, that greatly demeans the efforts and struggles of countless humans (including mine). Now, I don't think it'd be appropriate to alienate believers with "there is no God," but by the same token, I don't think it's appropriate to alienate non-believers.

Well, that was my one rant for this post. I now leave you with a conundrum to ponder. My friend Abbey wondered whether, for the couple minutes between Biden's inauguration and Obama's, Biden was technically Bush's VP. My sister Tamar suggested that maybe the switch happens exactly at noon, regardless of when the actual oath is taken. But in that case, is Obama legally allowed to try to undermine the Constution in the few minutes between noon and his swearing in, given that he hadn't actually taken an oath to defend it yet?

My humble suggestion for a fix is to affix onto each oath, "... effective upon the chief justice of the Supreme Court of the United States of America saying, 'beep.' " Both inaugurations should take place before noon, and at exactly noon, the justice should leant towards the microphone and say, with much somberness and weight, "beep!"

An economy based on free junk

Loss leaders are hardly a new concept, but they seem to be growing in importance. The idea behind a loss leader is that a company gives one product or service at a loss, or minuscule profit margin, in the hope that it'll attract customers who will then also buy more lucrative products. For instance, the price of a ticket at a movie theater barely covers the theater's expense of showing you the movie. Their profit only comes in when you buy concessions.

There are times when a loss leader is appropriate, but in many cases, the consumer ends up losing. Moviegoers have to deal with the sounds of popcorn being crunched and candy wrappers being rustled during quiet parts of a movie.

Part of the reason that loss leaders are gaining in momentum is that the Internet has come with a culture of free things. Try to think of how many sites' services you pay for on the web — I'll bet you could count them on one hand, and probably on one fist. Or, think of how many times you heard music, legally or not, without paying.

But someone still has to get their money, and the mechanism for them to do so sometimes hurts the product. Consider music. I've already complained that music numbs our brains, but now that artists are finding it harder to sell tracks, they're starting to use them as marketing tools. Snoop Dogg's Landy in my Egg Nogg was commissioned by Landy's maker to promote the drink, for instance. A platform already skilled in numbing our minds is being tuned towards manipulating them.

Newspapers have had a loss-leader model for years: they made almost nothing from selling newspapers, and instead got most of their revenue from advertisements and classified ads. That created conflict (or at least the potential for it) between the papers' editorial and sales departments. It also meant that newspapers were vulnerable when classifieds moved to craigslist, which is one of the biggest reasons that newspapers are struggling even as our thirst for news is at an all-time high.

Sometimes the loss-leader model makes sense. Cell phone service providers heavily subsidize phones and make their money through your phone bills. That works because you're essentially taking a loan for an expensive piece of hardware and paying it off as you pay for the service.

Generally, the loss-leader model makes the most sense when the loss leader and the profitable product are closely related — when they're both used for the same common end-goal. This is the case in cell phones, printers (where the money is earned in selling you ink) and Shai Agassi's plan for electric cars, in which the cars themselves are free but the electricity costs you. The end goals there are communicating, printing and driving, respectively.

But even in these cases, there's a potential for the system to hurt consumers. Apple's iTunes store is a loss leader for the iPod (Apple still profits from iTunes sales, but not nearly as much as it does from the iPod). For years, this made Apple consenting if not complacent to record companies' insistence that the music come with anti-piracy encryption — which also, as it happened, meant it was only possible to play that music on iTunes or an iPod. Apple was happy, record labels were happy, and consumers had less freedom.

Of course, the proliferation of loss-leader models isn't just companies' fault. We the consumers buy into it, sometimes insistently. We'll go to a movie theater and pay $10 for a ticket and $7 for a popcorn and soda, but we'd refuse to buy $15 tickets and $2 snacks. That's maybe the saddest part about this system: we're losing out not because some CEO is trying to bilk us, but because we wouldn't have it any other way.