Tag: risk

The More You Risk the More You Learn?

Here’s a relationship I’m exploring right now:

The amount you learn is proportionate to the amount you risk.

I’m not sure if it’s universally valid.  There are probably exceptions.  Still, the more I think about it the more I like it.

It’s important to note that “risk” is subjective.  An increase in risk is an increase in the probability and/or magnitude of a result that forces you to do something you’d prefer not to.  Risk can be material, emotional, physical, or psychological.

If you work for an established, large corporation you will learn things.  If you work for an early stage startup you will learn more things.  If you start your own company you will learn even more.  Each stage ratchets up the risk, in this case financial and social (status loss in event of failure), and the learning goes with it.

Physical risk seems to follow the same pattern.  To learn new moves on the court or field you have to be willing to try them.  Each new move has an increased risk of failure or even injury.  Adventure athletes can probably attest to this at the most extreme, where loss of life is a legitimate risk the physical and mental knowledge gained is likely tremendous.

Even in pure intellectual pursuits I expect this is true.  Sitting and reading or contemplating seems an inherently riskless activity but it’s not.  What you can learn is limited by what you explore, what questions you’re willing to ask, and how far you’re willing to go for answers.  If you safely examine comfortable, socially acceptable ideas you may learn a few things.  But the real learning comes when you push yourself and explore things with potentially risky ramifications.  If your beliefs were to change how uncomfortable would it make you?

This doesn’t mean intellectual risk taking is simply reading people diametrically opposed to your own views.  This is one of the least risky things to do.  More likely it involves reading someone reasonable with a number of foundational beliefs in common but with some unexpected angle or paradigm you’ve never considered.  Imagine a knowledgeable libertarian, for example, reading a radical socialist.  Not very risky.  It’s easy to predict what will be argued and responses are already at hand.  It’s riskier for a libertarian to read an anarchist who builds on the same foundation but extends the ideas into more radical territory – territory that might make one seem “impractical” at cocktail parties.

So what does it mean if the more you risk the more you learn?

The conclusion shouldn’t be that more risk is inherently good.  We all love the word “learning” but there is nothing inherently good about learning either.  Don’t necessarily feel guilt for not risking and therefore learning more.  There are plenty of instances where reducing risk, and therefore learning, is the better path.  I’m sure if I played chicken with an oncoming car I’d learn a lot about myself that couldn’t be learned any other way.  Doesn’t mean I should do it.  I’m not sure knowledge helps if you’re dead (then again, how can I know without trying…)

But I think there are some valuable implications to the risk/learning relationship.  If you know your own goals and are honest about them it can help you make decisions.  If you place a tremendously high value on learning something in particular you might consider higher risk situations that will impart a higher level of knowledge.

This is related but (I think) a little bit different than Nassim Taleb’s powerful concept of “skin in the game“.  Skin in the game is about getting more value out of the decisions you do make by being more invested in the outcome, whereas the risk/learning relationship is perhaps slightly broader and has implications for the kind of decisions you make in the first place.

Why Golden Parachutes are Better Than Tenure

People argue for tenure as a way to allow risk taking, bold explorations into controversial ideas, and new frontiers in academia.  Without knowing their job can never be lost, how would professors have the incentive to take risks?  And after all, even if many don’t pay off, the most important advances come from big risks.

Any time you’re in a non-market or highly distorted market, it’s hard to know what really works and what doesn’t since genuine signals are absent.  Higher education is not even close to a functioning free market industry, so in order to assess the merit of claims about the value of tenure we ought to look elsewhere.

If tenure is really effective we should see it in other areas where risk taking and controversial advocacy are necessary.

It turns out we don’t really see it anywhere.  In a genuine market, it’s not used as a mechanism for incentivizing risk-taking behavior, even where such behavior is arguably far more valuable even than it is an academia.

Entrepreneurs do not have tenure.  Their risk has no subsidy or backstop except the safety net of their own skill and ability to earn a living elsewhere if the venture fails.  Raising capital from an investor is one way to create the space necessary to experiment with bold ideas, but investors fight to ensure the opposite of tenure.  They want seats on the board and the freedom to vote the founder out.

Inventors and artists need to explore wild, crazy, unthinkable ideas.  Yet tenure is not common in any private sector research labs or the entertainment industry and certainly not in the garages and basements of individual creators.  Intellectual property laws can provide a kind of hedge against risk for the tiny percentage of creators with the means to gain and defend IP, but on net IP actually increases the risk to inventors and artists (when other people gain patents and sue).  Even if IP is gained, it protects the creation, which still has to sell to consumers, it doesn’t ensure an income for the creator.

What about CEOs?  Especially in large publicly traded companies, CEOs need to be free to take major risks.  They need to alter the brand, company culture, product lines, production processes, and anything else that might be inhibiting growth.  CEOs need to advocate crazy ideas and bring bold new visions to fruition, with no guarantee whatsoever they will work or be well received by customers, employees, or investors.  Billions of dollars and thousands of careers are on the line.  Do boards offer them tenure as a way to ensure they are properly incentivized to make unpopular decisions or advance bold ideas?

Never.

But the need for such protection is real.  An incentive structure too hard on failed risk-taking would be hugely detrimental.  Instead of the beloved tenure, something else has emerged in the market.  The despised “Golden Parachute”.

CEOs of large companies get really nice compensation packages, even if they get fired or the company tanks.  This is a hugely valuable tool.  Without it, the CEO role would be undesirable, and bold changes would almost never occur.  If they know they won’t be left out in the cold after a risky idea fails, they’re more likely to try it.  Additionally, if the previous CEO wasn’t impoverished for failure it will make the search for a high-quality new CEO far easier.  No one wants to work for a place that might destroy them if things don’t work out.

The huge advantage the golden parachute has over tenure is that it protects the individual risk taker without letting them bring down the quality of the institution.  Tenure for CEOs would be a disaster.  Boards would be stuck with bad CEOs for life, embarrassing the company and making everyone suffer.  Golden Parachutes, in contrast, allow for a speedy dismissal of a bad executive before they bring down the firm, but still create an incentive structure for risk-taking on the part of CEOs.

While some level of protection from catastrophic failure or public opinion is valuable for encouraging risk-taking and innovation in some fields, tenure seems an inferior method than what emerges in the market.

Help Me Publish A New Book!

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Support the KickStarter campaign to get this book printed and claim your copy!

I’m so excited about this book.  The basic idea has been one that infected me about five years ago and I haven’t been able to ignore it.

It’s simple.  Instead of demanding elaborate justifications for doing some big, crazy, out of the norm thing, demand reasons why not.  In other words, flip the burden of proof so that the status quo demands damn good reasons and that wild dream of yours is assumed to be a good idea until proven otherwise.

The project has been a blast to work on.  The book is made up of 10 chapters written by 11 different people, all of whom stopped assuming their dream was too impractical and just went for it.  It’s part personal story, part inspiration, part information, and part how-to.

Drop out of school?  Move to a new city?  Write a book?  Quit your job?  Start a business?  Travel the world?  Audition for American Idol?  Have a bunch of kids?  Fly first class?  Climb a mountain?

Why not?

This book is very personal for me because this question is the breakthrough that led me and my wife to move away from a place we didn’t realize how much we hated until we left to a place we love.  People would ask us, “Why would you move to a city where you know no one?  Why would you leave your roots?”  Our answer became simple and immediate.  “Why not?”

We realized that if we demanded perfection from any change we’d never make one.  If you need a long list of guarantees before you make a move, you’ll probably never do it.  Instead of demanding good reasons to move to a specific city, we started demanding good reasons to stay.  When we scrutinized the status quo we realized it didn’t have much going for it.  Why not leave?

I’m excited to get the eBook, paperback, and hardcover finished product on the shelves and in your hands.  But I need your help!

There is a KickStarter campaign live now to raise the funds to pay for turning the draft into a beautiful book.  We’ve got everything lined up and we want to do it right.  I hope you’ll be a part of bringing this book to life!

Check out the campaign to pledge your support and claim your reward – from copies of the book to having an author come speak to your event.

Why not?

The Economists Answer for Bad Drivers

I originally posted this as just audio, but then I had someone transcribe it for me on Freelancer.com.  I paid him $10 and he did it from Montenegro in 20 minutes.  Fun!

One of the many things I love about economics is that it helps you understand and make sense of things that otherwise seem irrational and mysterious.

It helps you come up with actual workable solutions, rather than of a bunch feel-good nonsense.

To give a concrete example, there are a lot of bad drivers out there and lots of accidents. It’s really scary, right?

So what’s the normal non-economist response to this? “Let’s produce and buy cars with more safety features, front airbags, side airbags, better brakes, glass that shatters in way that won’t hurt you.”

All these safety features seem like the thing to do, because with all these accidents and dangerous drivers you want to protect people, right?

Ah, but this is where the economic way of thinking sheds some light.  The economist says, “You fools!”

We don’t want to make cars safer, that’s just going to lower the cost of bad driving, let’s mount a spear on the steering wheel of every car at two inches from the driver’s chest. Now let’s see who’s driving recklessly! You don’t want to lower the cost of reckless driving, you want to raise it!

My comedian friend Jeremy McClellan has this great bit about whether you’d want your kids to take driver’s ed from cops, who basically drive as recklessly as they want to because they can turn on their sirens and get away with it, or from drug dealers?

The cost of a drug dealer getting in any kind of traffic accident is very high. If they get pulled over they could go to jail for carrying all these drugs around. You want to learn to drive from drug dealers. They’re going to be the safest on the road.  It’s all about the incentives.

This is the kind of crazy, seemingly barbaric but wonderful insight that economic thinking can bring.

Why in my neighborhood are all these soccer moms such reckless drivers? One of the reasons is because they have such wonderful breaks and safety features on their brand new SUVs.

They know they can scream up behind me at 65mph and slam on their breaks with two inches to spare and their car will come to a gentle halt.  Their latte won’t even spill. Meanwhile I’m terrified.  It’s endangering my heart rate if nothing else.

Then there’s me, driving my 2002 Saturn with a 195,000 miles on it. I’m like a train conductor. I start breaking about two and a half miles before the stop light to just ease into it because I know if I slam on the breaks with just 50 feet to spare my foot will literally go through the floor of my car and I’ll have to use my foot on the pavement as a break. That’s a really high cost. I don’t want to lose my foot.

I’m the most cautious driver you will ever see in my Saturn. I check my blind spot religiously, partly because my car is so low it could fit under other cars, but partly because I have no side mirror.  I lost that in an unfortunate parking incident.

This is just one little illustration of economic thinking and how it can help you develop counterintuitive insights and come up with counterintuitive solutions to common, everyday problems.

Below is the original audio, a note I left myself on Voxer.

How Obsession with Options Can Blind You to Opportunities

One of the first steps in your personal emancipation is to realize that the world is full of options, and the few things currently in front of you are not the only from which to choose.  But there is a difference between options and opportunities.

Options are theoretical.  Opportunities are actual.  Options are statistical probabilities.  Opportunities are singular, concrete instances.  Options can always be added on, and the option set can always grow as an aggregate bundle, so there is no urgency or scarcity in options.  Opportunities are temporary and cannot be aggregated.  Each is too unique and cannot be replicated.

The finite nature of each individual opportunity can be scary.  It feels more comforting to stay in the abstract world of options than to jump in to a real opportunity, which immediately reduces the set of theoretical other options.

Options thinking can be useful to gain some big picture long term perspective, but it’s a dangerous mindset too because it can blind you to opportunities or limit the ways you can gain from them.  Here are three of the downsides to thinking about options instead of opportunities.

Too Good for That

Because options are a giant aggregate of all possible activities, the field will always look better than a specific, individual opportunity.  When you know that the field is available to you (in theory) real actions always seem a little less glamorous.  The problem is that the field is not available to you.  Your life isn’t like gambling.  You can’t pick the field.  You have to settle on specific actions.  Grumpiness can result when you do specific things but obsess about keeping your options open.  You’ll always think you’re too good for whatever you’re doing and never fully throw yourself behind it.  This will, paradoxically, further limit your options as those around you will tire of your attitude of superiority and belief that, if you wanted to, you could be doing something better.  It keeps you from entering in to the moment and doing your best work.

Myth of the Perfect Path

The purpose of options is to be able to choose one or more at some point.  But after spending a lot of time expanding your theoretical option set towards this end pressure can begin to build.  When you finally do choose something specific, you’d better get it right.  Options thinking can make you so aware of opportunity cost (or in many cases, imagined, theoretical opportunity cost) of foregone activities that it puts an unbearable burden on whatever you do choose to be perfect.  This short-circuits the best of all human learning techniques, trial and error.  No trial occurs when error is so feared.  The endless keeping of options open in search for the perfect assumes too much about your ability to know all variables – including your own changing desires and interests – and deprives you of one of the best discovery tools, failure.  All this stress about choosing the mythical one true path leads to another problem.

Paralysis by Analysis

The ceaseless break-down comparisons, the cost-benefit analyses, the consideration of these seemingly weighty matters can itself become an activity so consuming it prevents you from all others.  You can become bogged down in a quagmire of strategic planning and never take the definite actions necessary to achieve anything.  The real problem is that inaction is also an action.  Not choosing is a choice.  Waiting, watching, thinking on the sidelines has a cost that’s even higher than the cost of choosing an imperfect opportunity.  When you take opportunity B it means you can no longer take A or C.  That’s the cost.  But the benefit is you get whatever goodness is to be had from B, and the self-knowledge of how well B suits you.  Even if you fail at it you gain something.  When you get stuck analyzing all three options you not only miss out on A and C, but you forgo the benefits of B as well.

Expanding your options set can be intoxicating.  For a time, it feels so fast paced and exciting.  I could do anything!  Why would I do this one thing when I could keep entertaining all the possible things I could do in my mind?

It’s alright to play with your options and expand them and think about them from time to time.  But you’ve got to put options in their place as subordinate statistical playthings when compared to opportunities.  Options don’t change the world or the holder of them.  Actions do.

Want to Make Better Decisions? Get Some Skin in the Game

If you follow sports you’ll notice something.  Vegas is better than the experts at predicting outcomes.  You could chalk this up to the wisdom of crowds, but this can’t be the only explanation, because in surveys and polls the crowd doesn’t do very well compared to Vegas either.

The reason Vegas is better on average than individual experts or surveyed masses is because people choose better when they have skin in the game.  It’s one of the reasons democracy is a bad way to determine the policies people want and grocery stores don’t survey their customers to decide how to stock their shelves.  When it’s free, people take different and dumber risks.

This is why my colleague and co-author Zak Slayback wrote recently that you should burn your backup plan.  It’s why some people get neck tattoos.  It’s why Bruce Wayne had to climb without the rope.

Even worse than having no skin in the game is having the opposite.  A cushion large enough to not only catch you if you try and fall, but one that can sustain you even if you don’t try at all.  Economists call this the moral hazard in the world of financial regulation.  When third parties insure against risk, people and institutions make worse decisions.  Think high risk home loans underwritten by banks who knew that taxpayers would be forced to bail them out if it went south.  It applies on the personal level too.  While it’s easy to call inheritors of wealth financially privileged, I think it’s often harder to discover and live a fulfilling life if you’ve got a huge trust fund.  If you don’t have to win, it’s hard to get the motivation to try.

All these examples might be too easy to agree with me on.  Let’s push a little farther.  I think college funds cause the same problem.  When parents put tens of thousands into an account that can only be used for college, young people will fall prey to the sunk cost fallacy and favor going to college much more than they would without that restricted money.  Once they do, they’ll take it less seriously.  As long as parents are satisfied with grades and activities, it doesn’t really matter.  The degree is perceived as free.  The opportunity cost is overlooked.  The diploma at the end is supposed to guarantee a job and an income, and these are supposed to pave the way to find fulfillment.  Plus, if you pick a major that is supposed to give you lots of career options, you get lulled into thinking you have infinite fallback plans.  Sure, you sat in classrooms or goofed around for the first 22 years of your life, but it’s all good. You’ve got that free degree so no matter what you do, you’re set.

Parents see college as an insurance plan against all problems.  They tend not to care much if you’re happy there or finding your groove or learning how the world works, as long as you get a degree.  Tell them you’re bored and restless and opting out to go start a business or pursue a career as an artist and risk giving them a coronary.  They feel more comfortable with you half-assing it through a moral hazard backed mediocrity.

Forget all that.  It’s your life.  Whatever you do, have skin in the game.  If you don’t or can’t in reality, imagine and live as if you did (a poor substitute, but better than nothing).  Find out the actual cost of your education.  Tally up how much of what kind of work it would take to pay for it yourself.  If it was all on you, would you pay and do it?  If not, why are you doing it now?  (Try the same with things like health care if you want a good shock and some insight into why the health care system is so screwed up.)  What are you willing to give up to get the things you want?  If what you think you’ll gain is less than what you’re willing to part with, why do it?

Are you willing to fail?  Are you so passionate about what you’re trying to do that you’ve got to try it out even if it doesn’t work?  What if the degree fails to bring you anything you want.  Will it have been worth it?  If not, why do it?  “Well, I’ve only got another two years, so I might as well have it under my belt.”  Really?  Compared to what?

If you are like most people and you don’t have any single passion or pursuit to throw yourself behind, no worries.  Go the opposite route.  Try a bunch of stuff and build a list of things you know you don’t love doing and want to avoid.  Avoid them.  Don’t do them because they’re low-risk or paid for by someone else.  That’s like the person who spends money they don’t have on clothes they don’t need because they were on sale.  A $100 pair of useless jeans marked down to $50 is not a savings, it’s a waste of $50.  Keep eliminating things that don’t bring you value and everything else is fair game.

I’m not saying it’s never a good idea to take something that someone is offering to pay for.  The point is to not overvalue the “free” part and undervalue the unseen costs.  Not only are there often strings and expectations and the cost of forgone opportunities, often valuable things offered for free aren’t even enjoyable or meaningful to you.  Don’t do them just because other people would call you crazy not to.  And don’t forget one of the biggest dangers of something someone else is paying for, which is the way it reduces your incentive to take it seriously and get the most out of it.

Look at the actions and activities in your life.  Do you have skin in the game?  The bigger and more important they are, the more you want to have skin in the game.  It’ll make you better and more likely to succeed in every way.

This is not an admonition to simply take more and bigger risks, or to alter your risk tolerance.  It’s an admonition to dig down deep and get to know yourself.  Discover your real risk tolerance.  Be honest about what you find, whether it’s more or less than you wish it was.  Make decisions for you, based on your unique assessment of the trade-offs involved.  Don’t suffer through things because, relative to everyone else’s opinion, they are low risk or a good deal or a safe backup plan.  Get some skin in the game.  The games you want to play.  On your terms.

Milton Friedman on Risk, Choice, and Regulation

A while back I came across one of many video clips in which Milton Friedman insightfully responds to a tough question.  The question is about Ford making a car with a part that saved 13 dollars, when studies showed that using the more expensive part could reduce harm in the case of collision and potentially save 200 lives.  The questioner feels this is a clear example of the callous, money-grubbing nature of the free market, the implication being that some regulatory body should prevent Ford from making such calculations.

Friedman asks how much Ford should be willing to spend to reduce the risk of a single death.  The student refuses to answer.  Friedman’s point is that the question was not over any principle, but over what amount of money Ford should be willing to pay for a single life.  It’s about costs, benefits, and trade-offs.  The student doesn’t seem to follow, but Friedman is dead-on.

Let’s say Ford decides to install the more expensive part.  Their profit margin goes down, maybe some shareholders start selling shares.  How do they make-up the difference?  Maybe they lay off a few low-wage workers.  Maybe they raise the price of their cars, putting them out of the reach of a few low-wage consumers.  Is it worth it?  Maybe these consumers would have been happy to buy the cheaper car, even if it was less safe.  Aye, there’s the rub.

Friedman mentioned this, but in the short Q&A there wasn’t sufficient time to really hammer it home. This real discussion is not about what Ford should make and sell, or how much risk is too much. It’s about who should decide how much risk is acceptable.  That’s the principle worth debating.

Advocates of free-markets like Friedman believe that each individual is in the best position to decide how much risk they are willing to incur.  In every action, every purchase, and every sale, there are costs, benefits and risk involved.  You are the best person to decide whether you should buy a motorcycle, or not buy the most expensive dead-bolt, or produce and sell an extremely sharp cooking knife.  The principle Friedman was referring to is that of freedom to choose what decisions to make and what is in your own interest.

Those who favor regulatory intervention want such choices made once for all by bureaucratic bodies.  They want a set standard of tolerable risk to apply to every human in every situation, no matter how costly abiding by it may be, or how much poverty or even death may be the unintended result.  These regulatory bodies are in the perfect situation to be captured by the largest, most connected businesses who will get them to pass regulations that help them and hinder smaller competitors, with no concern for what it does to consumers.  These bureaucracies are also most attractive to the very kind of unscrupulous, greedy sociopaths that interventionists worry about in the marketplace.

If Ford sells a risky product it may be a bad move on a variety of counts, but no one has to buy it.  Government decisions are the only ones that every single person is forced to abide by, no matter how bad they may be.  Regulatory intervention not only falls far short of free-markets on moral grounds – coercing everyone to make choices set by elites – it dramatically reduces the benefits to all.  It destroys wealth and the incentive and space to innovate.  It rewards political gamesmanship over consumer service.  It interferes with valuable signals sent by and to all market participants about what level of risk people want, and what makes them happy.

There are trade-offs all around us.  The question is not which decisions are correct for other people – we have a hard enough time figuring out which are correct for ourselves.  The question is, where should these decisions be made, and by whom?

Bitcoin – Because Everyone Has to Say Something

Whatever it is, whatever it will become, Bitcoin is pretty cool.

I’ve enjoyed watching it get a lot of attention, and draw attention to big ideas and questions like the role of money, decentralized orders, radical choice, polycentrism and the digital future.  It’s also a little depressing to read the flow of articles on Bitcoin coming from most journalistic outlets.  Not because they like or dislike Bitcoin, or because they describe it correctly or incorrectly, but because their grasp on the economics of money, from its origin to its uses and history, is shaky at best.

No one need be an expert on economics – especially the conceptually difficult arena of monetary economics – to write for a newspaper.  But when you are writing about money, and confidently, it behooves you to dig in and discover what this money is all about.  Rothbard’s famous quote applies here,

“It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”

Thankfully, none of this economic ignorance matters as it regards Bitcoin itself.  Bitcoin doesn’t care what journalists think.  The always quotable and insightful Jeff Tucker summed up why very nicely in a recent Facebook post,

“It’s so strange how this how thing is becoming some kind of fight between pro- or anti-BTC, as if this were some policy thing. It’s not. This is a market technology. It either works or it doesn’t. It’s like being for or against email, for or against online media, for or against Skype. I mean, if you don’t like it, don’t use it. Whether it succeeds or not is up to any intellectual; it’s up to the market.”

The downside of journalistic economic ignorance is that it may result in confused ideas among the public, and therefore create incentives for confused policy from lawmakers.  I’ve heard journalists claim that government guarantees are the best and only sign of a sound money, (because, you know, hyperinflation never happens) and that the core purpose of a currency is price stability (because, of course, markets have been traumatized when trying to adjust to the rapidly falling prices in, say, the tech industry).  It’s sad to see such silliness, but it’s also great to see discussion everywhere about what makes a currency.

It can be helpful to compare money to language.  Both are spontaneous orders.  Both are tools that facilitate exchanges between people.  Both are wholly dependent on the individuals involved for their value and evolution; yet neither can be controlled by any one person.  Try introducing a new language, or even a single new word to an existing language.  Not easy.  Yet anyone is free to try, and new words emerge constantly.  They stick around only so long as they are perceived as valuable ways to facilitate an exchange of ideas.  It doesn’t really matter what experts think makes for a good word or language.  It matters what actually takes root in the world – a world where people face trade-offs and try to get the most value for the least effort.

Bitcoin kind of reminds me (as an admitted computer ignoramus) of programming languages.  Computer programmers have developed and become conversant in all kinds of languages that mean almost nothing to me.  These emerged out of nowhere in a relatively short period of time.  Some lived, some died.  Today, they provide an incredibly valuable function that serves not just programmers, but all of us, even though almost none of us speak the language.  Perhaps Bitcoin could evolve similarly.

Even if never the dominant currency “above the table” so to speak, it may find a powerful place in behind the scenes markets among niche experts, just as programming languages do all around us.  Maybe you or your friend or your uncle will never own Bitcoins – none of you probably write computer code either – but perhaps the crypto currency will be busy at work facilitating exchanges among many market participants you interact with.

I don’t really know, and I’d rather spectate than speculate.  It’s pretty fun to watch, and it’s even better to hear the chatter about a lot of topics I never expected to see in the public conversation.  Money is a mysterious and complex thing.  It’s prudent in such matters to refrain from confident proclamations.  I’m as likely to buy-in to someone’s prediction of Bitcoin as I am their prediction of which words will fall in and out of use in the next ten years.

Five Assumptions About Fire Codes (why laws are less important than we think)

Originally posted here.

A friend and I were discussing the provision of fire services, and he made a comment in passing about how, thanks to government fire codes, fires have dramatically declined. It is true that fires have declined over the last 35 years (at least), but is it true that government fire codes are the reason?

There are at least five untested assumptions behind the idea that fire codes are the cause of a safer world.

Assumption 1: Cause and Effect

The most obvious assumption is that fire codes cause a reduction in fires. It is easy to see how unlikely this is when you perform a simple mental exercise: Imagine enacting US fire codes in, say, India. In India it is not uncommon for electricity to arc between two buildings or for people to pirate electricity by tapping in to an existing power line with a makeshift wire draped across the ground. Surely fire codes would prevent the dangerous electrical fires that sometimes result. The problem is, fire codes already exist in India, but nobody follows them. Why not? Because no one can afford to follow them.

Before government regulations can be broadly followed, they first have to be of limited consequence. Child labor laws only take effect once there are very few children in the work force, due to economic growth. It is well documented that OSHA regulations only came into effect after workplace accidents dramatically declined on their own. If you tried to impose the U.S. minimum wage on a very poor country, no one would follow it because if they did many would die for lack of work, income and food. You cannot wave a magic wand and demand that people take on major costs if the majority of people are not already able to bear the cost. Government regulations have a damaging effect to be sure, but it is primarily on people at the fringes of the economy—the poorest.

Government fire codes receive the credit for reducing fires, when in reality it is economic growth that makes people wealthy enough to spend money on safer construction. The codes come after the fact and claim the credit.

Assumption 2: Irrational Consumers

The idea that government fire codes reduce fires also assumes that, absent such codes, people would not protect themselves from fire. Are people so short-sighted that they would not think to protect their own property if the government didn’t force them to?

It is in everyone’s interest to protect their property from catastrophe like fire, and as such the vast majority of people do. Insurance is a common way to do so, but people also seek safe construction and other assurances against disaster. In fact, insurance companies have a tremendous incentive to only insure buildings with good fire prevention techniques in the first place (except when, as is not uncommon, the government interferes and prohibits insurers from placing stipulations on policies).

It can hardly be granted that people are too foolish to protect their own property from fire damage at all, so maybe it is assumed that people will merely protect their property at a minimum level and not “enough” without being forced to. But what is “enough?”

Assumption 3: Less Fire is Better

Fires are on the decline, and this is universally good, right? Not necessarily. Economist Steve Horwitz gives a question to his students that goes something like this: If a massive earthquake hit a city, what would be the economically optimal number of buildings destroyed? The answer: greater than zero.

How could that be? We all know destruction is not good for the economy (everyone, perhaps, except Paul Krugman). Consider that the cost of making the least valuable shanty in town entirely earthquake-proof is probably more than the value of the building itself. The same goes for fires. Not all structures are of equal value, and not all structures have equal risk of burning down. Because of this, it makes sense that people will have different risk preferences when it comes to protecting their property.

If I own a pole barn full of ice far away from any other buildings or woods, I am unlikely to invest in sophisticated fire prevention or suppression technology (unless compelled by the state), whereas a fancy condo owner in a downtown location is far more likely to pay for the best of the best. It’s easy to see how silly it would be to mandate that every single structure be built to withstand F5 tornadoes, category five hurricanes, massive floods and epic earthquakes. The same principle applies to lesser degrees of protection. For many structures, government fire codes are not worth it and the risk of a fire is lower than the cost of prevention. For others, government codes are not nearly sufficient and much more stringent precautions are in order.

The problem with government codes is that they are blunt and uniform and force everyone into the same mold, squelching innovation and disallowing the kind of marginal risk assessment that conserves resources. Not only are less valuable structures forced to overprotect, but often government codes are so widely accepted that more valuable structures are perceived to be sufficiently protected if they meet government standards, when in fact they may be better off with more.

Assumption 4: Irrational Politicians and All-knowing Bureaucrats

For fire codes to be the cause of enhanced safety it would require irrational political actors. Elected officials and bureaucrats would have to act not in their own rational self-interest, but on behalf of the public at large. To choose just the right amount of fire protection and just the right technologies to supply it requires not only a denial of potential individual profit (by cozy deals with some companies, etc.), but also a superhuman knowledge of what kind of construction everyone needs in every situation.

In reality we see that “rent-seeking” is prevalent everywhere the government intervenes—indeed, it could not be otherwise. How is a politician to choose the physical properties that must be present in caulk used between drywall and copper piping in a commercial building? Without the expertise they—or a wide array of public agencies—must rely on the information provided by competing companies. If it all sounds the same, do you think the company that donates to the right political campaigns might get an advantage? It is a fairy tale to imagine political actors wise and selfless enough to pick exactly the right amount and type of fire protection for every application. Every time they do pick, it reduces the options available to consumers and stunts the discovery procedures of the market in finding the best methods.

Assumption 5: The Government Did It

A final assumption is that the codes and norms of fire safety are, in fact, created by the government. In our discussion my friend mentioned government fire codes but also added a, “Thanks to UL.” UL is Underwriters Laboratory, a non-government organization that certifies goods for safety. They have built up quite a reputation in the marketplace and are highly trusted. (So much so that one professor has taken to chewing on UL certified power cords to prove how safe they are!)

It is often assumed that the order we see around us is the result of a government mandate—after all, mandates do exist for almost everything. But more often than people realize there are private entities and institutions doing the heavy lifting—UL is just one of them. There is a market demand for fire codes, and the market supply is far more complex, subtle, efficient and diverse than a government could ever be.

Conclusion

It is easy to assume government ought to get the credit for a great many life improvements. After all, government agents are constantly taking any opportunity to claim credit for everything under the sun, and to pass laws and regulations that demand certain improvements, whether or not they already exist. The existence of indecent exposure laws is not what keeps me from running naked through the shopping mall, and such laws shouldn’t be credited with my propriety. It’s naïve to assume that fire codes are the cause of a safer society, not merely a reflection of it.

Laws are less powerful than we think they are.

The Seduction of Guarantees

We want guarantees in life.  We are risk-reducing creatures who want to plan and plot and know as much in advance as possible.  We want tight and definite parameters around the possible outcomes of our actions and our world.  Whether we like it or not, they don’t exist.  Still, we persist in fabricating them and acting offended when people acknowledge the impossibility of our desired guarantees.

I recently heard two libertarian philosophers discussing social justice.  One made the case that social justice is a good goal, and that it is congruent with liberty because a truly free society results in the best-case scenario for the least well-off; something even John Rawls would approve of.  He said free-marketers should proudly fight for social justice and remind the world that a free economy will improve the absolute conditions of the poor more than anything else.

The other philosopher responded by saying the world is awash in guarantees   We are not suffering for want of guarantees, but for want of opportunity.  He said guarantees create expectations; when these are not met, they result in complaints, frustration, blame and disillusionment.  We needn’t coddle the unrealistic desire for a sure thing, but encourage an embrace of the risk and uncertainty in life and the courage to create and try even when the end results are unknown.

Even if it is true that free-markets result in better lives for the poor, is it really helpful to make the case for freedom to specific individuals as one that promises this?  To say that freedom will make you better off is appealing to everyone, because everyone wants a guarantee.  And it is correct in a general sense.  But the truth is no system – not a free society or a totalitarian one – can guarantee a specific outcome to specific individuals.  Will markets produce better results than interventionism?  You bet.  But can either system promise what will happen to each individual?  No way.  To hinge the case for liberty on guarantees is to utilize the same false advertising tyrants have been using since time immemorial.

Liberty is beautiful.  It promises nothing but the freedom to be, to act, to try, to create, to produce.  It does not promise what effects will follow cause, only that cause will be unimpeded so long as it does not impede anyone else.  The desire for a guarantee is the very desire that causes people to tolerate and advocate their own enslavement.  This desire itself is dangerous.  Better to disabuse oneself of the myth of a guarantee.

Anyone who’s done sales knows the danger of relying on expected results instead of actual results.  Don’t count the money until the check clears.  If you cultivate a guarantee loving mindset, you’ll find yourself bitter at all the unrealized expectations in life.  You will feel as though everyone, society, the system, or reality itself is your enemy.  Really, by choosing to accept the unreality of guarantees, it is you who have made yourself the enemy of what is.  Why?  It accomplishes nothing but to stunt your own creative and cooperative capacity and replace it with an adversarial outlook towards your fellow man.

The world is uncertain.  We seek to make the most out of it and eliminate hardships, but every course of action only brings probabilities of success, not guarantees.  That’s OK.  In fact, it’s wonderful once we make our peace with it.  Stop debating which ideas can guarantee what, and embrace the fact that guarantees are a serum that slows us down from acting to achieve our ends.  After all, it is the process of seeking just as much as the ends we seek that brings fulfillment   Guarantees put all the emphasis on the sought, and none on the seeking.  Even if our ends are realized, this mindset deprives us of half the joy.

I am not making the case that freedom ought only to be embraced because it’s “right”; far from it.  Freedom will produce better outcomes than statism, and this is the best reason to advocate it.  But what those outcomes are specifically, and how the manifest in each individual’s life is unknown, just as the results of statisms deprivations and favors are unknown.  What is knowable is the fact that freedom produces an outcome for every individual that no system of control and dependency ever could; but it is not an external or material outcome.  It is a sense of pride, of life, of self-worth that is impossible in a system built on false guarantees and dispensations from authorities.  The freedom to experience the effects of one’s cause, regardless of whether it is for good or ill, produces a sturdiness and fullness that humans need to be fully human.  The dignity of uncertain freedom is orders of magnitude greater for the human soul than the patronizing promises of central planning.

The Paradox of Survival

People who live the fullest lives have a loose grip on everything. They don’t cling too tightly to relationships, possessions, health or life itself. They are free from mood-controlling fear and worry. They take the prospect of terminal illness or the loss of a job with ease, because they don’t find their solace in their present material position relative to others, but in something deeper and more unshakable.

The ability to let go of things is useful in every arena of life. Let go of your kids rather than lamenting their choice of hobbies, or the fact that they grow and change. Let go of your fear of losing and put yourself into your sport with abandon. Let go of the desperation to be loved or else you are likely scare others away; to be less lovable. Let go of fear of death, and what life you have is richer.

All this freedom found in letting go, yet humans are programmed to seek their own survival above all else and against all odds. Are we to fight our own hard-wiring? And why are humans so universally inspired by stories of fighting cancer, fighting the odds, resisting the inertia of world, not giving up, not letting go? There is something noble and heroic about refusing to roll with the punches.

How can we square these competing approaches? If suffering from a serious sickness, is it best to let go of our fear of pain and death and find our zen, or should we fight the degradation of our bodies with every fiber?

Both.

There is a way to reconcile a loose grip on life with a refusal to let go of our dreams. I haven’t mastered it. Few have. The space between freedom from worry over the vicissitudes of life, and intense focus on how to overcome them, is the place where greatness emerges. I’ve seen it in sports. Think about Michael Jordan playfully taunting his opponent at the free throw line. He was so free from the worry of missing the shot, or of embarrassment that he closed his eyes while shooting – a loose grip on the game. At the same time, he was so focused on dominating the game, being the best, and making the shot. Greatness.

The key is to hold on to what we have and keep climbing the obstacles that impede us to obtain what we want. The key is also to let go of what we have and be free from the fear of not obtaining what we want. Now all you have to do is both at the same time.

Switch the Default to Neutral

Yesterday I talked about the virtues of remote work.  The point was not to prove remote work is better, but to change the default assumption.  The default position in nearly every firm is that workers must work together in an office.  The prospect of remote work is treated with special scrutiny, and it must prove especially valuable to be tried.  Meanwhile, the default of on-site work is given no scrutiny whatsoever, simply because it is the default.  What happens if we change our default to neutral?

Not just in the case of remote vs. on-site work, but in every choice between methods or worldviews there is much to be gained by switching the default away from the status quo and to an open position, ready to compare alternatives side-by-side.  One needn’t go out of the way to see the merits in a different point of view so much as back off a little from the currently favored view and see how it stands up to scrutiny.

Probably the most difficult areas to have a neutral default are those involving authority.  We tend to assume the best about authority and make it the default position, while we fear the worst about freedom and put it on trial.  Consider prevailing views about the state and state provided services.  The idea of fully private roads, or protection, or adjudication, or education, or charity are immediately met with skepticism and myriad objections in our minds.  They are compared to our idea of how things should be, and almost never to how things actually are under state monopoly.

Our default position is that a single authority is better at most things, but how often do we zoom out and analyze from a neutral default?  What happens when you compare government controlled postal delivery with private in a detached way, as if a disinterested observer from another planet?  What about other services?  The default position deserves analysis equal to that which we give to new ideas.

It’s not only government authority we default to.  I’ve found that as a parent, my default position is that raising kids on the power of my authority and say-so is better than giving them free reign and treating them like rational agents.  Turns out the default is wrong.  No, kids are not fully capable of making sound choices, especially at a very young age, but I’ve been amazed at how well – indeed how much better – they do when I back off and leave more choices in their hands.

The first time I heard radical ideas about unschooling, free schools, unparenting, and other laissez faire methods of interacting with children, I demanded answers to all the hard questions and difficult situations that may arise.  I examined every angle and poked holes in weaknesses I saw in each approach.  Had I ever been so rigorous in examining the more regimented style of traditional education and child-rearing?  Had I put my default assumption, that kids need order imposed by external forces, to any real test, mentally or in practice?  I was having a nice romance with the default position and failing to see its weaknesses, to the detriment of myself and my kids.

Sometimes you have a default for well-developed reasons: you have examined multiple options and found one far superior, so until further notice, it will be the default.  This makes sense and needn’t be abandoned as an efficient way of giving new ideas the basic smell test.  But ask yourself how many of your defaults fit into this category?  It’s surprising how many default assumptions we’ve never actually examined.  We assume our assumptions exist for good reason, but many do not.

Upon examination and experimentation, we may well arrive at the status quo as best option.  But if we never take a close look at our assumptions we do ourselves a great disservice.  You needn’t excitedly embrace every new idea or temper your skepticism about it.  Simply change the default position to neutral.  Be careful; your whole world may change.

There’s No Such Thing as a ‘Public-Private Partnership’

It’s long been a trend for local and state governments to create agencies and entities that are supposed to enhance commercial activity in their area.  There are myriad legal and logistical arrangements, but they all have some common features.  They’re all reliant on government in structure and law, they all use taxpayer funds to accomplish their projects, and they all love to use newspeak phrases like, “public-private partnership” to describe their activities.

An online dictionary definition of partnership is useful:

“A legal contract entered into by two or more persons in which each agrees to furnish a part of the capital and labor for a business enterprise, and by which each shares a fixed proportion of profits and losses.”

And,

“A relationship between individuals or groups that is characterized by mutual cooperation and responsibility, as for the achievement of a specified goal.”

Clearly, government economic meddling projects do not fit either of these definitions.  How can “the public” enter into a partnership?  How can “the public” share in profit or loss?  In reality, governments take money from people in their vicinity by force, then they give some of it to suits in an agency who give it to favored businesses and investors.  “The Public” never agrees to anything.  There is no mutual cooperation and certainly no responsibility or profit/loss sharing.

The absurdity of calling it a partnership can be illustrated with the following thought experiment.  Imagine your friend took some money from your wallet, deposited it in his checking account, kept most of it for himself and gave the rest to another guy to start a business.  No strings attached, just a gift of start-up capital.  Then your friend started publicly talking about how this was a partnership between you and startup guy.  After getting over your initial anger that he took your money and didn’t even consult with you before throwing it after some business venture, you try to consider the possible upsides of this unjust act.  You ask him if that means you will own shares in the company.  No.  Does it mean you get some percentage of any profit?  No.  Do you get an interest payment on your stolen and loaned money?  No.  He assures you it’s OK though, because neither are you on the hook for any losses (besides of course the loss of the money he already took, which you’ll never see again.)  In other words, this is nothing like a partnership.

What you get is money taken from you, spent on middle-men who are paid to give the rest to whatever business they want to.  You are not a partner, you are a victim.  Partnership implies consent.  Partnership implies shared benefit and responsibility   Partnership implies choice.  There is no such thing as a public-private partnership.

Never Have a Magnum Opus

In yesterday’s post, I said,

“I’ve also found that viewing a post as the beginning of my own understanding of the topic, rather than my final word or magnum opus, is intellectually enriching and produces a wealth of new ideas down the road.  But more on that later…”

Now is the later.

My son spends hours every day producing artwork.  Sometimes he will go for several days on a single theme: a new super hero or comic book he’s created.  He is lost in the world he creates as he produced dozens and dozens of drawings, each with elaborate back stories.  Inevitably, whatever theme he’s on comes to a sudden and unexpected (for me, anyway) halt.  He gets a new idea, abandons his previous project, and moves right on to the next.

As a father, of course I find his creations delightful and I have a strong urge to capture them as whole works and preserve them.  He asked me once to help him turn his book of 30 different wizards and sorceresses (“Wizopedia”) into a website.  I was excited to help and began digitizing his drawings and typing in his dictated details on each character…for the first two characters.  Then he got bored and abandoned it for new ideas.

At first, I saw this flightiness as a weakness in him.  Perhaps it is to a certain extent and he’ll need to learn to see some things through to completion.  But the more I think on it, the more I see it as a strength, and the more I want to develop the same tendency in myself.  My son is not concerned about an artistic legacy at this point.  He’s not concerned about a shiny, neat and clean completed work to present to the world so he can bask in his accomplishment.  He’s not trying to create his magnum opus.  He creates for the sheer joy of it, and when he doesn’t feel that joy in a particular project, he moves to where he does.

When I think about the most interesting people, who’ve created the most interesting art or analysis, so many of them produced things until the very moment they passed.  Some of the greatest academic minds produce interesting ideas into their 80’s and even 90’s.  Contrariwise, there’s something sad about a person who produced a magnum opus, and then spent the remaining years living on that legacy, protecting it from being misinterpreted, and making sure the world was aware of its brilliance.  It seems perhaps the best thing to do after creating is to let your creation out into the world and, in a sense, walk away from it and start creating something new.

When I think about my life, I try to imagine it as an upward trajectory through time, rather than a great peak followed by a slow decline in my twilight years.  I want my greatest ideas, moments, experiences and creations to be those at the end of my life.  It seems natural that this should be the case, at least until the physical body’s aging prohibits it, as we accumulate more knowledge and perspective through time.  That is, if we don’t stagnate.

Rather than a single epic project, it seems a more interesting and challenging goal to see one’s entire life as a great work.  Let your whole catalog of creations, from beginning to end, be your magnum opus.  Never peak until you die.

Kiteboarders or Cops?

Last summer I had a conversation with a kiteboarder about his sport and the clan-like nature of his fellow athletes.  He told me that the local government body has entertained the idea of putting more rules and restrictions on kiteboarding but that, thus far, they’ve been stymied.  Every time they try, the community of boarders rallies information and support and kills the case for more regulation.

As usual, calls for government intervention follow highly visible events.  Political operatives rarely push legislation because they spent hours studying how to make life better; instead they respond to opportunities to gain public support by appearing as the savior after bad things happen.  In this case, there was a kiteboarder who cruised too close to swimmers and had a collision.  No major injuries resulted, but it got a local reporter to write about this “growing problem”.  Ordinances were proposed.  Kiteboarders were able to stop them, mostly because the public was pretty indifferent and the few people that did care heard their stories.

The boarders explained two things: that no one could police bad actors better than they already were, and that no one should forget the immense value of kiteboarders, which outweighs the slightly increased risk to swimmers.

To illustrate the first point, the guy I was talking to described how all the boarders know each other, and new kites quickly attract the old guard.  They get to know the new boarders and make sure they realize they are not only representing themselves, but are part of a community with all the benefits (helping each other in rough weather, etc.) and accountability.  He said when an “idiot boarder” showboats, is in over their level of experience, or gets too close to swimmers, others in the community are quick to respond.  Sometimes they even threaten to “take action” if the behavior doesn’t stop.  He told me this works remarkably well.  He laughed at the idea that shore-based beach police could respond to rogue boarders in any meaningful time-frame.  He said by the time they arrived, the bad actor would have been thoroughly dealt with by other boarders.

The second point was even more powerful.  Do kiteboarders increase the risks of beachgoing?  Sure, a little bit.  It’s one more thing going on and collision is a possibility, self-patrolling notwithstanding.  But what about the benefits?  Not just the economic benefits to beachside businesses from the popular sport, or the benefits to boarders themselves, but what about a reduction in risk to the beachgoing public?  This boarder told me that in the last two summers alone no fewer than three people, two of them children, were saved from drowning by his fellow athletes.  The kites allow boarders to zip across the water at lightening speed to the aid of struggling swimmers long before anyone from shore could.  I’d take a slightly increased risk of a collision with a rogue boarder along with an reduced risk of drowning any day.

Every perceived new danger brings calls for regulation and intervention.  But who is better at producing order and reducing risk; communities like the kiteboarders, or professional bureaucrats and enforcement agents?  For a pleasant and safe beach experience, I’d take kiteboarders over cops any day.

(Also posted at LFB.org)