Straight Cash Homey

In this past Wedding Season 2009, the betrothed couples of most of the weddings I found myself at were either white American couples, whose families have been in the US for too many generations to count or matter and their self-identified ethnicities are some vague mixed concept of northwestern European ancestry (e.g. “Mostly German, but a lot of Irish, English. I think some Norwegian.”), or Asian-American couples, with the Asian couples I know being second or third generation, i.e., children or grandchildren of Asian immigrants.  (The generation naming convention for immigrants is unhelpfully confusing, with some folks using the term “first generation” for the immigrant generation and others using “first generation” to describe the first children born to immigrants in the new homeland.  Not even Wikipedia can arbiter definitely on the matter.  I use “second generation” when referring to the children of immigrants.)

Having been raised in a mixed household myself (my mother is from Vietnam and my father self-identifies his ethnicity as some vague concept of northwestern European ancestry), I like to think I’m attuned to the subtle protocol differences between “standard” American weddings and children-or-grandchildren-of-Asian-immigrant weddings.  The Asian-American weddings I’ve been to look and feel like textbook American weddings: the bride wears a long white dress, the ceremony/reception is at a church/resort/hotel/vineyard, the wedding parties wear matching getups and flank the bride/groom, there’s the best-man/maid-of-honor speech, dancing to a band/DJ.  Etc.  Visibly, there’s really no difference.  The major difference isn’t in the trimmings and form, but in the universal behind-the-scenes wedding quid pro quo between the guests and the couple: the wedding gift.  White American couples prefer gifts off a registry; the Asian-American couples I know prefer straight cash.

I did some light bragging earlier about being “attuned” to these cultural nuances, but the past two wedding seasons, I’ve gotten sloppy and inadvertently given a white couple cash and bought an Asian couple a gift off the registry.  (Registries for Asian weddings tend to more sparse and I suspect afterthoughts.)  Of course, my friends were grateful either way, but I couldn’t help wondering if the couples had deflated feelings of “Oh. Thanks.”  I imagined the “Oh. Thanks.” from the white couple was “Really?  You’re giving us cash for our wedding?  What are you?  Professor Gauche?”  And the “Oh. Thanks.” from the Asian couple was more like “Oh.  Thanks. Like I really needed those ice tongs from Crate & Barrel instead of a gift that could pay down our student loans and help us buy a house after we just spent mid-five-figures on this wedding.”

But why do my Asian-American friends prefer that one particular element of a traditional Asian wedding, but prefer all the other elements of The Traditional American Wedding?  It’s not like they had a banquet in a Chinatown restaurant with traditional Chinese garb and the bride changing dresses three times during the course of the night, yet encouraged their guests to give them gifts from Pottery Barn instead of cash.

My theories:

• The pomp and circumstance of The Traditional American Wedding are very visible and thus more infectious to young children of immigrants as they piece together their own visions of their future wedding days from media images.  The registry gift system is not as visible and makes less of an impression.
• I suspect what may be more important is that children of immigrants can often pick and choose from their parents’ cultures and the culture from their non-immigrant peers.  A second-generation Chinese-American might speak no Chinese and wear jeans and t-shirts, but will still take his shoes off before entering his own house.  He’s chosen to assimilate in a visible way, but retains a tradition that he feels is better (he believes it to be cleaner).  And instead of the circuitous we’ll-tell-you-exactly-what-we-want-and-you-buy-it-for-us American wedding gift system, the cash is a superior system if you don’t have an emotional attachment to the registry system.

Non-Obvious Learning

When I spend time with my nieces and the toddlers of my more grown-up friends, I feel like I’m getting an in-person case study on how the human brain learns.  When I see babies mimicking the sounds their mothers, I’m reminded that that is how we all learn language.  Playing with a plastic cube is how we first develop spatial intelligence.  But to a baby, it’s all just play.  It’s not a conscious, deliberate process to learn a skill for some obscure future benefit.  Babies play and learn because it’s fun.  And somewhere along the way, we introduce structure and rigor into learning.  Schools start on a schedule.  Checklists of The Things to Learn get checked.  Tests are taken and report cards are mailed.  We define our learning goals in terms of schools, classes, grades, degrees.

This is all necessary and good, but we unconsciously start believing that a structured class and a degree is the best and maybe even the only way we learn.  The formula for learning advanced subjects works well: an experienced teacher/professor + a reading list + class discussion + a work product (papers, tests).  But it’s not the only way we learn and often isn’t the best way we learn.  For some people and some subjects, the didactic nature of a structured class is an inferior format.  Just as we all did as babies, some of our best education is from implicit learning: the playing and meandering that end up accumulating knowledge and forging skills in a non-obvious way.

What then are these non-obvious ways that learn?  I’m not going to pretend I have a definitive answer, but here’s where I suspect the best implicit learning happens for me:

• Reading.  Okay, so reading is obvious learning, but it’s by far the most effective learning tool we have.  Constant reading is constant learning.  I strive for reading broadly and reading quality.
• Conversation.  I don’t mean conversation in the sense of catching up and the mutual sharing of recent personal narratives. I mean conversation in the sense of pushing and furthering an idea.  As in talking with someone to deeply understand their knowledge, ideas, and point of view — not just waiting to talk to state your own opinion or to tell a tangentially related mini-story.  As in asking meaningful questions.  As in looking for information that can change your own assumptions — not dogmatically convincing everyone you’re smart and right.  As in really listening.
• Following up.  On a recent hike in Peru, our group got into conversation about whether grits were made from corn or potatoes (corn), and my buddy and I had a back-and-forth on how old and genuine the ethnic/national identity of Yugoslavia was as opposed to the (sub?) identities of Croatia, Bosnia, Serbia, et al. (Yugoslavia was a relatively short-lived entity.)  These conversations came up outside of Internet access, and I wrote a note to find out once I got back home and in front of Wikipedia.  If someone mentions a must-read article, I write a note and make sure to find it.
• Tinkering.  My parents bought me and my sister our first computer (a Mac LC II)  during my sophomore year in high school.  I spent hours a day in front of it.  Not writing or doing homework or anything ostensibly productive, but just fooling around with the machine.  Changing the system settings.  Organizing and reorganizing the files.  Using Microsoft Word to format “STEPHEN DODSON” using all the different fonts on the computer.  In my high-school journalism class, my buddy Nate and I used to try to one-up each other’s special effects in Photoshop.  (He’s won.)  These actions weren’t taken because our parents or teachers told us to do them, but they set in motion long-term understanding and curiosity about technology which have served both of our careers well, much more so than memorizing periodic tables.
• Thinking.  My sister just told me a story about how when Joan Didion moved from California to New York, Didion realized that she had done much of her thinking and mental writing during the long drives endogenous to the Californian lifestyle.  Taking in large amounts of information is great; setting aside time to process and think about it is even better.
• Travel.  I learn from travel in a number of ways: There’s the overt learning of different cultures and places, but I find some of my best thinking comes from when I’m physically removed from the static patterns of my daily life.  We’re literally able to step away from our lives and examine and think about things from a remote and fresh perspective.
• Writing.  Putting my thoughts into words that hopefully stand to some scrutiny takes effort.  The permanence of the web and email creates a rigor that’s tougher than a casual statement of opinion over a meal.  Clear writing requires clear thinking.

We’re always learning even when we’re not trying to.  Just as we should be.  Always Be Learning.  Coffee’s for closers.

The Alumni

Exes.  Let’s talk about ’em.

More awkward than an ambiguidate, exes have got to one of the strangest types of human relationships that still technically qualify as being normal.  We enter into a deep, intense relationship with another human being for a long period of time that’s definitionally exclusive.  But then it ends.  And as blogger Musty Man has written, “I never know quite what to do with exes. When a toaster breaks, you just throw it out. When a family member dies, you go to a funeral. When a relationship ends, the object of your affection persists, often in physical and, in this age of social networking, frequently inescapable cyber forms…” We carry on and reconfigure the patterns of lives, but so do our exes.

People love overselling how wonderful their relationships are with their exes.  The Right Answer for what we want for our exes in their lives after us is “I just want her to be happy.”  OK.  Fine.  But let’s get more granular: What type of person do we want our exes to date right after us?  Some may like to answer this one with, “Oh, someone amazing.  Someone perfect for her.”  But these kind of answers always remind me too much of the runner-ups to the Miss America contests who seem just a little too excited that she didn’t win but that girl from Louisiana did.  Or the guiltily delightful multi-screen shots they do at the Oscars when they announce the winners.

(Skip to 2:05.  Anne Hathaway’s undoubtedly rehearsed-to-look-genuine “Yeah!” head pump is kind of amazing.  I wish I could have seen her practice that in the mirror. “Yeah!”)

In my highly rigorous, exceedingly scientific, double-blind placebo study I conducted on this topic (i.e. I asked some friends), how one feels about an ex’s new romantic interest depends a lot on who was the breakupper and who was the breakuppee.  There’s a lot more room to be all magnanimous if you’re the one who ended things.  We could say, “Good for her,” and really mean it.  Someone being insidiously passive aggressive may even signal, “I’m so glad she was able to find someone after the breakup.”  But what if the ex dates down?  Like way down.  Let’s say the next boyfriend or girlfriend is someone who leaves more than a bit to be desired not just in the looks and wit departments, but is also the type of person to steal money from friends.  The kind of person that’d make you say, “Him?  Really? That guy? C’mon!” Whom our exes date after us reflects on ourselves.  We’re members of the same club, and justified or not, it comes with all the guilt brought on by association.

But what if we’re on the other side of things?  How do we feel about the next guy our exes dates if it was a unilateral dumping decision by the ex?  Sure we can say, “I just want her to be happy,” and that’s mostly true.  But isn’t there just a little part of us that doesn’t want our exes to date too well right after us?  Do we really want our exes to date someone who’s better looking, a little cooler, funnier, more successful than us?  Someone that may elicit a “She did way better with her new boyfriend.” If we exaggerate to make a point, what if your girlfriend you’re crazy about breaks up with you and starts dating Tom Brady?  You’d start seeing her in People magazine talking about how perfect they are together.  Maybe you’d want to feel happy for her, but would you truly, deeply feel ecstatic for her?  I’m going to guess “no,” at least not right away.  There’s an entire genre of romantic comedies based on just this premise.

The perfectly rational view of exes is that we should always be rooting for our exes in every situation.  It’s a bit like the BCS ranking system for college football.  If our team, let’s call it “Cal,” gets beaten by USC, we should be rooting for USC in every game they play after us.  The better they do, the better our loss to them looks in comparison.  And it’s equally true if we’re the ones to beat USC; the better they do after us, the more impressive our win.  But this type of thinking falls into that way-too-big category of Things That Are Easy to Say But Hard to Feel.

Time tends to solve things though.  It’s rare to find someone who doesn’t want the best for a long-ago ex.  If you do find one of those, there’s surely a juicy drama-filled story behind it.  For the most part, we evolve into saying “I just want her to be happy” and really mean it.  If my high school girlfriend starts dating Tom Brady tomorrow, I would be truly, deeply ecstatic for her.  Also, it sure would improve my BCS ranking.

(Thanks to the friends who helped me think this through this post.  I’ve kept you guys anonymous to protect you and your exes.  You know who you are.)

Tooootally Random

Occasionally I’ll run into a friend on the street, at a restaurant, or at a ball game, and often the Thing To Say is “Hey, good seeing you… This is so random.”

“Totally.”

But is it though?  I created a plan ahead of time, left my home, and deliberately made my way to my destination.  My friend did the same thing.  We made conscious decisions to end up in a certain spot.  What made it feel “random” was that we weren’t expecting it. But we both took deliberate actions.  So is it still random?

This seems like a question of syntax, so it may be helpful to think about what exactly is random.  OED defines “random” in the technical and statistical sense as “Governed by or involving equal chances for each of the actual or hypothetical members of a population; (also) produced or obtained by such a process, and therefore unpredictable in detail.”  Random is a very specific idea, and it turns out that there are almost no natural examples of pure randomness.  As Leonard Mlodinow points out in his Drunkard’s Walk, there’s no such thing as a perfect die: “…no one can make a perfect die.  There will always be some faces that are favored and some that are disfavored.  It might take 1,000 throws to notice the difference, or 1 billion, but eventually you will notice it.  You’ll see more 4s than 6s or maybe fewer.”  In the strictest sense, the only truly random objects that exist are unstable atoms, which are used to create perfectly random number generators.  Before quantum generators, random number tables were never fully random since they were based on imperfectly random inputs.  They always had certain numbers that occurred more frequently than others, a slightly lopsided random.

If we look closely at the OED definition, we’ll find two subtle definitions of random.  The first part is more technical and is defined as a perfect distribution of chances in a recurring sampling.  This is called the frequency interpretation.  The second definition is known as the subjective interpretation, and it’s more loosely defined as “unpredictable.”

Since I don’t spend my days studying unstable atoms, I prefer to think about future events as “unpredictable” instead of random.  The word “unpredictable,” with its negating prefix, reminds us that there are degrees of unpredictability, as opposed to the more binary-sounding “random.”  Future event probabilities fall along a scale of predictability, i.e. some events are more predictable than others.  We have a good idea what the weather will be like in the next few hours, but it’s impossible to know what it’s going to be like 100 years from tomorrow.

We occasionally discover new tools that can make previously unpredictable events more predictable.  Satellites and computers make the accuracy of predicting the weather two days from now much higher.  Let’s think about the coin toss, the quintessential random unpredictable event.  In theory, a future computer program with a highly accurate map of reality could predict the outcome of a coin toss once the coin was in mid-air.  It could model out the weight of the coin, the velocity of the spin, the distance to the ground, the type of surface, and get a pretty good (say, over 65%) accuracy rate.  I’d bet this’ll happen within the next 50 years.  Now, would a computer be able to predict the outcome of a toss before the coin was flipped?  Probably not.  I don’t believe we’ll ever get to the ability to predict the exact amount of force a given person will happen to put into flipping his thumb.

Some investors allocate their capital by predicting highly complex events, such as the exact interest rate a year from now, the level the S&P 500 will be six months from now, the value of the dollar compared to the euro, or the price of oil.  I can’t use enough synonyms of “big” and “complex” to describe the number of inputs that drive these outcomes.  Other types of investors focus on situations where the number of inputs are much smaller and simpler, leading to higher degrees of predictability.  I don’t believe it’s an accident that the greatest investor ever Warren Buffett not only chooses predicting microeconomic outcomes instead of macroeconomic ones, he also invests in businesses that are relatively simple, in effect minimizing the number of inputs and maximizing predictability.

So, next month’s weather or running into someone at a restaurant may not be totally random, rather they’re unpredictable.  Next time you run into someone, maybe the better Thing To Say is “Hey, good seeing you… This is so unpredictable,” awkward syntax and all.

System Fail

Ah, health care.  Everyone’s talking about it, so why not me too?  The health-care debate over health-care reform of the health-care system brought on by a health-care crisis. Let’s hone our thinking here: what exactly is the “crisis”?  It’s really two separate crises: 1) Fifteen percent of American don’t have health care.  That’s a lot for the richest country in the world.  2)  Our system is incredibly expensive and not very effective.  The first part of the crisis, covering the uninsured, is a less interesting problem for me.  It’s basically a value judgment: do we want wealthier people to subsidize poorer people’s health care?  It’s really yes or no and how much.  What I’ve been perplexed by for years is why capitalism has failed so spectacularly in health care.

We spend 18% of our GDP (which is a lot), and growing, on health care with mediocre results and abysmal customer service.  Capitalism has given us dramatic product improvements at reduced costs in almost all areas of our lives: entertainment, technology, travel, etc.  The glaring outlier is health care.  Why?  Why did a capitalist system that produced so many positive economic results fail so miserably only in health care?

David Goldhill writing for The Atlantic has written the best article I’ve seen to date on why.  Atul Gawande’s piece in The New Yorker is also excellent, detailing the vast inefficiencies in the Medicare system and its perverse incentives.  Goldhill’s article takes a broader look at the problem and examines the economic forces that given us such a poor health-care system.

My summary on why capitalism failed us in health care:

The basics:

• There’s an endless desire for better health.  It’s literally life and death.  I can deal without an iPhone, but I’d really, really like to live.  We’re always going to pay more for better and longer life.
• Health care is intensely complex, and the consumer is at an inherent knowledge disadvantage vis-à-vis anyone other party in the health-care system.

OK, those are our constants.  Here’s where the system gets convoluted:

• Congress passed a series of laws that inadvertently made it more attractive for companies to pay for health benefits of their employees.  So instead of individuals paying for their own health care, companies started paying for their employees’ coverage.  This spawned a huge bureaucracy.  A great line from the article: “Imagine sending your weekly grocery bill to an insurance clerk for review, and having the grocer reimbursed by the insurer to whom you’ve paid your share. An expensive and wasteful absurdity, no?”
• More importantly, this created a strong sense among us that we shouldn’t pay for health care.  We should be getting unlimited access to very expensive health care, but someone else should pay for it.
• The problem is that we are paying for it, but we just don’t know it.  Higher health costs mean less money our employer gives us for our salary.  The problem is even more complicated because this is a result of collective behavior.  If I get unnecessary surgery that costs the my company’s insurer $50,000, I don’t pay much of it.  Neither does my employer.  But when enough people do it, it increases premium costs for everybody, which means lower raises.  Sure, companies try to push back on health-care providers, but employees have a visceral attachment to health care (understandably) and employers are effectively passing on the costs anyway.
• There’s such an extended food chain of bureaucracy that the doctor who treats his patient is not a provider serving his customer.  In fact, there’s always going to be an incentive for a doctor to prescribe treatment, particularly specialists.  A health care consumer is not sophisticated enough to know whether a particular MRI is necessary, but a hospital with an MRI machine will get paid by that consumer’s insurance company if it recommends an MRI.  With no cost to the consumer, who wouldn’t get an MRI?

So let’s recap: Consumers have an endless demand for better health.  Company-sponsored health plans give us the illusion that health care is being paid for by someone else, but it is being paid for by us.  We just don’t know it, and that’s why it’s grown so large.  Think of the food chain: employees/consumers see -> doctors, who are paid by -> health plans, who are paid by -> employers, who effectively take it out of the wages of their -> employees/consumers.

Similar to The New Yorker article, Goldhill’s piece does a better job of analysis than recommendations, some of which are a little goofy.  For the record, I don’t have a strong opinion on the specific details of what the final health care bill should look like.  I’m not a member of the tiny fraction of health-care policy wonks whose opinions should matter.  I do have tendencies: some level of subsidized coverage for the poor, better regulation of the most egregious behavior, and, as these articles make very clear, a mechanism to control costs.

Happiness Hyperopia

Argentinian blogger Carlos Miceli asks me and Ben Casnocha over email our thoughts on happiness hyperopia: Overestimating the benefits we think we will accrue at some mythical time in the future. Carlos’s question: What’s more likely to happen?  Overvaluing or undervaluing the future?

My (slightly edited) response: “My take is that it depends on who it is.  For example, someone who does a lot of hard-core drugs or gets a facial tattoo is obviously someone who is likely to undervalue the future.  On the other hand, the person who toils away in a miserable job just for the money that he theoretically will spend when he retires is someone who overvalues the future.  For me, I’ve had to make conscious efforts to more highly value my present moment — the overly clichéd Live in the Moment.  The year I have now is not necessarily worth less than a year two decades from now.”

This stuff is right up Daniel Gilbert’s alley.  His book Stumbling On Happiness is a fun read on all the non-obvious nuances on what makes us happy.  (Side Note:  The sub-group of pop-psych books on Happiness is getting to be a bit much, but what better topic to have a bit too much on?  Sure beats management books and dieting books.)  He doesn’t offer a comprehensive happiness framework; he mostly strings together non-sequitur-ish studies he’s stumbled on (sorry) as a psychology professor at Harvard.  The main lesson: We don’t have a very good idea of what makes us happy.  Happiness hyperopia is just one symptom.

A big problem in talking about the art of happiness is that the word “happiness” isn’t all that helpful of a term.  It conflates two separate, though highly related, ideas: joy and fulfillment.  Joy/euphoria/delight is an in-the-moment feeling.  Sky-diving, sex, laughing, dancing, singing.  Fulfillment/gratification/contentedness/inner peace is a deeper and harder-to-obtain emotion.  Family, love, accomplishment, a great book, friendships.  Joy and fulfillment can produce similar feelings, but they’re fundamentally different and often in conflict.  I’ve never done heroin, but I’ve got a good feeling it would render me euphoric.  It’s also a good way to become addicted and miserable.  A man who cheats on his wife is maximizing his joy at a cost to his inner peace.

We’re incredibly good at knowing what brings us joy.  We do it every day.  But we’re terrible at knowing what fulfills us.  We tend to overvalue money and undervalue relationships, and those are the easy false heuristics.  The most important and complex decision affecting our long-term happiness is choosing a life partner.  It’s pretty easy to find out who you’re attracted to (joy), but it’s a lot harder to find someone you can spend the rest of your life with, happily (fulfillment).  The divorce rate is 50%, but throw in unhappy marriages that drag on without divorce and you have a very high percentage of life decisions that didn’t work out.

It’s hard enough to know what brings us deep gratification today.  But to predict what will bring us deep, fulfilled-type happiness far into the future is daunting indeed.

Love, Hate and The Economist

I hate The Economist.

• Don’t get me wrong, it’s not a terrible newspaper.  It’s just not an excellent newspaper, and it’s also a little annoying that a publication that’s so clearly a magazine insists on calling itself a newspaper.  I discovered said publication in college and subscribed for years.  I was charmed by its range of topics, its funny British spellings.  But I never found it to be indispensable.  It isn’t is a leader in any of its primary coverage areas: There are better sources of information for politics (NYT), foreign policy (FA and FP), economics (Nobel-caliber economists’ blogs, which are for the most part surprisingly accessible), and business (WSJ).  The weekly print format spends much of its pages regurgitating news from the prior week, news which most readers of a top-tier daily are already familiar with.  The Economist just doesn’t engage in a whole lot of primary journalism.
• The writing is just so-so.  The writing isn’t bad, and is probably better described as “pretty good.”  But it isn’t on par with the Wall Street Journal, and the quality of the journalism isn’t remotely close to being in the high canon of feature journalism: The Atlantic, The New Yorker, Harper’s, Vanity Fair, and NYT Magazine.  The Economist doesn’t even have bylines.  Why would a Roger Lowenstein ever write for a paper that didn’t even mention he wrote the piece?
• The Economist mixes opinion and journalism unapologetically and often ambiguously.  As overtly conservative as the editorial pages of the WSJ are, the news section is generally — but no, not always — devoid of overt opinion.  It’s not uncommon to read an Economist piece in the news section and see a didactic “should” outside of an attributable quote.
• But for me, a big reason I unsubscribed to the paper is that it’s the most overrated publication in the English language.  There’s a bit of Anglophilia in all Americans, particularly financiers, and a lot of not-so-erudite Americans read The Economist to signal erudition.  “Mmmm… I loooove The Economist.  They have such an internaaational take on things, soooo sophisticated” reminds me too much of the kids I knew who went to Europe after high school and came back saying, “Mmmmm, I looooove European culture.  They’re just soooo sophisticated.  And I looooove those accents.”  In my more sardonic moments, I chuckle at my make-believe tagline for the paper: “The Economist — signaling for idiots who don’t know they’re idiots.”

I love The Economist.

• OK, OK, so I was exaggerating a bit up there.  I’m working on it.  The Economist is not excellent, but it’s good.  After a good issue, I’ll even give it a very good.  The Economist doesn’t do deep dives very often, but when they do, they’re often intensively analytical and their smidge of opinion can connect dots that other publications can only hint at.  Their issue on the drug war was the best piece I’ve seen in recent years on the subject, same with their special report on the changing demographics and economies of Texas and California.
• The writing is cheeky, which gives it a personal feel that is hard to find in the more austere news items of The New York Times.
• One reason I like The Economist is that they don’t go deep on every topic.  Sure, I could read a 10-page feature article about Brunei politics, but wouldn’t I rather spend 100 seconds on the subject, get the gist, and then get the gists of a lot more articles?  Not every article can be a long feature.
• Most importantly, The Economist isn’t trying to be The Wall Street Journal or The Atlantic.  It isn’t trying to break new stories or write seminal features.  It’s trying to provide the skinny in a short-format on a wide range of topics to those who care about world news.  Four hundred words on Jacob Zuma and his problems with the unions?  Yes, please. A page and a half on Britain’s education reform efforts?  Oh, why not? And as a special treat, how about a 14-page special on health care and technology?  Go on… I’m listening. And it’s successful at what it’s trying to do.  It’s true comparables are probably Time and Newsweek.  I’d take The Economist every time.
• So, I realized the only thing sillier than people trying to signal sophistication by subscribing to The Economist was me unsubscribing to a good magazine because of their misdirected signaling.  I’ve resubscribed.  But I’m still a little self-conscious when I read it on the subway.

What I’ve Been Reading

1.  American Pastoral, by Philip Roth.  It’s taken me this long to read my first Roth novel, which is embarrassing given how prolifically excellent he is.  American Pastoral is a powerfully moving novel.  The title is apt and ironic, the story of Swede Levov, a guy on the path to a perfect, idyllic, idealized American pastoral life.  Naturally, it wouldn’t be a great novel if he ended up getting his dream and keeping it.

One passage that occurs after a family tragedy that’s revealed early in the book: “He had learned the worst lesson that life can teach–that it makes no sense.  And when that happens the happiness is never spontaneous again.  It is artificial and, even then, bought at a price of an obstinate estrangement from oneself and one’s history.  The nice gentle man with his mild way of dealing with conflict and contradiction, the confident ex-athlete sensible and resourceful in any struggle with an adversary who is fair, comes up against the adversary who is not fair–the evil ineradicable from human dealings–and he is finished.  He whose natural nobility was to be exactly what he seemed to be has taken in far too much suffering to be natively whole again.”

2.  Predictably Irrational, by Dan Ariely.  Economists love elegance and hate messiness.  Much of traditional economic theory is based on the premise that, in total, individuals make economically rational decisions.  A specific individual may make a poor economic decision based on emotion, but that decision is offset by a more rational person taking advantage of that inefficiency, making the net sum of economic decisions rational.  This is important in economic theory because it underpins highly complex formulas used by economists.  The problem, as any astute observer of human nature will tell you, is that this core, underlying assumption is wrong.

We are not, even in total, always rational.  The housing bubble is example prima facie of group irrational behavior over a long period of time, but University of Chicago economist Eugene Fama, the most hardcore of the always-rational-school, doesn’t believe bubbles even exist.  He presumably assumes that the three-standard-deviation movement up in housing prices followed immediately by the three-standard-deviation down in home prices was a “random walk.”  If the major assumption that people are always rational is wrong, what does that mean for the economic models based on that assumption?  My take is that the models are directionally right over the very long-term, but not very useful past a certain point of granularity or time-sensitive analyses.

Dan Ariely, an economist at Duke and MIT, has written a very accessible and enjoyable book on this new-ish field of behavioral economics, which tries to understand how people actually make decisions, not just how they should make decisions.  Predictably Irrational is different from most of the pop-psychology books such as Sway and Influence in that it focuses specifically on economic decisions.  For example, in one of his experiments, he shows that we’re irrationally, but predictably, drawn to all things free, even if it means passing up a much better deal with greater cost savings.

3.  The Leopard, by Giuseppe di Lampedusa.  I read this while on a trip to Italy, and I am now wholeheartedly in the read-a-novel-of-the-country-you’re-traveling-in camp.  The Leopard takes place in Sicily (I was in Tuscany, but whatever) at the time of Garibaldi’s unification of Italy.  The novel follows a Sicilian prince — our “leopard,” which makes for all kinds of fun feline literary puns — as he deals with the decline of the regional monarchy.  It was the only novel, published posthumously, of an Italian aristocrat, and it’s too bad he never got a chance to see how well the world took to it.

4.  Money Masters of Our Time, by John Train.  It’s books like Money Masters that remind me just how rare it is to find good writing on finance, and it makes me that much more grateful for Roger Lowenstein and Michael Lewis.  Money Masters is mediocre but readable.  It’s a series of profiles on 17 renowned investors, and the style of Train’s vignettes are soft-idolatry  — lots of reverence; cursory criticism.  It’s a nice source of snapshot information on famous investors, but it’s not a must-read even for investing geeks.

5.  The Language Instinct, by Steven Pinker.  I’ve always thought the observations from pedagogical math types akin to “Humans aren’t very good at numbers” to be ridiculous.  We’re not good at math?  Compared to who?  Birds?  Ants?  Baboons?  What’s the baseline benchmark that we’re using to compare whether humans are “good” at numbers or not?

Steven Pinker makes me feel ridiculous for not seeing what now seems obvious.  We’re hard-wired for language, not numbers.  According to Pinker, the average high-school graduate has a vocabulary of around 60,000 words, if you include proper names, acronyms, non-intuitive compound phrases, etc.  The vast majority of these words were absorbed through the normal course of reading, talking and interacting with human beings.  Now imagine trying to remember 60,000 number combinations.  Essentially impossible.  This isn’t a learned trait; this is a native instinct.

6.  An Episode in the Life of a Landscape Painter, by César Aira.  I read this scenery-and-imagery-centric novella while traveling around Argentina.  Again, I’m now a huge fan of reading a local novel while traveling in that country.  The story is about a European landscape painter roaming through Argentina trying to capture its essence.  Perfect reading for a temporarily retired American financier roaming through Argentina trying to capture its essence.

7.  Create Your Own Economy, by Tyler Cowen.  For the last three years, Tyler Cowen has been a part of my daily reading routine.  My discovery of RSS readers and blogs have fundamentally and permanently changed the way I take in information, and it’s blogs like Tyler’s Marginal Revolution that have not just kept me more informed but also enhanced my ability to think critically.  Long essays and investigative reports that one can find in The Atlantic or The New Yorker are still the best forms for communicating complex ideas and arguments, but the short-length and high-frequency format exposes readers to a much wider array of data sources and opinions.

It is highly appropriate that Tyler has written a book on this phenomenon’s impact on our lives.  The “Economy” part of the book’s title is a bit of a misnomer, in the same way that calling Tyler Cowen an “economist” is technically true, but not fully accurate.  Readers of MR will know that while Tyler is ostensibly an economist, his insights on human nature and culture are equally, if not more, important reasons for his wide following.  Tyler’s main thesis in Create Your Own Economy is that our ability to create our own ecosystems (or economies) based on highly customized information choices (RSS reader vs. newspapers, iTunes vs. whole pre-set albums) lead to greater life satisfaction.  For more on Create Your Own Economy and the personalized assembly of information, read Ben Casnocha’s review of the book in AEI’s The American.  It’s got an awesome title: “RSSted Development.”

We’re Number 1…?

Wikipedia entry: Principal-Agent Problem.

“In political science and economics, the principal-agent problem or agency dilemma treats the difficulties that arise under conditions of incomplete and asymmetric information when a principal hires an agent, such as the problem that the two may not have the same interests, while the principal is, presumably, hiring the agent to pursue the interests of the former.”

The agency dilemma is one of, in not the, major conundrum for investors in public companies due to a fundamental set-up of the system: The people running the company don’t necessarily have the same interests as the people who own the company.  Private-equity investors have two primary advantages over public-market investors: First, the leverage mechanism is superior since, unlike buying stocks on margin, the ability for a bank to call back a loan is limited.  Second, a private-equity investor generally exerts operating control of the company, eliminating the agency issue.  E.g., a private owner of Broadcom wouldn’t have let the CEO Henry Nicholas III blow money on coke, hookers, and helicopters.  (Public-market investors have a few advantages of their own: Buying a stock on an exchange is immeasurably easier than negotiating a private transaction; there’s no control premium paid; and practically any investor can own a proportionate ownership interest in even the largest company.)

Managers want to run the biggest company.  Investors want to maximize returns.  A wonderfully sad example of this conflict at work is brand-new GM Chairman Ed Whitacare’s recent interview with the Wall Street Journal where he said being No.1 is “the position we should strive for… an American company that employs hundreds of thousands of people…We just want to be No.1.”  There’s more.  “I want to see it done quickly…the whole board wants to see it done quickly.”

Someone should remind Whitacare that GM had been No. 1 for the last 78 years.  A blind focus on market share is part of the reason that GM filed its inevitable bankruptcy — the financial crisis and recession only accelerated the timing.

Maximizing market share can be a goal that leads to maximizing shareholder returns.  For capital-intensive manufacturing businesses like autos, economies of scale is a powerful force.  But it’s not the only force.  A smaller manufacturer like BMW can be much more profitable.  If Whitacare had said something like, “We’ve thought about it really hard and calculated that the best way to maximize shareholder returns is to increase market share,” that would have made sense.  But instead he uses language like “an American company,” and the phrase “just want to be No. 1″ implies that is the goal, not the means to a more important goal.

Being Number One isn’t synonymous with being the best.  Being the largest seller of massively underpriced hurricane insurance to Florida homeowners is like being a casino that pays out 120% on its slots.  GM irrationally going after bragging rights isn’t much different.

Fraudsourcing

Harry Markopolos, the vindicated man.  For the guy who wrote to the SEC for almost ten years imploring them to investigate Bernie Madoff for fraud, he must have more than the usual smugness that comes from your average “I told you so.”  Today’s WSJ covers the annual convention by the Association of Certified Fraud Examiners, where “more than 2,000 accountants, auditors and attorneys who run their own investigative firms met in Sin City to compare tips for rooting out wrongdoing and to identify fertile ground for future scandals. Mortgage workouts and corporate espionage were top candidates.”  Markopolos won the annual award along with a standing ovation.

When I think of Markopolos’s near-decade of lonely diligence, the term “toiling in the dark” comes to mind.  Yet 2,000 people attended the fraud examiner conference, and presumably these are folks who consider their primary jobs to be some type of forensic specialist.  What if there was a well-coordinated, online, collaborative effort to detect fraud?  Thousands of computer programmers volunteer their time to open-source software projects like Linux and Firefox.  The benefits those volunteers derive are a feeling of contributing to a greater good, meaningful involvement in a community, but most of all, I argue it’s the chance to show the world one’s talents and knowledge.  Contributors to Wikipedia love the idea that their words become part of an “official” public record.  Imagine the satisfaction of citizen gumshoes publicly outing the next Bernie Madoff.

You could even make things more interesting by making it a futures market with real money at stake, an Intrade for identifying fraudsters.  Before the outing of the fraud, a number of people knew that Madoff supposedly managed $65 billion and invested by buying and selling stock options.  Yet every experienced options trader knows that the options market in the US is nowhere close to that large.  It was impossible he was doing what he says he was doing, but the people who thought they knew his strategy never talked to the people who understand the options market.  The silos of knowledge were never fully connected and certainly not in a public way.

If you’re the SEC, this effectively crowdsources your most important work of protecting the investor.  Just cherry pick the top five picks every month and send a small team into their offices for a week.  NetFlix didn’t like their own algorithm for movie recommendations, so they asked if anyone else could do better and someone did.  John Hempton seems to spot a financial fraud every quarter and has the courage to publicly do so on his blog.  With the right structure, there would be hundreds of John Hemptons interacting with each other, piecing together their clues.

Sure, the potential for abuse is not immaterial (false positives lead to tarnished reputations), but these could be mitigated.  Defiled Wikipedia pages don’t stay that way for very long.  The benefits of crowdsourced fraud detection are potentially hundreds of millions of dollars.  The rewards of peer recognition are powerful; an engaged community of fraud-detectors is an effective group indeed.

I can already imagine what the annual awards dinner would look like…

(Original video: http://www.comedycentral.com/videos/index.jhtml?videoId=24419)