Monthly Archives: July 2015

WEALTH INEQUALITY AND SKIN IN THE GAME

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WEALTH INEQUALITY AND SKIN IN THE GAME
A well functioning society isn’t one in which people are equal but one in which people have equal *probability*. So measuring static inequality is severely flawed.
Take the United States. Less than 10% of the people in the 1982 list of richest 500 were there in 2012. Compare to France where 60% on the rich list today have inherited their wealth. And there are other more robust metrics: 56% of Americans will spent at least a year in the top 10% (in income not wealth). Not in Europe.
So a good society is one in which people at the top have *skin in the game* hence can lose their money. Wealth generation should not lead to protected position at the top. Social mobility isn’t in elevating people, it requires the top to open a position.
So in Europe a civil servant from the “mandarin class” is safe for life as they extract rent from the system, while a good entrepreneur will run a chance of getting poor, leaving room for others.
PS- Let me explain to those who don’t get it. SITG means the rich needs to remain exposed to losing back his money rather than shielded.
PPS- 39% of Americans will spend a year in the top 5 % of the income distribution, 56 % will find themselves in the top 10%, and 73% percent will spend a year in the top 20 %. Ref http://www.nytimes.com/…/…/from-rags-to-riches-to-rags.html…

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OUR PRECAUTIONARY PRINCIPLE

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OUR PRECAUTIONARY PRINCIPLE
The anti-GMO crowd got very excited that a pro-GMO activist who just graduated with a math PhD “attacked” our paper. It is the first comment by a “mathematician” which seems to be a big deal. Let us discuss here. Please ignore the technical in my answer.
https://dl.dropboxusercontent.com/u/50282823/response.pdf

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SUPERSTITIONS AS RISK MANAGEMENT, A PROJECT

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SUPERSTITIONS AS RISK MANAGEMENT, A PROJECT
We can look at supersitions as x% useless and 1-x % with survival benefits, except that it is hard to know beforehand what is useless and what is not, what is “irrational” and what has a hidden implicit rationality that helps navigate opaque systems. But it suffices that a tiny proportions, say only .01%, of superstitions protect collective or individual survival for these superstitions to be necessary. And for the very notion of superstition to be rational.
Beware of the probability-fool scientist a la Pinker judging superstitions with primitive tools; in fact we can show that some of these superstitions are most sophisticated in complex systems.
Clearly superstitions might have calming effects in helping us make sense of uncertainty (I never fight harmless superstitions), allowing us to be rational elsewhere; but let us ignore these functions, just focus on survival. Recall that rationality is survival.
To prove the point that superstitions are risk management tools, extremely “rational”, all we need is 1) show that superstitions do not increase risk of ruin , 2) show only a few seemingly “anecdotal” examples (they are not) of risk-mitigating superstitions that we only understood ex post, such as the belief that ghosts haunt coastal areas ending yp protecting people against tsunamis by pushing indigenous populations to settle in elevated areas.

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Everything you learn in school contradicts Avot

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Everything you learn in school contradicts Avot (Abuoth) 1.10:
“Love what you do, avoid high ranking positions, and do not get too close to the powerful”.
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Also: “Torah learning is best combined with a worldly occupation, because the effort of both will keep one from sin. Study alone without work will in the end be nullified and lead to sin.” (2:2)
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Elsewhere (Avot 1.3): “Do not seek rewards”.
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.שמעיה ואבטליון קבלו מהם .שמעיה אומר, אהוב את המלאכה, ושנא את הרבנות, ואל תתודע לרשות

PS- Also, the Talmud was put together as a corpus, inspired by the methods of and to have an alternative to the Roman School of Law of Beirut (Berytus). All the Beirut texts vanished during the earthquake. The Jews, having a diaspora, never had such problem because versions of the corpus were spread across the diaspora

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SKIN IN THE GAME and OUR FRAUD DETECTOR

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SKIN IN THE GAME and OUR FRAUD DETECTOR
+ Have you ever wondered why people are upset by CEO compensation, sometimes >200x that of the average employee, but not if an entrepreneur makes the same amount of money; nor are they upset with singers, authors, or performers?
+ The economist Thomas Sowell found this an aberration. His argument is that a CEO is not harming you; he is not sponsored by the taxpayer (or let us grant him that for this argument). But Sowell and the others apologists of CEO pay are missing the fact that our naturalistic fraud detector may be picking up something quite severe. A CEO has inverse skin in the game; his losses are transferred to the shareholder (as he keeps the upside with stock options and stick others with the downside). As I said in Antifragile, he is no entrepreneur (or artist where thousands are sacrificing their lives, so entering the profession cannot be done rationally on economic grounds).
+ We also detect that a CEO is largely an actor. Just look at one on TV for a split second.
+ So our ecological instinct is effective there in smelling something unfair; it is more powerful than that of regular economists who need a more sophisticated understanding of contract theory/asymmetry to get the point.
+ Note that in some countries where wealth has a bad name, it is often because it is associated with rent seeking. In the US, perception is different because wealth is traditionally associated with risk taking.
+ Correct me if I am wrong, but it seems that societies give respect to people who have skin in the game (but not exclusively), and have a moral repulsion towards those who have inverse skin in the game.

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