Dias
I like the test. It seems to have multiple levels, each of which Brennan passes:
Can you do a simple bayes theorem calculation?
Can you resist conformity bias when necessary?
Can you spot when you’re fed bad data?
There are cases like this!
There were some people who drilled very straight tunnels and laid fibreoptic cables through them. They knew people were willing to pay a lot for this, but didn’t realize it was High-Frequency-Traders wanting a faster connection between Chicago and NYSE.
Some producers of intermediate goods see demand fluctuate from month to month, but have little idea why, or whether the fluctuations will persist.
Do people who passionate argue for buying a home instead of renting violate the Efficient Market Hypothesis?
The explanation for this market inefficiency, as for so many others, is the government. There are massive tax benefits to owner-occupied housing, like the non-taxation of imputed rent. This means that the value of a house to a homeowner exceeds the value to a landlord. This plus the liquidity-constraints of the marginal homebuyer mean that the marginal house is worth more to the marginal homebuyer than he is able to pay for it.
As for whether people are arbitraging this or not? Yes, millions of middle class homebuyers are arb’ing this, saving themselves a huge amount of money.
I don’t think so—an important part of Pascal’s Mugging is that the demon acts second—you produce a joint probability and utility function, and then he exploits the fact that the former doesn’t fall as fast as the latter rises.
Yes, I meant over adult children. I don’t think this has much impact on minors.
My pleasure! I love blog page-views.
It also means that discovering the universe is older than we currently expect ould significantly raise the EV of such research. Any probability of non-finite history could cause the EV to blow up.
Hmm, an interesting combination of arguments!
I’ll have to think about rebuttals. My concern is that by explicitly mentioning arguments that I think are silly we give them a certain level of credence. In some cases I’ve tried to indirectly address them, but maybe I should put more work into that. Alternatively I could write a separate ‘Common Objections’ article.
I’m really glad to see other people thinking these thoughts, and I would love to figure out how to make this a reality.
Awesome! I don’t have much in the way of practical ideas here, beyond talking about it, writing about it, and posting links in high-readership locations.
Yeah, that section is called speculative for a reason!
I guess the attractiveness of this option partly rests on whether you think parents generally have too much or too little influence/incentive/involvement in their children or not.
I think the same essential abuses that exist with debt exist here, so time-limitation (say equity stops yielding returns after 15-20 years, and can be discharged by bankruptcy) is important.
Yeah, so in the examples I assumed a 20yr duration. Note that student loan debt is currently not able to be discharged through bankruptcy though.
I worry about abuses when the equity stake is high. If you’re a mentor, and your investment decides they don’t really want to prioritize income maximization, what will you do?
Take a loss? Investors are used to small parts of their portfolio going badly. Obviously they’d prefer this not to happen. (Also you could limit the size of the equity stake).
Would the way to optimize returns involve hiring those you’ve invested in yourself (or arranging some convenient swap, if such direct employment is forbidden), and perhaps result in a system that looks either nepotistic or like indentured servitude?
My suspicion suggests not. What are the odds that the people who represent the most attractive investment (at current rates) also represent the best employees for your business? In general business in the US has been moving increasingly towards outsourcing over time—for example, few businesses own their property any more—and I would expect this to be the same.
I basically agree with everything you said.
With regards the race and socio-economic background issue, I agree, only noting that this is similarly an issue for job applications and other financial products. Reality is not race-blind; at some point you have to deal with it, and this is not a special case.
Perhaps it would be easier to do in England (or some other non-US country) for this reason.
Yeah, good point. You could address this through contingencies—have it be part of the contract that you had to carry on in engineering—but I expect investors would simply have to take the hit. This is basically the issue I was talking about in the section on Adverse Selection.
The expected income of an incoming freshman engineering student versus the expected income of a graduating engineering student are two very different numbers.
Yup, I agree. Incoming freshmen who said they wanted to do engineering might get a slight discount—only a year or two in, once they’ve passed some courses and actually declared would they get the full discount. I figure this is the sort of thing the market is capable of pricing in.
Human Capital Contracts
Congratulations! You are very unusually virtuous.
Sure, maybe you think it’s not morally obligatory. But EAs who think it’s good to give 10% generally think it’s better to give 20%, and similarly maybe it is permissible to abort a baby but morally better to not.
Effective Differentials