Phil's Newsletter #10 - Thinking better thoughts.
The secret concept economists don't want you to know about! How to be happy. And in Corona-related news: we suck at predictions. ⏳
What I’m thinking about
Ergodicity
I recently watched a lecture on YouTube called: “Time for a Change: Introducing irreversible time in economics“. If you don’t understand what that title means, neither do I. But the lecture was fascinating in so far as I could understand it…
It’s really about a concept called ergodicity. But it touches on the topics of predictions in economics vs mathematics, on the very non-linear history of probability studies in mathematics from the middle ages until the 20th century, and the differences between population averages and time averages. It concludes with some profound insights about the nature of science and about why there is so much wealth inequality in a world with such an abundance of wealth. I urge you to give it a few minutes.
And history is actually what (non-)ergodicity is all about. An ergodic system is one where the ensemble (population) average equals the time average. A non-ergodic system is one that has a history, that has chartered a specific path through time. To put it differently, the ensemble average would be what you get if 1000 people roll a die and you average the result across the whole "ensemble". The time average is what you get if you roll a die 1000 times and average the results across the whole time-series. Given enough rolls of the die, both systems would converge on the roughly the same average, removing randomness. This is an example of ergodicity.
But most systems we care about, like our world as experienced by biological creatures, is non-ergodic. The world of parallel universes and physics is ergodic. In such a world all timelines are equally true and have happened, the system visits all possible states. In our lived experience and the history of the world, we have only experienced one path among a theoretically infinite number of paths that the could have been (or that according to quantum mechanics do in fact exist as well).
This explains, in part, why there is so much wealth generated by systems like financial markets as a whole (the ensemble), yet many, if not most, individual investors lose money (their particular trajectory along a multilinear space of possibilities). Such a system is non-ergodic. And crucially, as argued by Dr. Ole Peters in the lecture, much of economic thinking still treats such systems as ergodic. Which is a big mistake.
For a much better explanation than I could muster on the topic of ergodic systems and how it applies to finance and investing, see also A Big Little Idea Called Ergodicity (Or The Ultimate Guide to Russian Roulette) by Taylor Pearson.
Uncertainty & Predictions: There is never enough evidence to be certain but we still have to act.
Why were we (and by we I mean the media and society in general) so bad at predicting the onslaught of this pandemic? There were many early signals and several smart people warned us early on (not just paranoid cooks and preppers).
I suspect it is due to our inability to 1) understand exponential growth intuitively and 2) reason probabilistically about uncertain outcomes.
Scott Alexander provides some insight in this recent article:
”If you really want to understand what happened, don’t read any studies about face masks or pandemics. Read Smith & Pell (2003), Parachute Use To Prevent Death And Major Trauma Related To Gravitational Challenge: Systematic Review Of Randomized Controlled Trials. It’s an article in the British Journal Of Medicine pointing out that there have never been any good studies proving that parachutes are helpful when jumping out of a plane, so they fail to meet the normal standards of evidence-based medicine. ”
Of course, this is a joke. An article in the same vein as an Onion article. But it has an important lesson. The reasoning behind why many health authorities around the world didn't (and some still don't) recommend the wearing of facemasks is due to a faulty assessment of the lack of evidence, and what actions make sense to take based on that lack of evidence. It's about "common sense" and when it does or does not apply.
“People were presented with a new idea: a global pandemic might arise and change everything. They waited for proof. The proof didn’t arise, at least at first. I remember hearing people say things like “there’s no reason for panic, there are currently only ten cases in the US”. This should sound like “there’s no reason to panic, the asteroid heading for Earth is still several weeks away”. The only way I can make sense of it is through a mindset where you are not allowed to entertain an idea until you have proof of it. Nobody had incontrovertible evidence that coronavirus was going to be a disaster, so until someone does, you default to the null hypothesis that it won’t be.”
“Gallant wouldn’t have waited for proof. He would have checked prediction markets and asked top experts forprobabilistic judgments. If he heard numbers like 10 or 20 percent, he would have done a cost-benefit analysis and found that putting sometough measures into place, like quarantine and social distancing, wouldbe worthwhile if they had a 10 or 20 percent chance of averting catastrophe.”
Thus, a lesson about predictions and probabilities: Just because we are uncertain about the likelihood of an outcome does not mean we should not take any action. If there is just a small likelihood of a catastrophic event occurring you don't wait until it has occurred before taking action, you take action right away. This is just another way of saying you should buy insurance.
Interesting things I've come across
Work and the Deep Life - People think about their careers and finding their passion in the wrong order. You don’t “find” your passion and then go and make a career out of it (at least most people don’t). Acquiring valuable skills and applying yourself to a craft is what creates passion for that, not the other way around. Deep, hard work towards a goal or in pursuit of a skill - going outside your comfort zone - creates meaning and mastery for yourself, and impact in the world.
“Master a useful craft, use this mastery to shape your working life in a way that’s both secure and satisfying, then look to build structures around your efforts that further amplify their meaning.”
Escaping the local optimum of low expectation - A great lecture by one of my new favorite people to follow on the internet - Lex Fridman. He shares a brief overview of the current state of AI research and deep learning as well as his own advice for living a deep and meaningful life.
“Forever oscillate between deep doubt and dissatisfaction, and deep gratitude.”
It's time to build - Internet legend and venture capitalist Marc Andreesen on what we need to do as a society, and where we’re failing. It’s a call to action. If we return to our curiosity and to optimism about the future, we can solve the world’s most pressing problems. But we have to start building. I think we need a 1962-moment to end our complacency and kick us into high gear.
“In fact, I think building is how we reboot the American dream. The things we build in huge quantities, like computers and TVs, drop rapidly in price. The things we don’t, like housing, schools, and hospitals, skyrocket in price. What’s the American dream? The opportunity to have a home of your own, and a family you can provide for. We need to break the rapidly escalating price curves for housing, education, and healthcare, to make sure that every American can realize the dream, and the only way to do that is to build.”
Podcast of the week
The Science of Happiness - most of what you think you know about how to be happy is probably wrong.
“In this episode of the podcast, Sam Harris speaks with Laurie Santos about the scientific study of happiness. They discuss people’s expectations about happiness, the experiencing self vs the remembered self, framing effects, the importance of social connections, the effect of focusing on the happiness of others, introversion and extroversion, the influence of technology on social life, our relationship to time, the connection between happiness and ethics, hedonic adaptation, the power of mindfulness, resilience, the often illusory significance of reaching goals, and other topics.“
Quote of the week
Developing your own ideas requires you to do the hard work of thinking about them deeply and repeatedly. Wrestling with the thoughts, writing them down, talking about them and challenging them. Putting them aside for a while return to them later with a fresh perspective. Most importantly, it requires you to push through and to stick with it for longer than what is probably comfortable.
“I find for myself that my first thought is never my best thought. My first thought is always someone else’s; it’s always what I’ve already heard about the subject, always the conventional wisdom. It’s only by concentrating, sticking to the question, being patient, letting all the parts of my mind come into play, that I arrive at an original idea. By giving my brain a chance to make associations, draw connections, take me by surprise. And often even that idea doesn’t turn out to be very good. I need time to think about it, too, to make mistakes and recognize them, to make false starts and correct them, to outlast my impulses, to defeat my desire to declare the job done and move on to the next thing.”
- William Deresiewicz, writing in the excellent essay Solitude and Leadership
Have a good week my fellow primates, and as always - stay safe out there,
/Phil