sixes_and_sevens

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In reply to:

It is plausible that a few LessWrong readers have information which would let them create a portfolio which would, on average, perform better than the market. For the large majority of us, though, knowing about overconfidence bias and the law of large numbers should be enough to convince us that putting most of our savings in an index fund is a good idea.

Although everything in this comment seems correct, it also seems to be missing the point a bit. Not all investment is equity. Any of us might be in a position to notice an asset is considerably undervalued.

The old saw about two economists seeing a $50 on the ground and dismissing it as impossible since if it were, someone would have picked it up, is illustrative in this case. The underlying point is broadly correct, since you don't often see fifties lying in the street, but when you do actually see $50 in the street, you don't just leave it there. Sticking with this analogy, by my reading, the OP is suggesting that LW readers go down some unusual streets without a lot of foot traffic, where stray fifties might not have had the chance to be picked up.

See comment in full context

Contrarian LW views and their economic implications

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Oct 8, 2014

LW readers have unusual views on many subjects. Efficient Market Hypothesis notwithstanding, many of these are probably alien to most people in finance. So it's plausible they might have implications that are not yet fully integrated into current asset prices. And if you rightfully believe something that most people do not believe, you should be able to make money off that.

Here's an example for a different group. Feminists believe that women are paid less than men for no good economic reason. If this is the case, feminists should invest in companies that hire many women, and short those which hire few women, to take advantage of the cheaper labour costs. And I can think of examples for groups like Socialists, Neoreactionaries, etc. - cases where their positive beliefs have strong implications for economic predictions. But I struggle to think of such ones for LessWrong, which is why I am asking you. Can you think of any unusual LW-type beliefs that have strong economic implications (say over the next 1-3 years)?

Wei Dai has previously commented on a similar phenomena, but I'm interested in a wider class of phenomena.

edit: formatting

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It is plausible that a few LessWrong readers have information which would let them create a portfolio which would, on average, perform better than the market. For the large majority of us, though, knowing about overconfidence bias and the law of large numbers should be enough to convince us that putting most of our savings in an index fund is a good idea.

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sixes_and_sevens

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Although everything in this comment seems correct, it also seems to be missing the point a bit. Not all investment is equity. Any of us might be in a position to notice an asset is considerably undervalued.

The old saw about two economists seeing a $50 on the ground and dismissing it as impossible since if it were, someone would have picked it up, is illustrative in this case. The underlying point is broadly correct, since you don't often see fifties lying in the street, but when you do actually see $50 in the street, you don't just leave it there. Sticking with this analogy, by my reading, the OP is suggesting that LW readers go down some unusual streets without a lot of foot traffic, where stray fifties might not have had the chance to be picked up.

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These feel like stating the obvious, but maybe outside LW they wouldn't:

Expect the judgement of evidently rational players (such as Peter Thiel, Elon Musk, and probably many others I'm unaware of) to be extra trustworthy. Do what they're suggesting, or what becomes profitable once their suggestions have been implemented by others. (For example, Elon Musk said fully electric hypersonic VTOL jets are possible. He's rational and knows a lot about electric propulsion and aerospace, so this heuristic means believe him even though he hasn't demonstrated it. So when looking at aircraft propulsion business, favor companies at least looking at electric propulsion.)
Expect economic upheaval created by self-driving cars and other autonomous drones in the next ten years. Avoid investing in any business insufficiently aware of, or insufficiently preparing for, that. Specifically, avoid brick-and-mortar retail with (narrow ranges of) products that could be shipped via drones.
Expect the education bubble to burst at some point. Avoid investing in business that would suffer in that case (e.g. real estate near universities), and invest in companies that benefit from it (e.g. online education providers).

Maybe if you make a detailed scenario study of a world where all of these are true, you can find more indirect opportunities. All those drones should create a booming market for ultra-low power radar devices, for example. But that's hardly an LW specific idea. I think rationality mostly helps you reduce uncertainty about probabilities, but not necessarily into any particular direction. I suspect its main value might be that with greater certainty about how things that haven't happened yet will eventually turn out, you can more confidently think another step ahead and take opportunities that other people aren't sure will even arise.

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Expect the education bubble to burst at some point.

Personally, I expect this "market" to remain irrational for longer than I expect anyone who bets against it to remain solvent.

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It's hard to short universities :-)

I expect the market to bifurcate with the top tier maintaining its ability to commandeer outrageous prices, but the bottom tier either reinventing itself or going bust. Harvard is fine, a fifth-tier law school in South Dakota is in deep trouble.

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These are very good suggestions; thank you for making them.

Expect the education bubble to burst at some point.

Is this a LW consensus? I know Thiel believes it, but if you follow a Caplan-style signalling model it's not clear we won't end up in a Peacock like race for more and more education.

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Is this a LW consensus?

There very little real consensus on LW. On most subject you do have a few people who are contrarian on LW. On the other hand many people on LW think that's the case.

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Genetic engineering for intelligence will be a game changer. I don't know when it will start, but as soon as we can reliably produce children with, say, 130 or above IQs markets will anticipate higher future economic growth.

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My initial reaction was

"Unfortunately I think this is too far away to have much impact on NPVs now. Say it takes 5 years to develop the technology, and 20 years for early adopters to mature and enter the workforce. Suppose the rate of RGDP growth increases from 2.5% -> 10%, and we use a discount rate of 8%. I don't think you'll get much movement in NPV"

But then I actually worked it out in excel and the NPV triples. So thank you for the good suggestion!

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Given the current political climate, I think it's likely that those children will be first born in non-Western countries.

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John_Maxwell_IV

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You may as well test an idea before trading on it, e.g. gather data about gender composition of a company + profitability, run a simulation, and see if someone trading based on this idea could expect to make money. One idea I've had is reading the Glassdoor.com reviews of what it's like to work at a company and trading based on those... I'm not sure to what extent the smart money is already taking that info in to account or whether it would have any predictive validity.

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sixes_and_sevens

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A related thing that came up in a discussion recently:

When I first found out about Bitcoin (~2010) I thought it was exceedingly clever and technically interesting, but then I put on my Monetary Theory goggles and concluded that as a currency it was subject to deflationary pressures, with a long-term trend towards appreciation. I then took off my Monetary Theory goggles and, I dunno, made a sandwich or something, when what I should have been doing was buying a quantity of Bitcoin below a certain regret-threshold face-value. I now consider this an object lesson in taking ideas seriously.

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What was the lesson?

The Big Theory only told you about the long-term behavior of the currency. Four years is not the long term! It applies just as much today as it did four years ago. What has happened in the interim, the thing you regret, has nothing to do with that Idea and everything to more people hearing about bitcoin, and maybe a bit to do with black markets. The only lesson I can draw from this is that if you think something is clever and technically interesting, other people might, too, which seems to be opposite from the lesson you draw.

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sixes_and_sevens

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You're right. It does apply just as much today as it did four years ago, but the buy-in hurts a lot more.

The lesson is to not interpret my beliefs as some abstract, god's-eye-view observation with no real-world consequences. Instead of answering the question "should I buy some Bitcoin?", I answered the question "is Bitcoin the flawless transcendental currency that its proponents claim it to be?" and let that guide my decision on whether to buy Bitcoin.

I obviously have this irrational in-hindsight regret of not whimsically buying a massive pile of Bitcoin in 2010, then selling them in early 2014 and rolling around in a big pile of cash, but I didn't have any good reason to do that. A more pertinent regret about my past actions is that I had a good reason to buy dirt-cheap Bitcoin when they were dirt-cheap by my own material standards, rather than simply dirt-cheap by the standards of history. I didn't act on that good reason and I should have. Even if the currency crashes into oblivion tomorrow, I'll maintain I should have.

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And I can think of examples for groups like Socialists, Neoreactionaries, etc. - cases where their positive beliefs have strong implications for economic predictions.

Usually the beliefs are impossible to put into practice because of legal constraints like rules against discrimination.

Can you think of any unusual LW-type beliefs that have strong economic implications (say over the next 1-3 years)?

Off the top of my head:

CFAR (and by extention LW) style rationality is practically useful. Watch out for companies trained by CFAR and invest in them
Effective Altruism is actually effective and raises the wellbeing of targeted people. Since wellbeing is correlated with economic activity, consider investing in regions where EA organisation are active.

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Usually the beliefs are impossible to put into practice because of legal constraints like rules against discrimination.

That's true of some of the beliefs yes, but not of all. For example, many socialists believe (or at least used to believe) that large organizations (states) could efficiently allocate resources across a wide range of industries, without making much use of market prices. If you believed that, you might like to invest in conglomerates (which many investors dislike because they think conglomerates are bad at capital allocation across industries) and vertically integrated firms (which make less use of market prices of intermediate goods than non-vertically integrated firms).

Thanks for the direct suggestion! The former would have direct relevance for venture capitalists.

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According to gwern,

In his autobiography, Alan Greenspan says he did exactly that: he hired underpriced women and made money from not being sexist. Similarly, I have read of a company or agency which does the same thing in highly sexist South Korea, and for other forms of discrimination, we have companies specializing in hiring discriminated-against people on the autism spectrum and making money off the difference. If you want to prove a market isn’t efficient, simply reliably make excess risk-adjused returns…

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Regarding the efficient market hypothesis:

It is mostly true for large, liquid markets, at times when you do not have any insider information.

The less liquid the particular market you are looking at, the less true it is. That is, if a $100 bill is lying on the ground in a place where people dont look very often, it very well could stay there for a while, and you might have found it first if you were looking.

And if you do have insider information, that is, you know about or understand something that most of the market participants do not understand, then you might very well discover opportunities to beat the market.

A concrete example of how markets are imperfect, and the efficient market hypothesis is not a 100% true rule:

On monday afternoon, Patrick Byrne, CEO of Overstock, gave a speech in Vegas in which he announced that Overstock was partnering with Counterparty (an altcoin), for their attempt to develop a blockchain stock market.

I saw this information very shortly after it happened, and I could have immediately gone and purchased some Counterparty. But I didnt.

One hour later, Counterparty was up 40%, and I thought: well, I shouldve bought! But I guess it is priced in now. After all, the efficient market hypothesis!

Six hours later Counterparty was up 150%. (This was an overshoot and it has since settled to being up about 100% from the announcement).

It took the market close to 6 hours to account for an announcement that was made at a conference, and was posted about all over reddit and bitcoin related sites. There were essentially a whole bunch of $100 bills lying around on the ground, and it took a number of hours and a whole lot of people looking at them before they were all picked up.

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You need to distinguish between (1) the beliefs people hold for social/political reasons and (2) the beliefs people hold for actually making decisions when important personal interests are at stake.

Feminists believe that women are paid less than men for no good economic reason.

I doubt anyone seriously believes this in the second sense.

That said, my personal belief -- in the first sense -- is that we are moving more and more towards a "winner take all" economy. As an extreme example, if Google were to invent GAI, it could easily end up being far more valuable as a company than all other companies combined. Partly for this reason, I am invested in a market index fund on the theory that there is a pretty good chance that either (1) one of the 500 biggest companies will hit with the Next Big Thing; or (2) one of the same biggest companies will scoop up and acquire whatever startup comes up with the Next Big Thing.

I guess that's not a contrarian view, but there it is.

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Invest in Quixey when they go in for the next round of funding, perhaps.

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Feminists believe that women are paid less than men for no good economic reason. If this is the case, feminists should invest in companies that hire many women, and short those which hire few women, to take advantage of the cheaper labour costs.

McKinsey did find that companies with a higher percentage of female outperform their competitors. But it could simply be that more forward thinking companies hire more woman. It's difficult to estimate to what extend those factors are currently priced into stock values.

Can you think of any unusual LW-type beliefs that have strong economic implications (say over the next 1-3 years)?

If the leadership of companies would learn CFAR style skills those companies would perform better.

Experts who get feedback on the prediction they make perform better so companies should put structures into place where their leadership makes data based decisions and get's feedback. You can pay out bonuses by giving employees chips for the internal prediction market of the company.

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McKinsey did find that companies with a higher percentage of female outperform their competitors.

I mentioned this elsewhere in the thread, but I thought I would point out here that I checked the McKinsey web site for the city where I work -- New York. It seems that 84% of the senior managers in New York are men.

http://www.mckinsey.com/global_locations/north_america/northeast/en/our_people

I also checked their web site for California, it seems that roughly 80% of the senior managers are men:

http://www.mckinsey.com/global_locations/north_america/west_coast/en/our_people

Ditto for the Southern office:

http://www.mckinsey.com/global_locations/north_america/southern/en/our_people

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Feminists believe that women are paid less than men for no good economic reason. If this is the case, feminists should invest in companies that hire many women, and short those which hire few women, to take advantage of the cheaper labour costs.

I suspect that the effect, if real, is likely small enough to be masked by confounders, like CEO competence, market conditions, various other biases of the executives and the board,random chance etc. I wonder if any statistics exist on the matter.

Can you think of any unusual LW-type beliefs that have strong economic implications (say over the next 1-3 years)?]

Given that MIRI and CFAR are still struggling to get enough funding despite presumably employing the most LW-rational people in the world, I severely doubt that LW rationality has "strong economic implications".

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I am astonished that after 105 comments, cryonics had not yet been mentioned. Very long term investments with compound interest plus a cryonics policy that works seem like a pretty simple formula for acquiring enormous absolute (and potentially even relative) wealth.

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106 comments so far and the word "artificial" (as in "artificial general intelligence", AI, or AGI) hasn't come up!?

As near as I can tell, if someone gets AGI to really work properly (and get even a not-very-explodey sort of intelligence explosion, just exponential curves with double times of months or years), it is likely, in the span of years to decades, to become worth more than the entire present value of the economy of the planet. How can this not be an investment opportunity?

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