Book Review Part Two: Bad Signals, Nate Silver, The Signal and the Noise
This is the second in my series reviewing Nate Silver’s new book, The Signal and the Noise.
1. Part One: Introduction and Overview
2. Part Two: Bad Signals
3. Part Three: A Better Approach
4. Part Four: How to Make Better Predictions
In part two, consisting mostly of chapters 1-3, Mr. Silver shows us what good predictions do not look like. Since I am much familiar with this kind of work from my experience reading sabermetrics and BaseballProspectus.com, I know Mr. Silver is on pretty comfortable ground when he is able to set himself up as the reasonable outsider, using the clear power of evidence over the conventional wisdom dispensed by the ill-informed media elite. In his Baseball Prospectus days, Mr. Silver and the other writers would often times be most convincing, and have the most compelling writing, when they were on the outside of the establishment looking in. Mr Silver actually share some of these humbly amusing stories when describing how he was hanging around the baseball General Managers meetings and seeing the rooms divide between jocks and geeks, and getting the extreme brushoff from Red Sox second baseman Dustin Pedroia.
Although it is getting to be a little bit of a cliche to find your worldview in the 2008 financial crisis, Mr. Silver is on pretty solid ground in claiming that this is a colassal fail of expert opinion and the power of prediction. Again, this crisis seems to teach us new lessons with every book moderately related to public policy that comes out, but if nothing else it is obvious that no one really saw the crisis coming and it might be worth looking at why that was the case. This dovetails nicely with Mr. Silver’s indictment of the political elite famous for their appearances on the McLaughlin Group show, who are influential and revered, yet get just about everything about politics wrong. Blind in the face of numbers and common sense, these people might on their own show us how not to make good predictions about anything.
That’s because the McLaughlin Group is made up of a lot of hedgehogs, people who are specialized in just one area, are stalwart in their beliefs, stubborn, seek order in the world, are overly confident and far too ideological. These people make weak forecasters as their minds are just not trained to the kind of thinking that makes a person able to better see the future. Folks who are better at this are what Silver describes as foxes (actually to be precise he borrows this terminology and gives great credit to Phil Tetlock, a psychologist at the University of California, Berkeley who developed the theory in trying to understand why so few people foresaw the collapse of the Soviet Union). Foxes are everything that hedgehogs are not: multidisciplinary, adaptable, self-critical and reflective, tolerant of complexity, cautious, and empirically driven. These kinds of people make good forecasters.
That’s because they are more likely to engage in the kinds of intellectual approaches that make one better at this sort of thing. The key traits of a good forecaster are thinking in terms of probabilistic outcomes that something has a certain percentage of happening is key to making good predictions, as is using only today’s information and not being tied to what you said yesterday, while trying to seek consensus with all relevant information and predictions. In short, this requires humility and open-mindedness, something hedgehogs are wired not to do.
This part of the book concludes with Mr. Silver returning to baseball to find good foxes. As baseball has evolved since the early 2000s, predictions have improved. Where once scouts looked upon statisticians like Mr. Silver with disdain, they have now borrowed their approaches and insights and combined it with their own qualitative information about how an athlete behaves, their mental character, and they work ethic. This has yielded far better results, and since Moneyball popularized baseball statistics and sabermetrics, the result has been that actually the scout-centric publication Baseball America has on the whole outperformed Baseball Prospectus’ ranking of top prospects.
Thus Mr. Silver displays his own foxiness, able to see how a field he once heavily criticized has adapted and improved.
Thinking Outside the Christmas Box: Best Holiday Shopping Guides
I am heading out for a fun-filled afternoon of mall shopping. I normally warn against this behavior, but since I am doing it with loved ones, I have little recourse. In so doing, I hope to stick to at least one principle: thinking outside the box and not giving someone the usual sweatshirt or electronic gadget they won’t use.
The great thing about the internets and such these days is the plethora of shopping guides that can help you think more creatively. Below are a few of my favorites:
1. NY Times Holiday Gift Guide. I am not sure if the Times will update this this weekend, as right now it as a little allover the place. Nonetheless they have gifts for those under $50, under $250, and over $250, as well as special sections for travelers and cooks.
2. TimeOut Chicago Gift Guide. You may want to click around for your city, this is my hometown of Chicago, but their advice is useful and a little bit different.
3. Huffington Post Green Gift Guide. For those trying to shop and save the Earth.
4. CNet Holiday Guide. Obviously more electronics orientated but laid out beautifully and elegantly.
Happy shopping and wish me luck on my adventure.
Your MacroWallet: US Housing Market Recovery Shaping Up
Everyone is affected by the price of housing, whether you rent or own, are buying or selling. Housing is a key pillar of the economy and perhaps the area we are all most invested in. A few articles over the past several weeks paint a promising future of the housing market in the US, especially for those with a long term outlook. Yearly returns look promising for sound primary residence investment, and/or that investment property you may be looking at.
The Economist says even hedge funds are getting in on the action, but the party may only last as long as interest rates stay near historic lows. They also have an interesting chart that shows us erratically moving back to pre-crisis growth rates. This blog entry also quotes Robert Shiller, one of he most famed housing analysts, as implying we can be an unrealistic wave of negative thinking since 2008 as we were in unrealistic optimistic thinking prior to that time.
Less wonky papers like the USA Today seem to concur through more anecdotal evidence. A path to wealth, not without headaches, can be property investment and management. and it is nice to know the evidence seems to be tipping to now being a fine time to move forward if you had plans to invest in this area.
The US Constitution and the Debt Ceiling Limit
Tied up in all the negotiations over the fiscal cliff is the debt ceiling debate from 2011. As you may recall, in that deal Congress raised the limit only enough to get into 2013 after the elections. As you also may recall, what was once a ho-hum affair was used by Congressional Republicans to extract a lot of spending cuts and damage President Obama’s ability to look like a leader. It seemed that Republicans may have been negotiating in bad faith at times as in several instances it seemed like a deal was sealed, only to collapse at the last second. While seemingly fairly banal, this debt ceiling business is of massively large importance to the US and the world economy. Much of the modern financial world is based on the assumption that US bonds are safe as safe can be. It would cause economic and financial paranoia to not pay the debt, damage US leadership in the world, and undermine our status as a reserve currency which provides a lot of value. This is of more immediate danger and concern than the fiscal cliff, and would provide no positives.
Most understand this, and Congress approval rating fell to new lows after the last round of chicken in 2011.
So this time around President Obama is playing hardball. Yesterday he seemed to suggest that he would raise the debt ceiling automatically, without Congressional approval, and simply use an executive order to do so. This would probably trigger a Constitutional crisis and may still cause chaos if investors and markets around the world had any uncertainty about what would ultimately happen in this showdown.
Can President Obama do this? First the case that he can. The 14th amendment, passed after the Civil War and largely directed at Southern states to make them comply with Reconstruction and bring them back into the Union on Northern terms, says this:
Section 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.
This clause was designed to make sure the US was not stuck paying back banks that lent the Confederacy money. There was also concern that when Southerners rejoined Congress they might vote not to repay debts to Union soldiers or others who assisted in their defeat. Finally, it was clearly meant to make sure that emancipation was not compensated, and that Southern slave owners would have little power to sue for loss of property. Still, all Constitutional provisions are designed for a peculiar time and place, yet apply throughout the ages as higher law. The first sentence in this section is unambiguous, and the President could say that he has an oath not to undermine the Constitution. Moreover, Congress has already voted for all of the spending and taxing programs causing the budget ceiling to rise, so the budget ceiling is of their own doing (as well as the President’s who must sign such budgets into law). In 1935 in Perry v. US, the Court held that voiding a debt went beyond Congressional power. So deciding against the President in this case would also overturn current law and Court precedent. More importantly, it would be hard for anyone to actually bring suit as you would have to demonstrate standing, or that you personally were harmed by the President’s action. No bondholder would be harmed of course, and no Republican member of Congress could reasonably say that they were personally harmed either. Finally, the power of an executive order is clearly Constitutional so you could not argue about the means the President would use. Executive orders have been used hundreds of time every year by every President, including such notable events as the creation of the Peace Corps and the integration of the armed forces.
The case against it, is that it has been practice for decades to give Congress this power and Presidents have not objected or brought the case to Court now. This is a so-called popular Constitutionalism argument, that we have agreed on long-standing practice, but also something that Conservative textualists on the Court usually are against.
What of the political fallout if such an event were to occur? It would be hard for the Court to take the case with someone with real standing, and even harder for them to protect Congress in a convoluted way when the economy might be melting down, especially when there is a clear Constitutional provision supporting the President and Congress would have to be seeking relief against itself for already passing the spending bills in the first place. The only hope of Republicans might be that the Court intercedes on naked political grounds, or that the economy melts down even with Presidential action and the the fallout somehow makes Obama look worse than the Congress. The Supreme Court may then be able to ride to the rescue and save the country from Obama, but even if they did the economic crisis would remain. Again, though, this assumes markets react unkindly to this Presidential action and panic anyway when in fact they might take it as a positive sign of smoother sailing to come. Also, key Republican constituent groups would be none to pleased with this kind of chaos and might demand the party make a deal.
It is hard to really see a bad legal or political outcome for Obama here, unless he looks like some sort of brat and doesn’t at least make some kind of effort or enter into some kind of negotiations. With the fact that he already did that in 2011 remaining, it would be indeed be hard for him to look like some all-powerful tyrant and the Court and public protect Congress instead.
The Fiscal Cliff Deal: The Impact of Increasing Revenues
It slowly looks like the two sides in the deficit reduction/fiscal cliff negotiations are moving towards an idea of what a deal might look like. Granted, no one agrees on specifics but it seems to be that at least on the revenue side (ie increasing tax income for the government and thereby increasing taxes paid by you) we are starting to agree on the issues we are arguing about. This is no small thing. Here are a few of the major topics Republicans, Democrats, and the White House are arguing over. This probably indicates some of these will eventually change and you therefore might want to mentally prepare for it.
While going through this list it might be a good idea to have this tax calculator loaded in another browser window, and some of your income paperwork handy. You will probably be surprised how much of an impact some of the deductions might have on your pocket. My colleague, when we were discussing the issues, said that for middle class people “their life wouldn’t exist without the Federal government’s benefits” and he is largely right. This is one reason why proposals like a flat tax almost always fail politically except with high income earners. But I digress, here are the issues on the table:
1. Raising rates on top earners. This will probably happen, the top rate right now is 35% for individuals and families making over $388,000, meaning they pay that tax on every dollar after $388,000. They are set to go up automatically with the expiration of the Bush cuts. Democrats would like to see this raised to 39% for those over $400,000 and also raise the bracket below this for those making over $200,000 roughly enough to put you in the top 1% of households. This will happen as the President seems to be making this his key sticking point in any deal and it will happen automatically if no deal is reached. Democrats can say the GOP held middle class hostage for the sake of high-earners,probably devastating them in the next election and perhaps giving them even more leverage if we temporarily went over the cliff and the press howled.
2. Deductions. Again, this is where it is helpful to have that calculator I mentioned handy. The big deductions are all on the table, but since middle class people marginally get more value from them, it is hard to figure out a system that only bites the wealthy. Some have proposed a $250,000 cap on all deductions, but this would likely devastate charities, universities, and hospitals who rely on large charitable giving from the affluent above this level. The big deductions that could change are:
- Home Mortgage Interest: probably puts at least a couple thousand bucks in most middle class peoples wallets. Check out your info on the calculator, plug everything in and then add in this deduction and see how much the numbers change
- Health Insurance Deduction: Another biggie. Many have expensive policies between $5000-$12000. The way this works is that anything you pay to health insurance is income that “disappears” to the government thus lowering your perceived income and therefore your taxes. Many working people see extra cash on each of their take home checks because of this, probably a hundred bucks at least.
- State and Local Taxes: Particularly if you are relatively wealthy and live in a relatively high tax area, this is another large deduction again potentially saving close to a thousand of dollars for people in the upper middle class.
- Charitable Deductions: Something most use to donate to their church, charity, or university of choice. Many give small amounts but the top 1% of folks often give much larger sums and these are the lifeblood of these organizations. Again, run the numbers for yourself but this is one of those tax breaks that makes the government poorer but probably vastly improves society and our civic life.
A Couple Tuesday Morning Shopping Tips
Gift cards and department stores are popular when shopping for friends and family, especially when your loved ones did not provide you with a specific list. Gift cards are great because they are essentially like giving money, but for some reason have a less sleazy aspect to them than stuffing wads of bills into someone’s Holiday card. Department stores work in a similar way, because of their many departments and numerous locations, even if you give a bum gift, it is likely that the recipient will be able to exchange it in for something they can use instead.
Most importantly, though, for the intelligent shopper is that they both offer some nice benefits to the purchaser of these two items. Three cases in point came across my eyes yesterday.
First is the American Express Gift Card, available for a 2.5% discount when shopping through the Bigcrumbs.com portal. While a relatively small amount, you are able to somewhat offset the purchase charge with this discount (most gift cars have a $3.95 fee or so when buying them). Since the fee is flat, if you happen to be buying gift cards in relatively large amounts (over $100) when you add in this discount, plus the value of a cashback bonus from your credit card (Discover is currently doing 5% on all online purchases), you may actually come out ahead on this deal. For smaller amounts $25-$75, this is not such a good deal. Another way to go with gift cards more broadly is to buy them at a store where you get point multipliers. Chase INK cards give 5x at office stores, and many carry large amount of gift cards including generic Amex cards and Visa cards.
Second is also through BigCrumbs.com, Nordstrom is giving 10% cashback on all purchases. Nordstrom.com is know for its particularly liberal return policy, so if you are giving gifts from Nordstrom it is likely that the recipient will have few problems returning items, even for cash. While Nordstrom isa higher end store, 10% plus the value of your cashback on your card(again that Discover one comes to mind) for online shopping may make this deal make sense for you.
Also remember many cards have yearly bonuses, the American Express Premier Reward Gold card gives a 15k point bonus after hitting a high yearly spend threshold, and the Chase British Airways card has a similarly valuable double-miles companion pass when hitting the high spend threshold. Chase United card does something similar. Check your card and if you are close it may make sense doing all your holiday shopping and charitable giving on those cards.
Related Resources:
- Thinking Outside the Christmas Box: Best Holiday Shopping Guides
- My Black Friday Shopping Strategy
- Christmas Shopping, App-o-rama, and Credit Card Signup Bonuses: A Perfect Team
- The 7 Sites You Need for Cyber Monday
- Credit Card Points/Miles: How Can I Use My Miles?
- Personal Finance 101: Credit Cards, The Miles and Points Game
- The Three Best Hotel Credit Cards Reviewed
The Three Best Hotel Credit Cards Reviewed
Since so many folks travel around the holidays, either for family or for fun, I thought this would be a good time to review the various hotel credit cards on the market. Most of the major hotel chains offer a co-branded credit card. These cards can be quite valuable, as most have an upfront free night(s) redemption after hitting a minimum spend requirement, an ongoing points bonus where you get a more powerful points multiplier each time you use the card at the hotel, elite status with the chain or nights towards that status which entitles you to better rooms and freebies, and some sort of ongoing yearly bonus.
While hotel cards do not traditionally have the same point value as airline tickets, mostly because a moderate increment of airline points can be used for much more expensive flights like first class; hotel points may, for many, be more useable in that it is easier to do a local staycation to “get away”. Also, domestic coach or less frequent fliers who need flights at a specific time, may find it easier to just book the flight paying regular fares on a good cashback card, and instead use their points for hotel award stays which tend to be slightly easier to use. Hotel cards often make it easier to earn points on each dollar spent, making it easier to build up a large cache.
Here are what I consider the best hotel cards, in descending order.
1. Starwood Preferred Guest, American Express Card, $0 fee first year, then $65
Starwood may not look so exciting on the surface, only 25k in miles and no free nights for a signup, what gives? Yet do not be confused by this, as the Starwood card offers unique powers. First of all, its points, unique among hotel cards, can be transferred to their many frequent flier partners. Moreover, for each 20k points transferred from Starpoints to an airline, you receive a 5000 point bonus, effectively giving you 1.25 points per dollar on all spending. Finally, Starwood offers an amazing ‘cash and points’ redemption option where you combine cash and points to book award stays. This often has the highest value of point value in the game, as a really expensive property can be booked for a nominal fee plus points. Category 6 hotels are among the finest and can be had for $150 and just 8000 starpoints. Even their most exclusive category 7 hotels, costing several hundred dollars each night, can be had for 15000 points and $275 points. Here is an example of how this would work and the savings that can be reaped from a somewhat random search of SPG properties in Paris:
2. The Citi Hilton Card, Visa Signature, $95
I carry this card as well and I believe it offers a few exciting benefits. First of all, just for having the card you get Hilton’s second highest elite level, gold, and this entitles you to free internet and breakfast. The signup bonus is two weekend night certificates at just about any Hilton property in the world after $2500 spend in 4 months. You also get a free night every year up to a certain category level if you put $10,000 spend on the card. Hilton cards also get 3 points per dollar on all spending and 5 points on airline tickets and car rentals, and a whopping 10 points on any Hilton stay. If you travel even a few times a year these multipliers can really add up, leading you closer to that free award night room.
3. Chase Hyatt Visa, $75
Chase has an amazing product in the Hyatt Visa as it entitles the cardholder to two nights at any Hyatt in the world, for free, once you hit the signup bonus spending of $1,000 in 3 months. Each year on renewal you get an additional free night at up to a category 4 Hyatt anywhere in the world. This card also offers 3 points on Hyatt properties; 2 points on restaurants, airlines, and car rentals; and 1 point on everything else. If you can leverage the free nights into expensive properties this card can be very rewarding!
There are certainly other options out there as well, Hilton itself has several good cards with Amex as well. These, though, hit the home run of benefits in signup bonuses, points earning power, and status at the chains.
None of these cards offer me any kind of referral credit, this is just a review of my three favorite cards.
Related Resources:
- The Best Credit Cards for Travelers
- Christmas Shopping, App-o-rama, and Credit Card Signup Bonuses: A Perfect Team
- Credit Card Points/Miles: How Can I Use My Miles?
- Personal Finance 101: Credit Cards, The Miles and Points Game
- Stories on Credit Cards
- Are Prepaid Credit Cards A Good Deal?
- Top 4 Sites on How to Use Your Miles and Points
- Personal Finance 101: Credit and Credit Cards
- How To Use American Express Membership Rewards Points
- American Airlines AAdvantage Amazing Value
Book Review: The Signal and the Noise, by Nate Silver
This is a multi-part review of Nate Silver’s new book, The Signal and the Noise. Today I review the introduction and broad overview of the book.
1. Part One: Introduction and Overview
2. Part Two: Bad Signals
3. Part Three: A Better Approach
4. Part Four: How to Make Better Predictions
Almost every action we take is based on predictions and expectations about the future. From how to spend our time, what to buy, what career to pursue and how we conduct oursleves; we are constantly making calculations about the things we do, their impact, and how that might enhance or change our future selves. In short, we are predicting machines.
Nate Silver aims to help us do that a bit better. In his introduction he runs through an eclectic mix of examples about how bad we are about predicting the future, even in areas of vital importance where money and success are at stake. Mr. Silver covers the awfulness of political predictions, even in the face of clear and simple information that could yield better thoughts on the future. He also concisely yet effectively makes note of just how wrong, terribly wrong, the business and economics community was in predicting the Great Recession of 2008 and the collapse of the US housing market. People who know the most and whom we trust to be experts are often times the worst at actually helping us understand the near future and what it is likely to hold.
Mr. Silver largely blames this problem on the “signal to noise” problem, our inability to actually grasp and understand the most important data and facts, or “signal”, amidst all the less relevant information that ultimately doesn’t mean much, the “noise”. Silver discusses how we, at best, often can’t tell the difference between these two things, and, at worst, even mistake the noise for the signal, thus leading us down an entirely wrong path. When our predictions are based on faulty signals, our behaviors end up being faulty and harmful as well.
The rest of the book Mr. Silver explains ways to train your mind to think better, how to become better at detecting real signals. Although his examples are eclectic and broadly relate to his own peculiar interests (baseball, weather, politics, poker), if the reader is willing to think then they will largely grasp how to apply Mr. Silver’s ideas to their own lives and problems.
Article Review: The Return of American Manufacturing Jobs?
The Atlantic’s front page story this month covers the “return” of American manufacturing and industry from low wage countries, particularly those industries once located in China and Asia. The story focuses primarily on General Electric and their decision to return to a massive series of plants in Kentucky that GE attempted to sell as recently as five years ago, ultimately only holding on to the plant because there were no takers after the 2008 financial crisis. Although the article is careful to make clear that we are not going to see as many jobs return to the plant as during the hey-days of the 1950s and 1960s, it is nonetheless broadly celebratory about how remarkable it is that the products themselves are “back” in America. While this alone makes the article worth reading, a few even more interesting thoughts come to mind after I put down the magazine:
1. Can we put a price on collaboration and the input of regular assembly line workers? In one passage, the article describes how the workers at GE, the marketing team, and the managers came together to try and improve the assembly of a hot water heate:
To get ready to make the GeoSpring at Appliance Park, in January 2010 GE set up a space on the factory floor of Building 2 to design the new assembly line. No products had been manufactured in Building 2 since 1998. An old GE range assembly line still stood there; after a feud with union workers, that line had been shut down so abruptly that the GeoSpring team found finished oven doors still hanging from conveyors 30 feet overhead. The GeoSpring project had a more collegial tone. The “big room” had design engineers assigned to it, but also manufacturing engineers, line workers, staff from marketing and sales—no management-labor friction, just a group of people with different perspectives, tackling a crucial problem.
“We got the water heater into the room, and the first thing [the group] said to us was ‘This is just a mess,’ ” Nolan recalls. Not the product, but the design. “In terms of manufacturability, it was terrible.”
The GeoSpring suffered from an advanced-technology version of “IKEA Syndrome.” It was so hard to assemble that no one in the big room wanted to make it. Instead they redesigned it. The team eliminated 1 out of every 5 parts. It cut the cost of the materials by 25 percent. It eliminated the tangle of tubing that couldn’t be easily welded. By considering the workers who would have to put the water heater together—in fact, by having those workers right at the table, looking at the design as it was drawn—the team cut the work hours necessary to assemble the water heater from 10 hours in China to two hours in Louisville.
In the end, says Nolan, not one part was the same.
So a funny thing happened to the GeoSpring on the way from the cheap Chinese factory to the expensive Kentucky factory: The material cost went down. The labor required to make it went down. The quality went up. Even the energy efficiency went up.
GE wasn’t just able to hold the retail sticker to the “China price.” It beat that price by nearly 20 percent. The China-made GeoSpring retailed for $1,599. The Louisville-made GeoSpring retails for $1,299.
This is in stark contrast to the typical relationship between management and labor, where a concrete hierarchy is in place. In such a structure managers often have an “inspired vision” that they believe will work and any employee input or advice on how to improve that vision is seen as overly negative and detrimental to the leader’s vision. Moreover, employees often feel as though they are just cogs in a machine and behave as such, trying to extract as much money and benefit with as little pain as possible. I don’t mean this as an attack on labor, but rather a broad description of how industrial relations might work. What if we took GE’s case here one step further and figured out a sound way to give all parties; CEO, manager, assembly line worker; equity for their participation on a product and especially when they improve the product in a measureable way? This would create more of a partnership of free labor and could perhaps end the friction between labor and capital. We may even be able to transcend our politics of each side attacking the other. If workers were part owners, or could potentially be if their ideas are good enough, we might have a new industrial revolution. This is broadly practiced in Germany’s famous Mittelstand industrial core. It works.
2. Can government play a role in creating the atmosphere for this process to accelerate? The article mentions how lower fuel and transportation costs were instrumental in tipping the economics of manufacturing. Cheap American gas and oil make making things here make more sense. This is a similar role that the railroad and internet played, making travel and communication more cheap creates an environment for explosive economic growth. Could sound government investment in pro-business infrastructure from rail, to high speed shipping corridors, to cheaper air transport accelerate this process? Might even both parties be able to agree on this?
3. If industrial production can become even more green and eco-friendly we may be able to have even greater collaboration and therefore benefits in design and product development. Imagine the GM plant in the marketing capital of New York City or the high tech atmosphere of California. As labor productivity increases we may even need less space, thus reindustrializing cities.
4. If the American consumer market remains the best in the world think of the mutliplier effect of paying American workers. They will buy and spend more creating a virtuous feedback loop.
All in all the article was highly informative but could be even grander than The Atlantic imagines. If used as a basis for industrial policy, we might be close to a new American Economic Renaissance. I recommend reading the entire story, which can be found online here.
No related posts.
Introducing “Value Considering Replacement Cost Longevity”
The greatest influence in the way I think and approach the world is sabermetrics. I first discovered this more analytical approach to baseball and life by reading Rob Neyer’s columns at ESPN.com; then I moved on to baseballprospectus.com and baseballprimer.com from there. This was all in college, and I think it made me a better student, improved my critical thinking, and eventually lead to my interest in Economics. I only wish I would have discovered it a bit sooner. I find great joy in seeing how the sabermetric approach has swept the world, first in baseball, then in politics, and now more universally in any field that requires intelligent application and insight into data.
The key insight of sabermetrics isn’t just that data matters, baseball always had that as it counts everything, but rather that there are superior ways to apply such data with more thoughtful models and ways of looking at the world.
I believe we can all be helped by this approach in our own lives as well. Here’s how:
If we take any purchase or investment and understand just two things about it; it’s exact replacement cost for the exact same item, and the amount of time until we need to replace it or sell it; then we will have a good understanding of its inherent value.
For example let’s take my lovely 2004 Mazda3. When I bought it, I paid somewhere in the neighborhood of $15,000 plus interest over four years for the car. This brought its total cost to someplace around $20,000 if I recall correctly. Now, if we know today in 2012 what that car would cost to replace it (probably around $3000) and that I have gotten good use out of the vehicle now for 10 years, we would have some idea about its total value. It is an asset that declined in value (most things we buy do, and contrary to what many may think cars perhaps decline less so than most other items like electronics and clothing) but one which I have received 10 years of use of.
This is a useful way of looking at our financial behavior if we compare it to other items and consider opportunity costs. For example, let’s say in 2004 instead of buying the car I instead purchased 10 very expensive laptop computers. Today, the value of those computers would probably be something close to zero, not much of a market for 10 year old technology, and perhaps none of the computers would have actually made it to the present day. I may have downloaded too many viruses in 2008 slowing them down, or they just won’t efficiently run new programs that require more processing speed and memory.
Clearly, then the car would have the higher “Value Considering Replacement Cost Longevity”, it would cost me more on the open market today (or command a higher resale price, it’s the same difference) and it gave me ten years of use, while the computers only yielded four.
If we start to compare our spending on even relatively small things, it gets quite interesting. Should I spend my money on new furniture or a new TV? We could arrive at a good answer by comparing how long the item would last versus its value at a point down the road. If I buy new furniture should I save a few dollars now by buying at IKEA, even if it will only last a couple of years and have no value at that point, or should I instead spend twice as much on a solid piece of craftsmanship furniture that may last twice as long and be resellable for close to the same amount of money at that point?
This statistical model can get even more fun if we add in an income multiplier, considering whether the item can reasonably be related to assisting me in my ability to earn an income and generate more money for myself.
We will discuss this additional component more next time.
No related posts.
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