Talent and not money is the truly scarce variable

Tuesday, October 4th, 2022

Rob Henderson finds Tyler Cowen’s latest book, written with Daniel Gross, thorough yet breezy, providing useful tips for how to develop a talent-spotting mindset with insights from psychometrics, management, economics, and sociology:

Cowen and Gross note that in the U.S., from 1980 to 2000, the main cause of income inequality was whether a person graduated from college. But from 2000 to 2017, income inequality primarily existed within educational groupings. In other words, talent appears to be more responsible than education for economic returns.

Cowen and Gross each describe how often they reject proposals, and they conclude that “talent and not money is the truly scarce variable.” But where does it come from? They acknowledge that talent can differ between individuals, but they also stress the importance of practice. Indeed, those with the potential to cultivate serious talent sometimes practice to the point of obsession. Discussing which attributes predict eminence in a field, psychology professor David Lubinski has said that passion for work is key, and that highly creative people tend to be “almost myopically” fixated on work.

Relatedly, Cowen and Gross observe, “If you are hiring a writer, look for signs that the person is writing literally every day. If you are hiring an executive, try to discern what they are doing all the time to improve networking, decision-making, and knowledge of the sectors they work in.” Developing the habit of practice and self-discipline — the authors describe it as “sturdiness” — is critical for talent acquisition. “Sturdiness is the quality of getting work done every day, with extreme regularity and without long streaks of non-achievement,” they write. “If you are a writer, sturdiness is a very powerful virtue, even if you do not always feel you are being extremely productive.”

Accordingly, the book cites research indicating that perseverance is a stronger predictor than passion for success. When it comes to achievement, persistence pays off more than pure passion.

The authors’ favorite interview question about browser tabs is meant to tap into this question about whether a person spends his or her free time practicing. What the book describes as “downtime revealed preferences” are more interesting than “stories about your prior jobs.” For instance, asking what newsletters or subreddits a person reads is often more illuminating than asking what a person did at their previous job.

The book is very much about identifying high performers, as opposed to average workers. This is particularly true of its interview section, which gives guidance on unstructured, as opposed to structured, interviews. Most research indicates that interviews are more effective for higher-level jobs.

Talent provides several fascinating questions designed to yield interesting answers. How did you prepare for this interview? What’s a story one of your references might tell me when I call them? Which of your beliefs are you most likely wrong about? Whether the candidate can draw on intellectual and emotional resources to answer is a sign of broader stores of intellect and energy that he or she will bring to the job. The authors suggest that interviewers should not be afraid to let a question hang in the air after asking it; better to hold the tension to make clear you expect an answer.

The authors suggest using challenging and unusual questions to identify those with more style than substance. As they put it, “Beware of verbally adept storytellers.” Most of us have a bias toward well-spoken and articulate individuals. Bear this in mind, for it can lead you to hire what the authors describe as “glib but unsubstantial people.” They conclude this line of advice with, “Do not overestimate the importance of a person’s articulateness.”

Grids have excess capacity 95% of the time

Monday, August 29th, 2022

There are many ways Texas’s grid could have avoided disaster during winter storm Uri:

Being synchronized to one of the other wide-area grids in the US is one way. Another is not to have ~50% of its households rely on electric heat.

Cold weather causes demand to spike while also hampering supply. ERCOT is not the only grid to have suffered significant supply outages during cold weather. But other grids like PJM in 2014 were bailed out by imports and lower shares of customers using electric heating.

Customers using electric heat don’t pay the costs of their impact on the grid when they only pay a fixed price per kilowatt-hour. Electric resistance heaters and air source heat pumps see power usage spike dramatically during the coldest events. The overall kilowatt-hour usage only sees a slight increase on the monthly bill, but the peak power might be two or three times higher than the norm.

The owner can by right operate a bar, a restaurant, a boutique, a small workshop on the ground floor

Monday, August 22nd, 2022

There are a number of reasons small business in Tokyo is so vibrant:

A huge one that you can look at cities around the world and ask is how many flexible microspaces are available across your city. By microspaces, I mean small little nooks and crannies in the commercial or residential sectors of the city that you can do a lot of different things with and don’t need to pay a huge amount of money in rent.

This is going to sound wild to anyone who lives in the US, but for any two-story rowhouse in Tokyo, the owner can by right operate a bar, a restaurant, a boutique, a small workshop on the ground floor — even in the most residential zoned sections of the city. That means you have an incredible supply of potential microspaces. Any elderly homeowner could decide to rent out the bottom floor of their place to some young kid who wants to start a coffee shop, for example. When you look at what we call yokocho alleyways — charming, dingy alleyways that grew out of the black markets post-World War II, which are some of the the most iconic and beloved sections of the city now — it’s all of these tiny little bars and restaurants just crammed into every available space.

[...]

Liquor licenses are extremely cheap and easy. A liquor license in an American city can sometimes run up to $500,000. You’re not going to have a little four-seat, mom-and-pop bar for the locals. So those regulatory and policy choices that we make fundamentally determine what our cities are going to feel like.

Crime’s costs are even higher than we thought

Tuesday, August 16th, 2022

How bad is crime?, Ben Southwood asks:

In the paper, whose calculations were done in 2006, Americans were willing to pay $25,000 to avert a burglary across their society, $70,000 to avoid a serious assault, and nearly $10m to avoid a murder.

A more practical situation comes when juries award money to ‘make people whole’ for physical injury, pain, suffering, mental anguish, shock, and discomfort that they have experienced due to some illegal action. For example, one 68-year old lady was shot through the spine in a drive-by shooting, and left paraplegic — a jury gave her $2.7m in addition to her medical costs.

If you combine these awards, in a large sample, with separate ‘physician impairment ratings’ — basically how bad doctors think the injury is compared to death — then this is another method of estimating the statistical value of a life, something we have hundreds of estimates for, which typically comes out somewhere above $5m, depending on the wealth of the country and the methodology.

[...]

Their central estimate is that crime costs America $2.6 trillion annually, mostly coming from violent crime. This is about 12 percent of US GDP. By this metric, it would be, in GDP terms, one of the US’s biggest problems, on par with housing. For a country like the UK with a murder rate about five times lower, the problem is probably about five times smaller.

I actually think the American problem is considerably bigger than this estimate, because this study only includes the costs of crimes that actually get committed. However, people try their damnedest to avoid being the victims of crime. This leads to many extremely socially costly behaviours.

What are some of these extremely socially costly behaviors?

For example, one study by Julie Cullen and Steven Levitt finds that when crime rates across the city rise ten percent, city centre populations fall one percent — with people generally moving to the suburbs. One crime tends to push one person out of the city centre, on average.

Quantifying this in terms of a real world city, the roughly 400 percent increase in New York City’s murders from 1955 to 1975 (from around 300 to over 1,500 per year) would have been expected to empty the densest parts of the city out by about 40 percent, assuming that other crimes rose in line with murder. And indeed, the population of the centre city — Manhattan — fell about 35 percent over that period, while the population and physical extent of the suburbs grew rapidly.

Murders in New York City peaked in 1990 at over 2,000 per year, roughly as population reached its nadir in the city centre. They have cratered by over three quarters, to about 300. This would have likely driven city centre population up massively, much moreso than it actually did recover, but building restrictions have prevented this happening anywhere near as much as it might, meaning that it has driven up prices instead.

So this story implies that crime in city cores drives people to the suburbs, creating urban sprawl. If so, then crime’s costs are even higher than we thought.

When people arrive at the same policy recommendations but shift to the opposite rationale, it seems fair to doubt their objectivity

Tuesday, August 9th, 2022

There are two carbon calculation problems, Arnold Kling explains, and they are interdependent:

One problem is to figure out the optimal amount of carbon emission reduction. That means making a judgment about how much harm carbon emissions cause (and this relies on unreliable models) and comparing this with the cost of the carbon-emission reduction measures. The other problem is to figure the optimal carbon-emission reduction measures, which will in turn help you to calculate the cost of those measures.

When someone makes a specific proposal, such as changing fertilizer use, I want to say: Show Your Work. That is, show the assumptions and calculations that you made in order to arrive at this proposal. Otherwise, it may not even be true that your proposal would reduce carbon emissions.

In the economy, central planners face a well-known calculation problem. Even when they are sure that the market is getting things wrong, they usually lack a way to measure the degree of correction needed.

To a first approximation, the best way to have a sustainable economy is to let the market work. In order to determine sustainability, markets perform a complex calculation problem. If a firm’s output sells for more than the cost of its inputs, then its production process is sustainable, and it remains in business. If it sells for less, it experiences losses, and it goes out of business. No public official has knowledge that can enable a regulator to outperform the price system.

But there are costs that the market does not count. One cost that is on the minds of most policymakers today is the cost of carbon emissions, which add to greenhouse gases and hence to global warming.

Markets can still help in addressing the carbon emissions calculation problem.

[...]

As an aside, I should point out that animosity toward gasoline-fueled automobiles and “smokestack” industry long preceded the focus on global warming. Fifty years ago, one concern was air pollution. This was a fair concern, and I would say that the regulators who mandated filtering systems probably got it right. Certainly, the air in Los Angeles is cleaner because cars no longer spew as much pollution. And the air in Pittsburgh is cleaner because it no longer is a steel town.

Also fifty years ago, there was a concern that we would soon run out of fossil fuels. This motivated President Carter and Congress to create the Department of Energy, tasked with developing alternative energy sources in what Mr. Carter called a “moral equivalent of war.”

The global warming issue shifted the rationale for opposing gasoline and “smokestack” industries. The concern that fossil fuels were subject to scarcity was replaced by a worry that they are too abundant. When people arrive at the same policy recommendations but shift to the opposite rationale, it seems fair to doubt their objectivity.

Diamonds are forever

Friday, August 5th, 2022

Back in 1982, Edward Jay Epstein asked, Have you ever tried to sell a diamond?

Until the late nineteenth century, diamonds were found only in a few riverbeds in India and in the jungles of Brazil, and the entire world production of gem diamonds amounted to a few pounds a year. In 1870, however, huge diamond mines were discovered near the Orange River, in South Africa, where diamonds were soon being scooped out by the ton. Suddenly, the market was deluged with diamonds. The British financiers who had organized the South African mines quickly realized that their investment was endangered; diamonds had little intrinsic value — and their price depended almost entirely on their scarcity. The financiers feared that when new mines were developed in South Africa, diamonds would become at best only semiprecious gems.

The major investors in the diamond mines realized that they had no alternative but to merge their interests into a single entity that would be powerful enough to control production and perpetuate the illusion of scarcity of diamonds. The instrument they created, in 1888, was called De Beers Consolidated Mines, Ltd., incorporated in South Africa. As De Beers took control of all aspects of the world diamond trade, it assumed many forms. In London, it operated under the innocuous name of the Diamond Trading Company. In Israel, it was known as “The Syndicate.” In Europe, it was called the “C.S.O.” — initials referring to the Central Selling Organization, which was an arm of the Diamond Trading Company. And in black Africa, it disguised its South African origins under subsidiaries with names like Diamond Development Corporation and Mining Services, Inc. At its height — for most of this century — it not only either directly owned or controlled all the diamond mines in southern Africa but also owned diamond trading companies in England, Portugal, Israel, Belgium, Holland, and Switzerland.

De Beers proved to be the most successful cartel arrangement in the annals of modern commerce. While other commodities, such as gold, silver, copper, rubber, and grains, fluctuated wildly in response to economic conditions, diamonds have continued, with few exceptions, to advance upward in price every year since the Depression. Indeed, the cartel seemed so superbly in control of prices — and unassailable — that, in the late 1970s, even speculators began buying diamonds as a guard against the vagaries of inflation and recession.

[…]

To stabilize the market, De Beers had to endow these stones with a sentiment that would inhibit the public from ever reselling them. The illusion had to be created that diamonds were forever — “forever” in the sense that they should never be resold.

[…]

Movie idols, the paragons of romance for the mass audience, would be given diamonds to use as their symbols of indestructible love. In addition, the agency suggested offering stories and society photographs to selected magazines and newspapers which would reinforce the link between diamonds and romance. Stories would stress the size of diamonds that celebrities presented to their loved ones, and photographs would conspicuously show the glittering stone on the hand of a well-known woman. Fashion designers would talk on radio programs about the “trend towards diamonds” that Ayer planned to start. The Ayer plan also envisioned using the British royal family to help foster the romantic allure of diamonds. An Ayer memo said, “Since Great Britain has such an important interest in the diamond industry, the royal couple could be of tremendous assistance to this British industry by wearing diamonds rather than other jewels.” Queen Elizabeth later went on a well-publicized trip to several South African diamond mines, and she accepted a diamond from Oppenheimer.

Their bloated administrations are the shock troops of the culture war

Monday, July 25th, 2022

There are two kinds of revolutionaries, Balaji Srinivasan argues, technological and political, and there are two kinds of backers, venture capitalists and philanthropists. There aren’t term sheets between philanthropists and political revolutionaries, with “exits” to the tune of billions of dollars, but impact certificates could fix that, Scott Alexander suggests.

Arnold Kling doesn’t want that “fixed”:

Profit-seeking investment is driven ultimately by what consumers want. Philanthropy is driven ultimately by what donors want. Unless you think that donors are morally superior to the rest of us, you should not be rooting for more philanthropy.

One can speculate that one of the causes of increased social tension is the rise in philanthropy. Our “cold civil war” is funded by George Soros, Peter Thiel, Tom Steyer, and the like. Universities are among the most popular “charitable causes,” and their bloated administrations are the shock troops of the culture war.

We are better off with Soros speculating on currencies and Thiel trying to take businesses from zero to one. We are better off when university alumni invest their money in search of profit.

[…]

A lot of philanthropy goes to colleges and universities. Much of this goes to fancy new buildings. I think that Scott would agree that this does not help poor people. But were the donors who funded buildings trying to help the poor but lacking skills at effective altruism? Obviously not.

The challenge is not to make philanthropists more efficient at getting performing-arts centers and sports complexes built on campus. The challenge is to change the focus of donors toward something more worthwhile.

On the other hand, over the years Wal-Mart has hired many low-skilled workers and lowered the cost of living in many poor rural areas. Wal-Mart did not set out to help poor people, but that was the result.

More generally, markets have been shown over time and across countries to reduce poverty. The market does not produce the results of a benevolent omniscient quasi-deity. But donors themselves are neither benevolent, omniscient, nor quasi-deities.

I think that there is too much money to be made nowadays in non-profits dedicated to causes. Think of people making money as “activists.” I worry that “impact markets” could lead to even greater investment in arms races between opposing advocacy groups.

Status anxiety keeps earnings flatter across employees than they would otherwise be

Sunday, July 3rd, 2022

Robert Henderson has been reading Choosing the Right Pond: Human Behavior and the Quest for Status, by the Cornell economist Robert Frank, which addresses the question, Why are the least productive workers in an organization typically paid more than what they produce, while the most productive workers are paid less?

In most organizations, productivity varies more across employees doing similar jobs than wages.

In other words, if you take a selection of workers in an office who are all earning $80k/year, what is the likelihood they are all producing the same amount of value for the firm?

Basically zero.

Moreover, the highest-ranked employees are typically paid less than what they contribute. And the bottom-ranked workers are paid more.

[…]

Robert Frank suggests the reason for this is that workers would generally prefer to occupy higher-ranked positions in their work groups than lower-ranked ones. They’re forgoing more earnings to hold a higher-status position in their organization.

[…]

The low-ranked workers are giving up status for money. The high-ranked workers are giving up money for status.

[…]

Status anxiety keeps earnings flatter across employees than they would otherwise be.

What couldn’t von Neumann do?

Tuesday, April 26th, 2022

Reading The Man From the Future, Steve Sailer notes, it’s hard not to acknowledge mathematics as the king of the disciplines:

Von Neumann was first and foremost a mathematician, a protégé of David Hilbert, the most influential mathematician of the early 20th century. He delighted Hilbert by offering, as a teenager, a response to Bertrand Russell’s Paradox that was undermining confidence in Hilbert’s program for mathematical progress.

From von Neumann’s position of strength on the intellectual high ground of math, the adult prodigy then conducted a series of lightning raids on lesser fields:

Physics (helping reconcile the seemingly conflicting quantum-mechanics approaches of Heisenberg and Schrödinger).

Engineering (leading the design of the implosion device for triggering the first-ever atomic bomb, which was exploded at Trinity, New Mexico, in July 1945).

Economics (more or less inventing the subject of game theory and coining the useful term “zero-sum game”).

Computer science (articulating in 1945 the von Neumann architecture that instantly became the standard way to design general-purpose computers; note that he didn’t invent the computer, but his clarity of mind and prestige helped get the American computer industry off to a quick start on the right foot).

Nuclear war strategy (hanging out at the early RAND Corporation in Santa Monica, von Neumann offered ideas for dealing with the Soviets that tended to be less Dr. Strangelove than Gen. Buck Turgidson. Like the leftist pacifist Russell in the late 1940s, von Neumann kicked around the idea of nuking the Soviets before they got the Bomb and could retaliate).

Psychology (writing a book on the subject while dying of cancer).

What couldn’t von Neumann do? Bhattacharya lists a few of the great man’s shortcomings: He hated sports and anything else you couldn’t do in a well-tailored business suit, was a bad driver, had little musical ability, was not terribly interested in hearing about the feelings of the women in his life, and was an enthusiastic but mediocre chess player. Fascinatingly, an endnote mentions that the inventor of game theory was a notoriously poor poker player.

China also lives in a G7 world

Thursday, April 14th, 2022

But by the second day of the Ukraine war, Beijing realised that China also lives in a G7 world, Edward Luttwak notes, with its economy utterly dependent on the daily arrival of bulk carriers loaded with animal and human food:

China’s economy was self-sufficient if miserably poor in 1976 when I first visited, with a population on the edge of malnutrition. But today’s citizens will not grin and bear it without their meat, eggs, or milk. Last year, Xi Jinping’s naval groupies, including the jovial retired Admiral Luo Yuan, suggested that the US could be scared off from defending Taiwan against a Chinese invasion by sinking a US warship or two, perhaps even an aircraft carrier. Now Xi must realise that if a US warship is sunk, the supply of animal feed would end.

Zoom and Amazon fed on the carcasses of mom-and-pop businesses

Monday, April 11th, 2022

When COVID hit, the stock market took a deep dive, but it subsequently recovered:

Why did it recover? Because we used the Internet as a substitute for activities that were curtailed by COVID. And the Internet services we used were provided by corporations with shares traded on Wall Street. The economy shifted in the direction of bits, and this redistributed profits toward shareholder-owned companies. Zoom and Amazon fed on the carcasses of mom-and-pop businesses, so to speak. So even though overall wealth declined, the share of wealth accounted for by large corporations increased, and this buoyed stock prices.

As with COVID, the Russia-Ukraine war and the responses to that war are disrupting the economy. As I write this, though, the stock market seems to be relatively unconcerned. It is as if speculators are saying, “Corporate America thrived on the virus. It can thrive on the war, too.”

But the economic adaptation to the virus was to substitute bits for other means of getting goods and services. You used Amazon to get stuff delivered to you instead of going to the store to get it. You used Zoom to meet with work colleagues or out-of-town friends and relatives instead of going to the office or engaging in travel.

Instead, Zeihan predicts that the war will result in a scarcity of food. It’s not easy to see how we substitute bits for food. I cannot point to a corporation that is positioned to profit from mass starvation the way that Zoom or Amazon were positioned to profit from social distancing.

An economy is a system for generating and trading solutions to problems

Sunday, April 10th, 2022

Robin Hanson once wrote about how intelligent people tend to overestimate how smart everyone else is, and Anatoly Karlin elaborates on this, with support from PISA test scores:

Fortunately, the PISA website has sample math questions from the 2012 assessment, corresponding to each of the six different levels of difficulty, as well as statistics on the percentage of 15-16 year old students from each of the participating countries that is capable of correctly answering it.

Here is the sample question from Level 6, the hardest level:

Helen rode her bike from home to the river, which is 4 km away. It took her 9 minutes. She rode home using a shorter route of 3 km. This only took her 6 minutes.

What was Helen’s average speed, in km/h, for the trip to the river and back?

Karlin notes how few people get this right:

This problem requires a multi-step approach, an understanding of rates, and the intelligence to complete it in the correct order.

Though not especially hard, even at this level. I suspect that many of you can do it in your heads within a minute.

But a majority of all the tested teens begged to differ.

OECD average: 3% (!!). Korea: 12%, Japan: 8%, Germany: 5%. The US, Italy, Sweden, and Russia were all at 2%; the Mediterranean was at 1%.

Some countries where a big fat 100% (rounded up) were unable to do this problem: Argentina, Brazil, Chile, Colombia, Indonesia, Jordan, Kazakhstan, Malaysia, Mexico, Peru, Qatar, Tunisia, Uruguay.

The number of people at this level, the highest measured by PISA, is dwindling away into insignificance in Latin America and the Middle East.

And yet this only translates to an IQ of 120-125. We’re nowhere even near genius level yet.

This matters:

The classical definition of an economy is a system for the production and exchange of goods and services. However, I will argue that you can view it even more fundamentally as a system for generating and trading solutions to problems.

[…]

Some of these problems, such as subsistence farming and trucking, are pretty simple and can be accomplished with reasonable efficiency even by relatively dull workers. This is because problems in this “Foolproof sector” (as Garett Jones calls it) require few steps and have only a minimal threshold difficulty, so production in this sector is governed by the standard Cobb-Douglas equation. More highly skilled workers are only modestly more productive, and are thus awarded with modestly higher salaries. Labor differs by productivity, but is substitutable — one experienced waiter is worth two novice ones.

Other problems are very complex and require teams of competent workers to perform multiple complicated steps to create a successful solution. The best are paired with the best for maximum productivity. Moreover, many O-Ring problems might have a threshold limit for IQ, below which no productive work can be done on them in principle (as per the Ushakov-Kulivets model). To be commercially viable, the risk of failure on any one link of a long production chain needs to be kept low. Examples of these “O-Ring” tasks may include: Aircraft manufacturing; corporate merger planning; computer chip design; machine building; open-heart surgeries.

Is financial innovation a good thing?

Wednesday, April 6th, 2022

Is financial innovation a good thing?

In the context of a free market, innovation is a positive-sum game. The innovations that survive — most don’t — are the ones that conserve resources and improve quality. In the case of financial innovation, improving quality could mean better risk management.

But financial innovation does not take place in the context of a free market. Our financial system is permeated with government guarantees. Some guarantees, like deposit insurance or pension guarantees, are explicit. Other guarantees, like “too big to fail,” are implicit.

These guarantees can be exploited by firms that take on excessive risk. If a gamble pays off, the gains go to owners and managers of the firm. If the gamble turns out badly, some of the losses go to taxpayers. Even though managers might not consciously be searching for ways to game the system, the competition for returns will push them in the direction of doing so.

Innovative financial instruments and practices can facilitate gaming the system, without regulators realizing it. Clever innovations can enable a bank to comply with the letter of a regulation while violating its spirit. Sometimes, even the executives of the bank are fooled. They do not realize that their profits are coming from this “regulatory arbitrage,” rather than from real business skill.

This insurance was supposed to pay off in case those bonds lost value

Tuesday, March 22nd, 2022

Many money managers who had bought Russian bonds in the past had purchased credit insurance from other companies:

This insurance was supposed to pay off in case those bonds lost value, which they clearly have as a result of sanctions.

Under terms of some of these contracts, some money managers have been able to collect insurance claims. But other insurance contracts stated that in order to be paid, the money manager had to transfer the bonds to the insurer. But the sanctions will not allow the bonds to be transferred! Once again, innovative financial instruments proved to be fragile in ways that were not anticipated.

They want to solve poverty with sacrifice and without math

Wednesday, March 16th, 2022

Why is Bryan Caplan’s perspective on poverty so unpopular?

The obvious answer is that Effective Altruism is usually unpopular. Soft hearts and soft heads go together. Most people are instinctive Ineffective Altruists. They want to solve poverty with sacrifice and without math.