Fun Ways To Teach Your Kids Encryption

Here are 2 simple ways to introduce the idea of encryption to elementary school kids.

 

Ciphers

I had them try to decode the following code:

4 15 7

(with some prodding they eventually figured out it was a simple letter-number cipher spelling “dog”)

 

Mastermind

You might recognize this game from your own childhood.

 

 

You don’t need to buy it. You can play it with different color marbles, bingo chips, coins or almost any set of things lying around the house.

How to play:

    1. A codemaker constructs a hidden sequence of 4 different colored beads (out of a possible 6 colors).
    2. The codebreaker tries to guess the sequence by arranging 4 colors in order.
    3. The codemaker gives non-verbal feedback:

      a) Identifies how many of the colors used are correct
      b) Identifies how many beads are the right color AND in the right position

    4. Repeat until the code is cracked

      Enrichment questions:

      How can the game be made easier?
      How can the game be made harder?

      And if you have an older onlooker…how many possible codes can be created?

      And if you have an Excel fan in the vicinity, see how you can solve such problems using the hypergeometric distribution. (A Reddit thread targeting game designers)

A Slightly More Advanced Example: Using a “Mask”

Suppose a group of people are sitting around a table and you all want to know how much money everyone makes but of course nobody is willing to share their own salary.

Here’s a way to uncover the average pay at the table without anybody needing to disclose their pay.

Let’s pretend A, B, C, and D are having dinner together at this table.

Just follow these steps:

Masking Phase

  1. Tell “A” to add an arbitrary number to their pay and write the sum on a piece of paper. It’s very important to write just the sum! So if A makes $100k per year and the arbitrary number is 5,000,000 then they would write: $5,100,000

  2. Pass the paper to “B”

  3. “B” notes the sum and adds it to their own salary plus their own arbitrary number. They write this sum on a fresh piece of paper and hand it to “C”. Important: use a new piece of paper, we don’t want anyone to see the history of how the sum was created. 

    Example:

    “B” receives paper with the sum $5,100, 000
    “B” add this to their own salary $50,000 plus an arbitrary number of $1,000,000
    “B” passes a piece of paper with the total $6,150,000 to “D”

  4. Repeat this process until the paper gets back to “A” 

Un-masking Phase

  1. “A” subtracts their arbitrary number only from the total and passes the new total to “B”.

    Example :

    “A” receives a piece of paper with the number $9,000,000 written on it
    “A” subtracts the $1,000,000 arbitrary number and passes the number $8,000,000 to “B”

  2. Repeat until everyone has subtracted their arbitrary number.

The remaining total is the sum of everyone’s pay. If we divide by 4 (the number of people) we have discovered the average pay at the table and nobody needed to reveal their own number!

You have learned a simple way to “mask” data with arbitrary numbers!

Try it yourself. You don’t even need paper — just explain the rules to some friends in your texting group and find out if you are actually under or overpaid! Just don’t kill the messenger.

(The mask example was inspired by this Twitter thread by @theemilyaccount)

Path: How Compounding Alters Return Distributions

Compounded returns experience “variance drain”. This idea captures the fact that typical result of compounded returns is lower than if you compute arithmetic returns even though the expected value is the same. We mostly care about compounded returns. This describes the situation in which your bet size or allocation is a fixed percent of your wealth, savings, or bankroll.

This is in contrast to keeping your bet size fixed (ie if you invested $10,000 in the stock market every year regardless of your wealth).

The distinction is critical because as humans we experience the path of our investments so we care about the distribution of returns in addition to the expected value.

Let’s back up for moment.

Recapping Intuition

  • What land are we in?
    • Compounding Land

      If you bet 1% of your wealth on a coin flip and win then lose, you are net down money. This is symmetrical. If you lose, then win, still down money.

      1.01 * .99 = .99 * 1.01

    • Additive Land

      In additive or non-compounding land we bet a fixed dollar amount regardless of wealth.

      So if I start with $100 and win a flip, then bet $1 again and lose the flip I’m back to $100. The obvious reason is the $1 I bet when my bankroll increased to $101 is less than 1% of my bankroll.

  • The order of win then lose, or lose then win leaves you in the same place in both worlds.

    The order does not matter if we are consistent about how we size the bet (so long as we are consistent to the style whether it’s fixed dollar or fixed percentage).

So is fixed percentage somehow “bad” in that it opens you up to volatility or variance “drag”? 

Well in the last example we used an alternating paths. Win then lose or vice versa. Let’s look at the case where instead of alternating wins and losses, we trend. Win-win or lose-lose.

  • In the additive case, we are either up 2% or down 2%
  • In the compounded case we are up 2.01% or down 1.99%

Wait a minute. In the compounded case, we are better off both ways! So the compounded case is not always worse.

The compounded case is better when we trend and worse when we “chop”.

If bet a fixed percent of our bankroll fair coin toss game we are in compound return land.

Compounding is not “bad”, it just alters the distribution of our terminal wealth

Your net compounded return in the coin-flipping game is negative more often than it’s positive, even though the game has zero expectancy.

So why is the median outcome negative?

It goes back to the trend vs the chop. Compounding likes trending and hates chopping as we saw earlier.

  •  Chopping happens more 𝐨𝐟𝐭𝐞𝐧 so you get a negative median
  • …but this is balanced by a larger trending bonus due to compounding.

Let’s illustrate.

2 Coin Flips

There’s 4 actual scenarios:

2u (trend)
1u, 1d (chop)
1d, 1u (chop)
2d (trend)

Zoom in on “compounding bonus/drag”:

Observations:

  • Chop and trend happen equally.
  • The magnitude of the boost/drag is also equal.

3 Coin Flips

There’s 8 total outcomes, but again order doesn’t matter. So there’s really just 4 outcomes.


The “chops” are bolded. They represent compounding “drag”

Note:

  • You drag 75% of the time!
  • The larger positive boost magnitudes make up for the frequency.

Now that you have the gist, let’s do 10 flips.

10 Coin Flips

  • 65% of the results are chop giving you compounding drag.
  • The times you trend though crush your performance if you only bet fixed dollar!

Visualizing “The Chop”

Let’s take a look visually at paths where N=10  to see the “chop”.

Pascal’s Triangle is a quick way to to get the coefficients of a binomial tree. The coefficients represent combinations which are weighted by the probabilities in the binomial expansion.

I enclosed the “chop” or drag paths

100 Coin Flips

  • The negative median now becomes very apparent in the “cumulative probability” column.
  • The chop occurs in 68% of paths. The median return is -.50% after 100 flips though the expectancy is still zero.
  • In additive world if you win 50 $1 bets and lose 50 $1 bets your p/l is zero.
  • In compounding world, where you bet 1% each time you are down 50 bps in that scenario.
  • The negative median associated with compounding is balanced by better outcomes in the extremes.

Both the maximum and minimum returns in simulations are better than the fixed bet case. This simulation by Justin Czyszczewski (thread) shows just how substantial the improvement is in those less probably trending cases:

Lessons From Compounding Coin Flips

  • Your overall expectancy is zero because the common chop balances the rare but heavily compounding trends.
  • Paths affect distribution of p/l even if they don’t affect expectancy.

Since we actually experience “path” and all its attendant emotions, it pays to think about the composition of expectancy and returns.

A Socratic Money Lesson For 2nd Graders

I’m sharing the money lesson I did with a pair of 2nd graders on my rotation day with the pod. No worksheets involved. I just used the Socratic method to ask questions and let them develop an understanding on their own.

The concepts:

  • hourly income
  • budgets

Techniques applied:

  • addition and multiplication
  • estimating
  • brainstorming

Materials needed:

  • Poker chips or play money
  • Pencil and paper (we actually used markers and small dry-erase boards)

Script

“Let’s suppose you make $25 per hour.

Pick something you want to buy so you have a savings goal.”

[In our example, they answered gumball machine, so I set the price at $1,000]

Question 1:  How long would it take you to save up for it?

What we are looking for in the answers:

    • How many hours it would take to save up $1,000?
    • How many hours you might work per week? (Expect bad estimates. I found myself asking them what time their parents go to and from work)
    • How the time it takes to save varies with how many hours a week you work.
    • Extend discussion to how much you would make in 1 year.

If you were a grown up you would need to pay for many things. These are known as necessities

Question 2:  Can you make a list of necessities?

What we are looking for in the answers:

We want them to identify categories. I had them create a list on their dry-erase boards. Here’s the ones we settled on:

      1. Food/Drink
      2. Shelter
      3. Transportation
      4. Clothes
      5. Utilities/Energy (including gas for the car)
      6. Hygiene(teeth, hair, soap)
      7. Entertainment/Fun
      8. Furniture/phone/computer (things you buy every few years…durable goods)
      9. Then savings!

Question 3: Create a monthly budget per category item.

What we are looking for in the answers:

In our lesson I had the kids estimate their monthly income and had them count out that much money worth of poker chips. You could use play money from Monopoly just as easily. I then had them estimate the amount of money they would need to spend on each category. They have now learned the concept of budget! Be ready to spend a lot of time here helping them walk through reasonable estimates. When one of the boys said $100 a month for food I explained that you could not even by 1 Happy Meal a day for that amount.

I had the kids stack of the appropriate amount of poker chips on each category.

It is interesting so see how much money the kids allocate to each category once reasonable ranges are established. These 2 boys had a big difference in their fun budgets!

Question 4: How long does it take to save up for that $1,000 gumball machine (or whatever they want to save for)?

What we are looking for in the answers:

Bound by the need to pay for necessities, the kids will discover that they can only make extra discretionary purchases if they amass enough savings. Compared to not having obligations, they should notice that it takes much longer to save up for that gumball machine.

Question 5: How can you get the gumball machine faster?

We want to establish the importance of this category. Adults understand it is a stock variable that changes with monthly flows. We want the kids to establish a link between savings and the things they want to buy. What can you do to save faster?

What we are looking for in the answers:

    1. Work more hours
    2. Spend less on budgeted items
    3. Earn more per hour

Going Further

This is where we stopped but next time this is my plan to continue.

Beyond Labor

This is where we will talk about creating a business. We had already started the discussion when the boys realized they could buy a gumball machine, stock it with candy, place it in Target and pay the machine off. Rinse and repeat. This got their little gears turning!

Here is some ideas I have for exploring:

Basic Accounting

  • Revenue
  • Fixed Costs
  • Variable Costs (COGs)
  • Profit

2 kinds of businesses: service and product

Service: Money-for-time businesses. For example a dentist or dogwalker or haircutter or coach. Earnings potential constrained by hours.

Product: Writing a book, or song (I want to talk about writing credit vs performing credit vs lyrics credit for songs. To make it fun I will look up some examples of a songs they like –Hamilton’s My Shot, Lil Nas X’s Old Town Road, or Bruno Mars’ Uptown Funk)

Brainstorming businesses

  •  Brain dump of business ideas
  • Labeling business examples as type 1 or type 2

Application: Lemonade Stand example

  • Working at a lemonade stand is hourly labor and similar to a service business.
  • Owning a lemonade stand is product business.

Demonstrating the difference in risk: the upside and downside of ownership

Contrast the p/l after an hour’s work at a lemonade stand for the worker vs the owner on a

      • Hot day [above expected revenue]
      • Cold day [below expected revenue]
      • An AQI 500 day where people stay indoors (hey these are CA kids!) [no revenue]

EVH Forever

Friends,

In February 1978, a neutron-bomb of a debut album was dropped on American soil. An album that sounds “like it has no fathers”. That album’s side 1 sent a soundwave rippling thru speakers thousands of miles away from its epicenter in Los Angeles.

The first 4 songs in order:

“Runnin’ With The Devil”
“Eruption”
“You Really Got Me”
“Ain’t Talkin’ Bout Love”

A more recent reviewer described the album best:

…Like all great originals it doesn’t seem to belong to the past and it still sounds like little else, despite generations of copycats.

This past week, the world lost the inspiration for those copycats. Eddie Van Halen died at age 65, 20 years after his first cancer diagnosis.

The Mad Scientist

Every guitar teacher I’ve had in my life that was older than me can recount the many hours after school they spent in their bedrooms rewinding VH albums to figure out that sound. Eddie represents the limits of what’s possible when you don’t believe in limits. His modded guitar, Frankenstrat, was a classic Gibson cross-pollinated with Fender parts including a new tremolo system designed to stay in tune with those swooning divebombs.

In the hook of the Atlantic’s tribute, The Mad Genius Of Eddie Van Halen, James Parker writes:

He boiled strings, cut vibrato bars in half, put the head of one guitar on the body of another—and created a sound that changed rock forever.

In 2015, Eddie himself penned a piece for Popular Mechanics going into his inventions and patents. In a relatively recent interview with Joe Rogan, David Lee Roth discussed Eddie’s innovations in recording. It’s common for guitarists to compose their solos before recording. But in the late 70s, with the emergence of multi-track recording being cheaper and easier Eddie would improvise 5 or 6 takes. And just as he built his guitar from parts, he would mix and match segments of the recording to splice together the solo that would make the album. Afterwards he would  go back and learn how to play these frankensolos jumping wildly up and down the neck where the tracks were fused together.

Over the years, EVH’s distinct voice has been emulated and even carries a nickname. The “brown” sound. In recent interviews he has clarified that when he referred to Van Halen’s “brown” sound in a 1985 interview, he was actually referring to the organic, lumber-like pitch of his brother Alex’s snare drum. Not his guitar sound. Despite the clarification, the “brown sound” has been entrenched as a reference to Eddie’s tone.

Still, all the technical details wouldn’t amount to anything if it was just an obsession of guitar nerds in their basements, digging rabbit holes to depths reserved for lonely gear heads and maybe sommeliers. In the hands of its maestro, the wood, string, and circuits assume unprecedented possibility, just as “brown”, came to mean more than its uttered intention.

Parker again:

His noises, his phrases, came rainbowing out of an electric abyss: something out of nothing, creativity at its origin… his most idiosyncratic zoomings arose, blissfully, playfully, from the void. That’s how it feels to listen to Eddie Van Halen.

Speed

Eddie played fast. He inspired generations of shredders. He lived fast. He had a penchant for Lambos. In fact, he and and Sammy Hagar shared the same mechanic, who fatefully connected them after the band parted ways with Diamond Dave. He married rising star Valerie Bertinelli, a paragon of 80s cuteness, and still didn’t slow down a step. Even in the past 20 years, while fighting many battles on the health front, he has managed to tour (his son Wolfie took over bass duties for much of the last decade, combining with Alex Van Halen on drums, redefining the upper-bound of what it means to be a “family band”).

Eddie was turbocharged. If you believe we are each endowed with a set number of RPMs per lifetime, then Eddie might have lived to a 120 if you consider how high he revved in his 65 years.

Pagesix:

“He spent his whole life as a rock star and had never been anything but that,” Martin Popoff, author of “Unchained: A Van Halen User Manual,” told The Post. “Since his young teens in Pasadena, he was lauded as a star.” “A famous story Eddie told about his acclimation to alcohol was that [as a kid] he got bit on the hand by a German shepherd and was bleeding. His father gave him a cigarette and a shot of vodka and told him he would be fine.”

Eddie preferred to write songs on keys before transposing to guitar. When it came to music he was in control. A genius redefining his craft. But when I read bits of his story, I have a hanging sense that he was not quite in control of himself. That his hands could never be idle. It is not his fortune but ours that the gods placed an electric guitar in those hands.

The Links

I had planned to write about something else this week, but it’s been a EVH Youtube and tribute merry-go-round for me for a few days. Here are some of my favorite finds.

Articles

  • The Mad Genius Of Eddie Van Halen (The Atlantic)
    James Parker
  • The Astonishing Techniques That Made EVH A Guitar God (NPR)
    Steve Waksman

    Here are five songs where we can hear that balance in full bloom…they represent something of the breadth of his musicianship and cumulatively paint a portrait of Eddie as a guitarist who dwelled in multiple dimensions.

    Includes song commentaries accompanied by videos.

  • How Eddie Van Halen Hacks A Guitar (Popular Mechanics)
    Eddie Van Halen

    The nitty-gritty including patents. Why am I not surprised he electrocuted himself? (Interestingly, he also ran his circuits so hot in the recording of the solo for Michael Jackson’s Beat It, that the monitor in the control room caught fire.)

  • How EVH Corrupted -Then Saved – Valerie Bertinelli (Pagesix)
    Michael Kaplan

    Rockstar stories are cliché but Eddie’s life was the prototype. A backstage look at the virtuoso’s fast life.

Video Clips

  • Sitting in with Paul Shaffer’s Band (YouTube)
    The Late Show with David Letterman

    All the segments of EVH playing outros to commercials in a 1985 episode of Letterman when the show recorded in LA. It’s fun to see Eddie’s playful side in a non-concert performance setting.

  • Tribute (Youtube)
    Howard Stern

    Howard reminisces about Eddie and does a nice job highlighting what makes him special. He has a guitar-playing superfan break down Eddie’s style and explain why its familiar sounds are so distinctly his.

  • A Party at Eddie’s house (YouTube)
    Home Footage

    This was one of my favorite videos despite it’s choppy quality. Eddie’s raw joy and energy playing a big party in the backyard of his LA mansion. How do you get invited to stuff like this?!

  • Isolated guitar track for Panama (Youtube)

    Just Eddie. No drums, keys, or bass.

  • Ain’t Talkin Bout Love reaction (YouTube)
    Lost In Vegas channel

    Ryan and George share the joy of hearing Van Halen for the first time. I always find it fun to watch somebody else appreciate and breakdown a great song. See if this one makes their “staylist”. (I plug these guys all the time because their breakdowns are a fun way to discover new music or find angles to appreciate songs you already dig.)

RIP

On the day the news broke, Valerie Bertinelli’s message on Instagram:

40 years ago my life changed forever when I met you. You gave me the one true light in my life, our son, Wolfgang.

Through all your challenging treatments for lung cancer, you kept your gorgeous spirit and that impish grin. I’m so grateful Wolfie and I were able to hold you in your last moments.

I will see you in our next life my love.

Oh that impish grin. The devil smiles whenever a 12-year old makes a guitar squeal through a hot amp for the first time. Rock in peace, Eddie.

My Favorite Takeaways From Derek Sivers On The Knowledge Project

Link: https://fs.blog/knowledge-project/derek-sivers/

Notes: https://podcastnotes.org/knowledge-project/derek-sivers-on-the-knowledge-project-with-shane-parrish/

About Derek: Musician, speaker, writer and entrepreneur



Allocating Time

  1. Hell Yeah rule: If an activity doesn’t feel like a hell yeah for you, then don’t take it.

(However, don’t use the Hell Yes rule when you’re just starting out in your career. In the beginning, try to say yes to every opportunity.)

  1. “Strategically, it’s better to do 5 bigs things with your life instead of 500 half-assed things”.

    Me: I’ve seen this advice from Josh Waitzkin and Marc Andreesen as well

  2. On curation and deciding what to read:

A lot of books are much longer than they need to be. Derek doesn’t want to read a 400-page book about diet, he wants to read one page on what to eat and what to avoid.

“If you trust the source, you don’t need all of the supporting evidence”

Me: This is a case I’ve made for curating your info sources carefully. Being thoughtful about your inputs takes effort but saves you time in the long run. This is the idea behind my post Build Your Own Cabinet

Delegation

“You know you’re a true business owner when you could leave your business for a year and come back a year later and find that it’s doing better than when you left. That’s when you’re no longer self-employed, you’re a business owner.”

The short term pain of training and delegating is acceptable if you take the long view.

Me: This is a critical point if you ever want to sell your business at a multiple. It’s a strategy that complements what potential acquisition funds look for. For example Brent Beshore’s Permanent Equity fund lists “Healthy Layer of Non-owner Management” as a one of its investment criteria.

Ideas Without Execution Are Dime A Dozen

Ideas multiplied by execution will tell you how much a company is worth.

Motivating Employees

Let employees own projects

When you offer small tweaks or suggestions to an employee who is taking initiative on an idea or project you steal some of their thunder. They lose a sense of ownership. The resultant loss of motivation is always larger than the value of the tweak. Resist the urge to make a suggestion.

A convenient development is the project usually ends up incorporating your suggestion organically as the work starts getting done and the direction becomes more clear.

Derek Has A Pragmatic, Even Post-Modern Approach To Life

“Whatever makes you take the necessary actions is the perspective that helps you. I’m never aiming for reality. I’m trying to make decisions usually based on finding the perspective that helps me take actions.”

Thinking From First Principles Is Thinking For Yourself

“To me, the world feels unnecessarily ceremonial, like people imitate others without questioning it enough, but I don’t want to learn their ways. I don’t want to be like them”

Me: I’m a big believer in the wisdom of markets, the wisdom of Lindy and that which has endured, and the value of thinking by analogy. But I think this type of thinking makes the most sense when it comes to tactics and strategy. But when it comes to choosing what you want to do with your time on Earth this is an obvious place to think from first principles. Don’t live someone else’s script.

An example of why I think this is my own experience with education where I generalized too much from the school environment to the life environment. I wrote about that in We Don’t Need No Education

The Inverted Recipe For Happiness

Inspired by Charlie Munger’s adulation of mathematician Carl Jacobi’s advice “invert, always invert”, Derek has a list called:

How To Stop Being Rich & Happy

1) Prioritize lifestyle design

Make all your dreams come true and follow your immediate gratification

2) Chase that comparison moment

Always buy that the new thing

3) Buy, not rent

Buy the house, boat, etc.

4) Internalize your new status

Celebrate your new status and relax

5) Be a connoisseur

Insist on only having the finest foods, drinks, etc.

6) Get to know your possessions

Spend more time learning about more possessions and getting them just right

7) Acclimatize to comfort

Eliminate all discomfort and blame others when life seems hard

Ideology Sounds Like Idiocy

Trump is not a white supremacist.


It’s not a political tweet. It’s just my read of a guy who lacks ideology and principles. If I lost some of you with that, here’s where I lose the rest of you  — his lack of ideology and principles is only half bad.

Lacking principles is self-indicting. It’s metaphorically not having a backbone. Literal invertebrates. A super-category of such special distinction it had its own unit in 7th grade life science. What about the importance of ideology? In the Big Lebowski, the first time we sense fear in war vet Walter Sobchak is when he learns his pursuers are nihilists. His sighs a sullen acceptance of the nature of the enemy: “Say what you want about the tenets of national socialism — at least it’s an ethos”.

But should we really prefer bad beliefs to no beliefs?

When Ideology Equals Idiocy

This week has been a supermoon high tide for opinions in the Twitter ocean. With so many takes tossed around, you will inevitably wonder “how does such a smart person have such a bad take?” One of the reasons is ideology. Ideology is a powerful force. If you needed to gain control of a smarter adversary, the Lex Luthor move would be to inoculate them with a worldview that was so coherent it could not withstand logical collisions. A view so monolithic that its preservation becomes the ends in itself. A wholesale substitution of a tidy narrative for the messiness of reality.

You’re a step ahead of me I can tell. “If these ideologues so smart, how would you inoculate them in the first place?” My guess is you ensnare them at their most impressionable ages. High school or college. But this is just a guess. There is actually a more critical dimension than the initial inoculation. It’s the ultimate judo — the person’s own intellect will internalize the ideology, cementing it with the mortar of superior rationalization skills.

In Poor Charlie’s Almanac, Munger gives a concrete example of how ideology can skew your conclusions. Here’s an excerpt via Allen Cheng’s notes:

[Munger talking about how Noam Chomsky can’t admit that language is built into our genome]

”Stephen Pinker can’t understand why Chomsky—who, again, is such a genius—takes the position that the jury’s still out about why this ability is in the human genome. Pinker, in effect, says: “Like hell, the jury is still out! The language instinct got into humans in exactly the same way that everything else got there—through Darwinian natural selection.” Well, the junior professor is clearly right—and Chomsky’s hesitation is a little daft. But if the junior professor and I are right, how has a genius like Chomsky made an obvious misjudgment? The answer’s quite clear to me—Chomsky is passionately ideological. He is an extreme egalitarian leftist who happens to be a genius. And he’s so smart that he realized that if he concedes this particular Darwinian point, the implications threaten his leftist ideology. So he naturally has his conclusion affected by his ideological bias.”

“Ideology does some strange things and distorts cognition terribly. If you get a lot of heavy ideology young—and then you start expressing it—you are really locking your brain into a very unfortunate pattern. And you are going to distort your general cognition. You can have heavy ideology in favor of accuracy, diligence, and objectivity. But a heavy ideology that makes you absolutely sure that the minimum wage should be raised or that it shouldn’t—and it’s kind of a holy construct where you know you’re right—makes you a bit nuts.” 

Meta-Ideology

There’s a battle playing out in real-time over the role of ideology in the first place. Consider the contention that “silence is complicity”. These days it is best associated with BLM, and forcefully pushed by Ibram X. Kendi who sorts people into 2 categories: racist and anti-racist. You are either for or against us. I have not read his books but even the most charitable version of the sentiment threatens to re-frame every issue into a race one. And if my hesitation to accept such an ideology is cast as evidence of my “white privilege” (although I’m told I’m brown) then I’m feeling a bit cornered. So in a twist of irony, a movement fueled by injustice is now backing me into a corner. But I prefer a more forgiving interpretation. I think this is well-founded activism that is too high on ideological blue meth. If the right is having magical thoughts, the left is addicted to ideological overreach.

Andrew Sullivan captures the idea in Is There Still Room For Debate?:

Liberalism is not just a set of rules. There’s a spirit to it. A spirit that believes that there are whole spheres of human life that lie beyond ideology — friendship, art, love, sex, scholarship, family. A spirit that seeks not to impose orthodoxy but to open up the possibilities of the human mind and soul. A spirit that seeks moral clarity but understands that this is very hard, that life and history are complex, and it is this complexity that a truly liberal society seeks to understand if it wants to advance. It is a spirit that deals with an argument — and not a person — and that counters that argument with logic, not abuse. It’s a spirit that allows for various ideas to clash and evolve, and treats citizens as equal, regardless of their race, rather than insisting on equity for designated racial groups. It’s a spirit that delights sometimes in being wrong because it offers an opportunity to figure out what’s right. And it’s generous, humorous, and graceful in its love of argument and debate. It gives you space to think and reflect and deliberate.

I strongly recommend the whole article (Link) (With my highlights)

Ideology In The Workplace

The role of corporations and their duty to stakeholders and society is an enormous topic replete with scholarly nuance. Notions of corporate responsibility span a wide gamut, but it’s only a matter of size before a company is caught up in politics. Michael Jordan was contrasted to Muhammad Ali for abstaining from politics and social commentary. He didn’t want to alienate customers — everybody wears sneakers and drinks Gatorade. This stance is criticized today where celebs are looked upon as role models more than ever. Corporations face the same questions. Nike, Chik-Fil-A, Twitter can all be oriented on liberal/conservative poles. But political fatigue has opened the door for recruiters to target talent who specifically seek to maintain separation of work and state.

Byrne Hobart discusses this in his paid letter:

Brian Armstrong of Coinbase has issued his apolitical manifesto. The gist: Coinbase is a company with a specific, limited mission. At most companies, in most parts of the world, in most recent years, the only thing strange about this post would be the need to say it, but Silicon Valley has converged on a different set of corporate culture norms, in which national politics plays a role in who companies work with, what they launch, and what they say publicly.

It’s the nature of politics that being openly apolitical is itself a political statement; to someone who has taken a side, vocal neutrality means taking the other side. But the post illustrates something about the Silicon Valley job market. Most people are not especially political, in the sense that they have beliefs but don’t structure their lives around those beliefs. These people are a big percentage of the electorate but a tiny percentage of public discussion, so it’s easy to round their presence down to zero. Coinbase’s executives could hold their no-politics-at-the-office conviction quietly, but there’s a business case for advertising it: they want to recruit from the set of tech company employees who are uncomfortable with how much politics has become a part of the culture at these companies. It’s not a coincidence that this piece ends with a link to Coinbase’s careers page.

Byrne makes an astute observation on what it can mean for organizations who define their objectives within a wider social/political context:

A common dynamic in companies and communities is the “social evaporative cooling” effect, where anyone uncomfortable with the range of the Overton Window is more likely to leave, which shifts the Overton Window away from what those departing people believed.

The “evaporative cooling” idea is trippy. Employees matching with employers based on political beliefs. As if job-hunting wasn’t hard enough, it’s possible some places will expect you to have an opinion on everything (straight talk here — the thought of people having opinions on everything makes me cringe).

No Ideology As A Principle

My layperson distinction between principles and ideology is that principles are irreducible. Honesty is a principle. Ideology is something you build with it. Principles can be used as a guide to build many things. Capitalism and socialism can both be the result of honest inquiry. Interpretation and sense-making are not objective processes so there is no 1-to-1 mapping of principles to ideology. That’s why scientists who all subscribe to the same methods can disagree. Uranium is a basic element, like analogous to a basic principle. Uranium can used for nuclear energy. Or to enrich to bomb-grade material.

Principles are pure, while ideologies are the sum of complex logic chains. Each link multiplies the chance that the entirety of the chain is faulty. Unlike a principle, these are not hills to die on. There’s too many ways to be wrong. The problem really comes when the ideology takes on a life of its own. Religious adherence removes the space for nuance. What if I agree with the spirit or basis of a movement but not the methods. Am I expected to have an opinion without putting in the work? If so, who decides what topics this is true for?

When you accept an ideology you are selling puts on future hypocrisy. Ideology is a bad deal not because changing your mind is bad, but for the opposite reason — being able to change your mind is good. And ideology will make it that much harder. It’s a strait jacket. Eschewing ideology admits that the devil is always in the details.

Ideological Tribes

Anyone passing judgement on your moral standing on such a low resolution rule as “if you’re not with us you’re against us” has undermined the binding of that judgement in the first place. “You are either for or against” is an express train to dehumanization. Look up Godwin’s law to see where the last stop on that train is.

I’ll leave with an excerpt from Sullivan who wraps with a quote from JFK:

“We are not afraid to entrust the American people with unpleasant facts, foreign ideas, alien philosophies, and competitive values. For a nation that is afraid to let its people judge the truth and falsehood in an open market is a nation that is afraid of its people.”

Let’s keep that market open. Let’s not be intimidated by those who want it closed.

Pink Floyd and Slash

I wandered into Amazon Prime video on Friday night. I ended up watching a documentary The Making of Dark Side of The Moon. They explicitly made an observation that I have told people myself — you can definitively bisect Pink Floyd’s discography at the Meddle album. Specifically right before the last song, Echoes, a 20 minute opus that would set the stage for the most epic run of album per unit of time in history:

1973: Dark Side
1975: Wish You Were Here
1977: Animals
1979: The Wall

Echoes was a preview of Dark Side and really dialed in so much of what they hinted at in their prior albums and especially in the movie scores and soundscapes they crafted.

They are such a compelling band not just for what they created but the arc of their career and how it lined up with the music they created. You can practically feel the band’s mindset as you travel through the discography and hear them evolve. I’ve toyed with doing a write-up based on the various docs I’ve watched and my own joy of the music but I can see it just being a long Twitter thread if the inspiration holds long enough above my personal activation threshold.

If you are a fan then this doc, Momentary Lapses, is worth your time.


Friday, I also watched the Amazon original Slash: Raised On The Sunset StripI’ve read plenty of books about GnR including Slash’s biography. He was raised in Laurel Canyon in the 1960s and his parents were both creative designers. The young Saul Hudson was regularly in the company of folks like David Bowie, David Geffen, and many music artists you’d all recognize. I’ve previously mentioned the Echo In The Canyon doc which accompanies this Slash one well, as it is set in the 60s and 70s while the Slash doc takes the baton into the 80s and beyond. The cameos in the Slash doc are fun with the Dave Grohl one being especially interesting for anyone familiar with Axl Rose’s run-in with Kurt Cobain at the 1992 VMAs.

If you have any interest in this stuff you can get some leads in some of my prior posts:

The Sunset Strip Pilgrimage (Link)

Movies For Your 60s Nostalgia Fix (Link)

Making Property Taxes Apples to Apples

You will be working from home more often. Not all of you but many of you. That means browser tabs devoted to Zillow searches in Austin, Nashville, Vegas, Denver, and Miami. Geo-arbitrage won’t be as dramatic as software devs had hoped since the big companies will cut your pay when you leave, but in some of these places you could sustain a 20% pay cut and still be better off (at least if you’re leaving SF).

One of the biggest inputs into cost-of-living comparisons are so-called SALT (state and local) taxes. Since 2018, SALT deductions are limited to $10,000. They were previously uncapped. This has created even larger disparities in cost-of-living between states. CA, IL, NJ, and NY have income taxes that get a bit handsy with their residents.

Beyond state income taxes, one needs to consider property taxes for a more complete picture. Texans enjoy zero state income tax but hefty property taxes. NJ residents are assaulted from both ends — above average state income taxes and punitive property taxes. How about CA? The state income tax, gas tax and the cost of renewing a vehicle registration are nothing short of sunny weather ransoms.

But what about CA property taxes? The answer to this is sneaky and can be used to understand the impact of property taxes in general. But I’d go further and say that if you have not walked through the math the way we are about to, then you may be walking around with some very mistaken impressions about the cost of housing.

Property Taxes: Apples to Apples

The effect of property taxes depends on 2 core variables. The property tax rate and the assessed value. If you are weighing a house in CA to a house in NJ you want to make an apples-to-apples comparison. How do you do that when the rates are different and the methods of assessing value are different?

Let’s isolate each effect.

[Obviously the cost to buy a home has many factors that can mostly be tucked under the headings of supply and demand. Yet the effect of property taxes is significant so it’s worth isolating. It’s also worth noting that since a primary residence is most people’s largest asset, a property tax is a defacto, albeit incomplete, wealth tax. Economically it’s passed-thru to renters so it hits everyone]

Assessed Value Effect

Property taxes are waged on assessed value. In NJ, assessed value resets whenever a home trades. So if you buy a $1,000,000 home and the property tax rate is 1% you owe $10,000 per year in property tax. As the estimated market value of your home changes, your assessed value changes. So if your market value jumps 15% in one year you can expect a big increase in your tax bill. It may lag the full market return but the idea is the assessed value tracks the value of the home. Downturns in prices require homeowners to plead their case that the home’s value has declined if they want relief on their taxes.

Like NJ, CA assessed value resets to the purchase price after a transaction. But then CA diverges from other states. A month before I was born, in June 1978, CA passed Prop 13, a ballot proposition that has created distortions in wealth that few could have foreseen. Prop 13 froze assessed values at 1976 levels for homes which have not since traded. It also limits increases in assessed value to a cap of 2% per year.

Combined with a NIMBY attitude to permitting new construction, CA features a lopsided sight to behold — multi-million dollar homes with single-digit thousand tax bills. Nice for those owners but not socially desirable.

Consider:

  • The flipside of having seniors be able to stay in their homes is that it limits worker mobility by poorly allocating big homes to people who don’t need them. It basically keeps rooms off the market. If you are a senior citizen on a fixed income you are not going to sell the home you’ve outgrown to buy a condo with much higher property tax than the big house you leave behind. And that’s after you pay a huge cap gains bill.
  • Prop 13 starves the state of tax revenue that needs to come from somewhere. So the state income tax can be seen as a wealth transfer from young, working Californians to older, entrenched Californians.

In a state that has seen generational wealth built on a loop of buying real estate, and cash-out refis it’s easy to see how Prop 13 has contributed to the party. Let’s pretend you buy a home in CA and NJ.

Assume:

  • Each home costs $1,000,000
  • Each has a property tax of 2.5%. We are isolating the assessed value effect so need to hold the tax rate constant.
  • Each home has a real (inflation-adjusted) return of 2% per year.
  • The only difference is the CA home is assessed only when you buy it, but the NJ home is assessed each year.

The CA home’s IRR will be .14% after-tax while the NJ home’s IRR is -.52%. The CA home outperformed the NJ home by .66% per year over 30 years. On a $1mm home that’s over $275,000 simply because the NJ home is re-assessed every year.

It gets crazier. The effect actually explodes with higher appreciation rates. If we double the appreciation rate to 4% per year, the CA homes nets you $700,000 more than the NJ home. Remember that the tax rates are the same! We are just isolating the impact of fixing the assessed value at the purchase price.

The main takeaway is Prop 13 is a call option on inflation. Your home is much less of an inflation hedge than you think if its assessed value increases in-step with the market value.

[This year Prop 15 is on the CA ballot. Prop 15 would repeal Prop 13 for commercial properties only. Based on the examples above, it’s obviously something RE investors are highly concerned about.]

Rate Effect

What if you wanted to compare the price of homes in 2 places with different property tax rates? Let’s pretend CA no longer had Prop 13. Like NJ, it’s property taxes were re-assessed annually. This allows us to simply isolate the impact of differing tax rates.

Let’s assume:

  • Each home costs $1,000,000
  • CA tax rate is 1%
  • NJ tax rate is 2.5%.
  • The homes do not appreciate over 30 years (just to keep it simple)

Let’s explore 2 methods of comparison:

The Mortgage Method

If the homes do not appreciate then their assessed value remains fixed at $1mm. This makes it easy — the CA home owes $10,000/yr in taxes and the NJ home owes $25,000. On a monthly basis, the NJ home costs an extra $1,250. If mortgage rates are 3% we can find that a $300,000 30-year mortgage corresponds to a $1,250 monthly payment. So we can say that a $1mm house in CA costs the same as a $700,000 house in NJ since the $700,000 plus an additional $300,000 mortgage would equate to the cost of the CA home.

The IRR Method

The IRR on your home’s value will approximately differ by the spread in the tax rates. In the table below, we see that the CA home returns 1.44% more (close to 1.50%) over 30 years. If we use an inflation rate of 3% to keep consistent with what I chose as a mortgage rate, we find that the NJ home costs you $300,000 more over the 30 year holding period than the CA home, matching the result from the mortgage method.

Combining Effects

To compare the price of a home in CA to a home in NJ you need to account for both the difference in property taxes and how assessed values are treated. Let’s combine the results in one model with more realistic numbers:

  • A 4% annual home appreciation in both markets
  • A 2% inflation rate
  • CA tax rate is 1%
  • NJ tax rate is 2.5%
  • CA assessed values do not increase, NJ is re-assessed annually

CA, due to Prop 13 and a lower property tax rate, has an almost 2% edge in annual return (3.29% vs 1.34%). Since these are nominal returns and inflation is 2% per year we see that the NJ home end up actually losing value in real terms. The fact that the home is re-assessed every year means that even though the home’s value is growing faster than inflation the taxes are also growing very quickly.

I don’t want to have you miss the point — these CA and NJ homes were assumed to grow at the same rate of 4% per year and yet the CA home earned you an extra $900k in present value vs the NJ home. This is strictly due to lower property taxes and Prop 13.

We know that home appreciation in CA has been faster than NJ (my family considered moving to CA in late 70s, early 80s so we are very sensitive to the comparison). The difference in property tax policies has a staggering delta in terminal wealth when applied to CA real estate boom over the past 50 years.

Wrapping Up

Having grown up in NJ and now lived in CA, I have noticed a massive divide in how people have earned their money and wealth. You cannot live here and not notice the wealth built in real estate and not think about how policy has enabled it. When you start comparing apples-to-apples, the headline prices of CA homes are not as relatively expensive as they appear. Don’t hate on Californians though. Those SALT taxes are still burying all of us who still work for a living.

In sum:

  • Prop 13 allows homes to be a call option on home appreciation/inflation
  • High property taxes on homes that are re-assessed require rapid appreciation to not render the home ‘dead money’
  • Compare homes with different property taxes by amortizing the difference in monthly payments into a mortgage

Sending a thanks to @econompic who I discussed these topics with. As another NJ to East Bay transplant he has given these ideas plenty of thought as well. And on the math side, he gave me the idea to use IRRs instead of CAGRs. CAGRs are simpler because they are compounded returns which require no more than a start value, ending value, and time period. They are commonly used when calculating a return for a stock or fund that you buy and hold.

In this case, IRRs or NPVs are preferable since there are many cashflows.

Resisting Arguments and Magical Thinking

Last week we explored how we form beliefs. The main takeaways were:

  • we adopt ideas before we reason about them
  • most of our beliefs are derived from others

There is nothing inherently wrong with these mechanisms. They are adaptive. The problem arises when our standards for adopting a belief are poorly matched to how we apply a belief. If that sounds abstract, don’t worry, I am going to tackle it in an upcoming letter. For now, just realize that we form beliefs the way we do for economical reasons, but that efficiency can mask deep pitfalls.

This week we will see how beliefs stay so firmly lodged. I have bad news. This also happens for sound reasons which is unfortunate when the beliefs are wrong and counterproductive (some wrong beliefs are totally benign…like thinking seahorses are mythical).

Let’s explore 2 ways in which we adhere to false beliefs, why they should be forgiven, and what the remedy is.
Failure mode #1: Not Letting New Information In

We all know about confirmation bias. It is our nature to reject contrary evidence. We prefer to protect our egos. We are “cognitive misers” so we like to avoid inconvenient information because thinking hard consumes calories. News flash: humans are insecure and lazy.

  • Why should we forgive this failure?

    Here’s a more charitable reason for why we shoot down foreign concepts. Scott Alexander calls it “epistemic learned helplessness”.

    He writes:

    A friend recently complained about how many people lack the basic skill of believing arguments. That is, if you have a valid argument for something, then you should accept the conclusion…And I nodded my head, because it sounded reasonable enough, and it wasn’t until a few hours later that I thought about it again and went “Wait, no, that would be a terrible idea.”

    He goes on to explain that people’s dominant strategy is to ignore many smart-sounding arguments. You will recognize his hair-pulling examples of nodding along with clever reasoning, be swayed 180 degrees by equally clever rebuttals, only to come back to agreeing with the original argument ashamed to have doubted it in the first place (Link with my highlights)

    Without this helplessness, most people’s lives would turn into a silver pinball ricocheting at the flippers of copywriters and TED talk sophists.

  • The remedy

    Get smarter. That’s kind of it. Hopefully reading Moontower helps, I don’t know what else to say.

    Slatestar continues:

    I’m also glad epistemic learned helplessness exists. It seems like a pretty useful social safety valve most of the time…you have to be really smart in order for taking ideas seriously not to be immediately disastrous. You have to be really smart not to have been talked into enough terrible arguments to develop epistemic learned helplessness.

Failure mode #2. Doubling Down On Wrong Beliefs

This is what is journalistically referred to as “mental gymnastics”. Look around and you will see people so limber they are suspended in a floating Siddhasana pose channeling Dhalsim. Which is convenient, since this is the best posture for indulging “magical thinking”. This failure mode is embodied by a runaway uncritical acceptance of confirming information.

This video is about 45 minutes but it’s a wild trip into who, why and how of magical thinking in the US today. It’s well-edited, moves fast, and leaves quite an impression. (Link)

 

  • Why should we forgive this failure?

    Magical thinking is double-edged. It is only through the power of beliefs, often false beliefs, that we can fight through utter despair and hopelessness. “There’s no atheists in foxholes”. Or if you prefer the more secular Lucasfilms interpretation, “Never tell me the odds”.

    My favorite example of this is what Tali Sharot calls optimism bias. It’s an adaptive use of magical thinking that seems integral to our collective progress. It’s not possible or desirable to wish magical thinking away altogether.

  • The remedy

    I’m not going to make any friends saying this but here it goes. Logic and rationality are reasonable antidotes to magical thinking — but only if the subject is relatively young. I need to believe teens can be saved and hopefully people in their 20s, maybe even 30s. But, if epistemic learned helplessness is so cemented in a subject that has went down the QAnon rabbit hole, then logic is not going to cut it. Just remember this Jordan Ellenburg quote:

    “If you do happen to find yourself partially believing a crazy theory, don’t worry — probably the evidence you encounter will be inconsistent with it, driving down your degree of belief in the craziness until your beliefs come in line with everyone else’s. Unless that is, the crazy theory is designed to survive the winnowing process. That’s how conspiracy theories work.”

    Look, a person inoculated against sound reasoning is a tough customer for conversion. Some people will believe reason never did them any good, and trying to convince them otherwise without invoking logic is like trying to describe “green” to a blind person.

    So if logic is futile, how do we combat magical thinking?

    We recognize that magical thinking is a natural response to desperation. The prevalence of magical thinking is an irregular pulse of a patient’s vitals. If it’s quickening, the patient is scared. The answer is to address the underlying causes of the fear.

    It’s a cop-out answer to say fix the world and magical thinking will decline. But if you think magical thinkers are ready to hear why they’re wrong then you never tried to reason with a hungry bear. Your choices are to either stop hunting the bear’s food or adopt the prepper’s mindset — you don’t need to outrun the bear, just someone else.

Recap

We cling to false beliefs by:

  • resisting arguments. This is often a valid defense. But even white blood cells make mistakes.
  • diving into comforting or confirming fantasies. Pressure thins the line between being stupid and coping. Address the source of distress not the fantasy.

If interested in more on beliefs and illusion see my post Illusions, Empathy, and The Hackability of Perception (Link)


Here are a few Twitter threads pointing to signs and causes of desperation:

  • Let’s play a game. in one tweet only (no threading or linking!) how would you describe the crux of the problem of American society in 2020? (thread by @danlistensto)
  • Here’s a sign of the state of the US that doesn’t seem to be getting covered much: The country is sold out of handgun ammo. Every website is sold out, the ranges in Austin are sold out, a guy at Cabela’s said each restocking shipment sells out in < 1 hour. Absolutely wild. (thread by @nateliason)
  • Majority (now 52%) of 18-29 year olds living with their parent(s). (chart via @ROIChristie)
  • Interesting and somewhat disturbing. The % of people earning more than their parents has collapsed. (chart via @jsblokland)

Adopting Beliefs

If Trump was gung-ho about masks would masks have been politicized?

The more you think about that question the more uncomfortable you become.

I have questions.

  • Would liberals have been the mask-deniers?
  • Would pro-mask research from the science community be suppressed from the left?
  • Would pro-mask research from the generally left-leaning science community actually be boosted from the right?
  • What arguments in favor of masks would a Trump base promote if they were not rooted in science?

These questions are unsettling because one wouldn’t think masks would become political. Do you think it’s possible that the red and blue positions could have been exactly flipped based on Trump’s mood towards masks (I know it’s hard to imagine him embracing masks but what if he saw them as the key to business as usual, or if you are more cynical, if he happened to have a stake in the world’s largest N95 manufacturer)?

Is there a limit to “my enemy’s enemy is my friend” logic?

I hate to be a pessimist, but the answer is no. The mind can rationalize anything. Every historical human atrocity had a wave of support. Support from ordinary people who were once innocent children. Blank slates.

Let’s see how. I have broken this into 2 parts as I’m trying to keep these letters compact.

Part I: How We Adopt Beliefs

1. Belief precedes reasoning

The mind doesn’t see facts then build beliefs on top of them. It starts with beliefs then finds facts to support them. This is hard-wired. Kids believe in Santa based on trust. Then around age 7 their ability to reason takes a big leap forward and the fantasy melts away from the heat of logic. The Santa story has too many holes in it to believe.

Yet, we have flat-earthers.

This is instructive. Survival doesn’t depend on accurate abstract logic (although luxuries like circumnavigating the world does). Survival just depends on accurate beliefs about sensory perception. Fire burns. Falling hurts. These beliefs don’t rely on knowing the reasons. This is merciful. Reasons are not our strong suit.

Annie Duke on the dangers of holding beliefs before we vet them:

  1. We often fail to later vet the ideas we are wandering around with in our heads.
  2. If we do vet, we are biased. This leads to what Kahneman called “motivated reasoning”. Examples:
    • Confirmation bias. You know, ignoring evidence that doesn’t fit. Finding patterns in randomness. Ouija.
    • Blindspots. Often willful.
    • Smart people being often more extreme in their biases because they rationalize with greater repertoire.

So the main takeaway:

Out of the box, we really have no trouble believing things without logic. If someone tells us it’s important to have reasons to support our opinions, we come fully-equipped to mine for them after the fact. Or simply make them up.

2. We outsource opinions

We start our lives by downloading our parents’ beliefs. They are the tribe we are dealt. As we get older, we make friends. They are the tribe we choose. They are like us and make us feel good. If we are so alike, then it follows that what’s good for them is good for us. What a great shortcut. Instead of researching every opinion or decision a citizen needs to make, we can just let the “you might also like” recommendation algo choose for us.

I sound sarcastic but it is reasonable to outsource decisions to your tribe. You cannot be an expert in everything. Modernity is too specialized and complex. I’ve written in Build Your Own Cabinet about how you need to do this thoughtfully.

Whether or not we do it competently, we cannot help but borrow views from others. But if we cling to those views strongly it’s not because we expended great effort to acquire them. The stickiness of a view is more correlated with the order in which it arrived than the rigor it endured on its way over.

In sum:

Beliefs are either birthed by perception or we adopt them from others. They originate from impressions. They are far more spontaneous than deduced. Your beliefs won’t tell you what to do. They’ll make you feel good about what you do. They are chosen for comfort not speed. They are here to protect more than to serve. They are only invited in if they play well with your other beliefs. You don’t have time nor energy to listen to them quarrel in your head. And lastly, they use the first-in-last-out accounting method.

For all these reasons, it is obvious that once beliefs become tenants they will soon become squatters. You’ll let them live rent-free in your mind. The buyout price doesn’t seem visibly worth it. Once a belief takes up residency it is very difficult to evict.

Next week, in part II, we will see how beliefs become so firmly lodged and how we might loosen the grip on them in ourselves or others.