Moontower #41

Friends,

As a teen, I read that book probably 20 times. My brain was full of Seinfeld takes thanks to the book basket next to our bathroom toilet. The book is still in that bathroom more than 25 years later.

Good luck with the stegosaurus

I remember having that exact reaction in the wake of the “dress illusion” that swept the internet nearly 5 years ago.  You can be staring at the same picture as your neighbor and disagree on the color. Then in 2018 the yanny/laurel debate exposed how different our audio perceptions are. These illusions are unsettling. If we can’t agree on what appears plainly before us, what hope is there for mutual understanding on issues.

It’s a cynical thought. And I’m not sure it’s wrong. The minimum amount of structural disagreement that would exist if everyone agreed on the same facts is disturbingly high. Call me naive, but this was a dark realization. And once you notice how futile striving for agreement is, the world does nothing to help you unsee it.

The Hackability of  Perception 

Scott Alexander writes:

“I’ve been focusing a lot lately on the idea of the Bayesian brain and its input channels. Some input channels, like vision, are high-bandwidth; we get so much data about the real world that we usually see pretty much what is really there.

Other channels, like pain, are low bandwidth. This is why the placebo effect works – we get so little data about how much pain is coming from different parts of our bodies that even our strongest percepts are wild guesses, where we fill in the gaps with predictions and smooth away conflicting evidence. If our predictions change – ie we know we just got morphine and morphine lowers pain – then the brain will happily change its guesses. This would never happen with vision – I can’t use the placebo effect to make you think an orange crayon is blue – but pain is low-bandwidth enough that it works.

Vision, with all of its flaws, represents a ceiling on perceptive fidelity. Sensations like pain are lower bandwidth. Vision is hackable but less so than pain. And unfortunately, logic and reason are even more hackable.

He continues:

Reason is one of the lowest-bandwidth channels of all, which is why biases are so omnipresent and rational debate so rarely changes anyone’s mind. Most people revert to their priors – the beliefs of their tribe or the ones that fit their common sense – and you have to provide an overwhelming amount of rational evidence before the brain notices anything amiss at all.” (Link)

And then the lesson appeared.

The Real Meaning of Empathy

I’ve often thought of empathy as being able to put yourself in another’s shoes. Commiseration for what you have not experienced but could imagine. Pain, loss, anxiety. We can relate to these feelings. But that is only half of what it means to be empathetic.

Why?

Because you presume that the other person’s sense of loss correlates with how you would feel in the same scenario. But if you can’t agree on what color the dress is, how can you know how Mary feels when she loses her dog? True empathy requires tremendous humility. You are not living their loss through your eyes but accepting that your eyes are irrelevant. In a world in which we simply will never agree, empathy that is contingent on being able to relate is an empty virtue.

These illusions teach us that sometimes we can’t relate. Empathy needs to be ok with that.

For the past few years, I have seen illusions as a heat check. They are as humbling as they are entertaining. Magic shows, mentalists, and illusions are a constant reminder that our perceptions are heuristics that can be exploited. And if our thoughts are built upon our perceptions, we should afford them leeway in proportion to how much error lives in what we see, hear, and remember. Humility is not optional if you value honesty.

Paul Graham has described our minds as a compiled program that we’ve lost the source code to. It works, but we don’t know why.

How Do We Protect Ourselves From Illusions

1) Recognize we are not natural fact-checkers. Be humble since you are usually not thorough. (Link)

2) Be aware of biases

Nick Maggiulli highlights:

• The peak-end rule: we tend to focus on the most intense and the most recent parts of a memory when judging an experience. Professor Dan Ariely has pointed out that this flies in the face of conventional wisdom to rip band-aids off quickly. He was a survivor of severe burns and used this knowledge in advising nurses about the daily removal and redressing of his bandages.
• The serial-position effect: People tend to remember the first things (primacy) and the last things (recency) in a list, but tend to forget the middle things. Nick cleverly demonstrates this with the following example:
  • You sluhod be albe to raed tihs snetnece tohguh amlsot ervey wrod is spleeld icorenlrcty.

3) Appreciate that your memory is not a video camera

Professor Dan Gilbert on our memories being edited and unreliable:

“We try to repeat those experiences that we remember with pleasure and pride, and we try to avoid repeating those that we remember with embarrassment and regret. The trouble is that we often don’t remember them correctly. Remembering an experience feels a lot like opening a drawer and retrieving a story that was filed away on the day it was written, but…that feeling is one of our brain’s most sophisticated illusions. Memory is not a dutiful scribe that keeps a complete transcript of our experiences, but a sophisticated editor that clips and saves key elements of and experience and then uses these elements to rewrite the story each time we ask to reread it.”
Taking advantage of illusions

The Placebo Effect

We already saw how the placebo effect can be used to trick the low-bandwidth input channel of pain. Dan Ariely has claimed that the “mind is so powerful as evidenced by the placebo effect. The link between expectations and beliefs is astounding.”

Scott Alexander (a psychiatrist by trade) recaps the explanation of the placebo effect from Surfing Uncertainty and when you would expect it to be most effective:

Perceiving the world directly at every moment is too computationally intensive, so instead the brain guesses what the world is like and uses perception to check and correct its guesses. In a high-bandwidth system like vision, guesses are corrected very quickly and you end up very accurate (except for weird things like ignoring when the word “the” is twice in a row, like it’s been several times in this paragraph already without you noticing). In a low-bandwidth system like pain perception, the original guess plays a pretty big role, with real perception only modulating it to a limited degree (consider phantom limb pain, where the brain guesses that an arm that isn’t there hurts, and nothing can convince it otherwise). Well, if you just saw a truck run over your foot, you have a pretty strong guess that you’re having foot pain. And if you just got a bunch of morphine, you have a pretty strong guess that your pain is better. The real sense-data can modulate it in a Bayesian way, but the sense-data is so noisy that it won’t be weighted highly enough to replace the guess completely. 

If this is true, the placebo should be strongest in subjective perceptions of conditions sent to the brain through low-bandwidth relays. That covers H&G’s pain and nausea. (Link)

An example from my recent trip to the Lawrence Hall of Science

Consider this statement again:

In a low-bandwidth system like pain perception, the original guess plays a pretty big role, with real perception only modulating it to a limited degree

In the virtual reality exhibit currently on display, there is a recording playing. I’ve reproduced it here. If you’d like to play along, have a friend silently mouth the word “far” in sync with the recording. If you look at them while they do this, that’s exactly what you’ll hear. If you look away, you’ll hear what I actually recorded. In the exhibit, they show a silent video with 2 people mouthing different words. As you flip your gaze between them you hear what they are mouthing although the recording is always saying the same word.

More fun illusions

Here are 2 optical mind benders I’ve collected over the years.

• The cafe wall (Link)
• Sinusoidal waves (Link)

The Money Angle

I recently listened to Charley Ellis’ 2018 interview on Capital Allocators and it’s outstanding. It covers 2 main topics. Here’s my notes including a transcript. (Link)

Indexing

• Ellis recounts the history of financial markets since WWII setting up the “paradox of skill” which defines the current and probably forever investing landscape. His argument for indexing is framed by the pardox and would be my reference argument to people interested in US investing. While justifiably forceful in his view he doesn’t ignore the limits of indexing. For example, he explains why David Swenson should not index, why you might not want to index in Asia (hint: it’s still a retail-driven market), and what would need to happen for indexing to overwhelm the price discovery function of markets.

 America’s pension crisis

• All developed nations’ pension crisis are well-advertised at this point but remain politically ignored relative to their importance. At its core, the crisis stems from people’s retirements being underfunded. People are regularly living 20 or 30 years after retiring. The entire concept of retirement is less than a century old and is rooted in an era of different needs and circumstances.

If I grab a beer with you, and you were so-interested, I could try to calmly vent my attitude on how destructive I think the idea of retirement is on many different levels. But for now, you can enjoy Ellis’ version of just how carried away we got with what started as a very narrow solution.

History of the retirement age

Age 65 came from Social security which dates back to 1935 which came from the Railroad Retirement act in 1923 which is a descendant of the U.K, retirement age of 70. In fact, the U.S. age of 65 was suggested to remain competitive with Germany. And this is where we find the root of the entire concept of lifetime income.

German’s in the early 1880s

1) Baron von Bismark tried to unify the German municipalities via technology namely the telegraph and the railroads. The telegraph combined with the post office allowed instantaneous communication anywhere in Germany.

We’re going to bring coal and iron ore from the rural and other areas to where the steel mills are and we’re going to build steel mills and have tremendous industry. And then railroads are going to be able to bring people from the cities out to the countryside for weekends, vacations to can be normal, and will bring from the countryside, fresh fruit, fresh vegetables, all kinds of wonderful things that people establish good eat, it’s going to make everything terrific. That’s great.

2) But where are you going to get the workers to work on the railroad?

Offer lifetime employment.

You get them to come out of the forest because they can get lifetime employment. That’s terrific. What do you call that? That’s guaranteed. This is a commitment. It’s the honor of Germany. Okay. Let’s go.

3) What happened when you offered lifetime employment?

Well after a couple of years there were accidents on the railroads. Trains ran into each other, people were killed. Public outrage and scrutiny.

Well, let’s send a study group and find out what the heck is going with these accidents. Well, we found out what the answer is in the work. Laying tiles, lifting heavy ties, brailles, shoveling coal, all kinds of heavy work. They’re saying to the older guys in their late 50s and 60s, you’re too old for this kind of work. You take the easy job. You’ll be in charge of the switches.

4) Even the easy jobs became risky as workers aged.

So the switches are being manned by guys in their early 60s. A beautiful summer’s day and no trains coming in for the next couple of hours, why not take a little nap? And they’re just taking a nap, forget to wake up, and the accident happened. 

5) A new idea: a retirement age!

Guarantees for life. Pay them not to work. To be cost effective find the min-max where it costs not too much to solve most of the problem. And the answer was 65. Most people don’t live to 65 in those days in Germany, but those who do are really doddering, so they will only last for another couple years after 65 anyway.

An obsolete model

We have inherited and retained a retirement model that is a poor fit for our post-industrial circumstances.

• People live longer now. The ratio of non-working to working years has increased.
• People are able to work longer as manual labor’s share of the economy has declined.

The state of the pension crisis today

Here’s Ellis portraying the position of retiring boomers:

“God damn it. I worked hard all my life I played by the game rules as everybody laid them out. And I was supposed to be able to retire at a decent age and enjoy retirement. That’s part of the deal.”

But the answer they will get back?

“Sorry, but nobody else understands that to be the part of the deal. And you’re on your own.”

So you will have a giant generation that is angry, focused, and motivated to do something about this false promise.

If you think we’ve had divisive politics in the past, imagine what it would be if you had millions of people and their relatives all saying “It isn’t fair. It isn’t right. These guys got screwed.” I think we’re going to have a terrible societal problem, a political problem.

I don’t think Ellis is being an alarmist. From what I can tell the arithmetic is unbending. Massive pension shortfalls are inevitable. The division of that burden is a political problem. How much austerity retirees are going to have to swallow verse the working population. All of this will hit state and federal budgets, it will impact everything from your taxes to the quality of services delivered for those taxes. Emotional questions like how many cop salaries does a retiring cop pension cost? Using an online annuity calculator, for someone retiring at 65 years old a $75k/yr pension is worth about $1.5mm.

As we enter the period of peak boomer retirements, arguments will be heated.

To jump to Ellis’ discussion of the scope of the problem as well as his prescription to lessen to its sting, click here.

Climb Higher