Based on two simple observations, I have produced a model of the body’s system of rest and energy. I have no training in biology, but I have noticed two strange facts of personal disposition.
1. A good night’s sleep does not assure me to feel good the next day
2. Exercise feels good and increasingly so with frequency
Many might assume the more sleep enjoyed the night before the better one will feel the next day. Through my experience this simpler observation does not hold. Or at least not so directly. Often it takes many days of consistently good sleep to produce an energetic state of body and mind.
It may not seem strange that exercise feels good (and by feel good I mean after it is done.) But in one sense, exercise is the very activity we should wish to avoid and minimize. Exercise requires more calories relative to the resting state. As a result pleasure in the activity signals a human to find more food than would otherwise be required. This is inefficient. Donning the evolutionary lens, food is scarce. A human that utilizes less calories to survive will outcompete one that requires more. So why would the body reward us for this wasteful behavior?
In summary, humans are constantly preparing for the unforeseeable stressful event. The world usually follows a mundane routine. However, occasionally (I won’t define a time period for “occasionally”) an unforeseeable crisis arises. This crisis requires great energy. If this energy threshold cannot be met death follows. You can never lose (at least not until you have fathered or birthed some children).
In order to prepare for the stressful event, the body maintains an energy reserve (adrenaline?). The energy reserve is a fixed cost that the body pays nearly every day. The energy reserve maintains the annoying property that it doesn’t store well. It needs to be continually replenished. It doesn’t go down to zero every day but continually needs a topping off.
Once the energy reserve has been satisfied the body feels free to release extra energy to the regular workings of the day. Now obviously this is a tricky relationship. The body doesn’t strictly release energy after the reserve has been satisfied, since this would mean regular operations couldn’t take place until the reserve is met. It’s more like the body delegates energy between regular activity and the reserve until the reserve is met. It is only when the reserve is met that the body releases extra energy. This release can be noticed through a positive attitude or natural exuberance.
The key here is consistency. In order to consistently feel “good” the reserve must be met every day and enough energy produced to consistently exceed the reserve. A good night’s rest for several nights will slowly improve a person’s natural mood. The fact that the improvement is slow implies that the energy reserve is a significant cost. Consistency is also good in that it allows the body to plan. Erratic rest may signal erratic times.
Where does exercise come in? Exercise can be thought of as an investment. During the process it feels terrible—the unavoidable cost. Shortly after, the body often releases a short term pleasure emotion. Usually if someone rarely or never exercises this short term benefit is largely outweighed by the short term cost. (The nature of these costs and benefits are not static.) But exercise also has a long term benefit. This is what an investment is: the exchange of a current cost for a long term benefit. Exercise challenges the body and in the processes improves the efficiency of energy production. Exercise is practice. It not only prepares the body for the future unforeseeable stressful event but also improves the body’s ability to produce the energy reserve along with the daily energy requirement for regular tasks. The short term pleasure signal, which seems strange, signals the mind to invest in the body.
The key here is also consistency. For simplicity sake let’s say that exercise costs net $1 today (to the body) and benefits $3 three days from now. If invested in every day the effective yield is a $2 benefit every day. The consistent benefit improves the incentive to continue exercising. In this way it can be thought of as a positive feedback cycle. This positive feedback serves as a subtler signal. "When I exercised in the beginning it hurt a lot, but felt good at the end. As I continue, it doesn't quite hurt as much and I am able to enjoy the benefit" (a stronger net benefit through time. If inconsistent the signal is much less clear. There is a net cost on the initial day of exercise rather than the net benefit experienced for the consistent exerciser.
This concludes my simple model. A fixed toll must be paid each day to the energy reserve. Exercise is an investment with a positive feedback cycle. This simple model has one simple policy prescription: if interested in feeling good, sleep and exercise consistenly. (Prescription might be good, but the model may be just pandering to it.)
Tuesday, August 19, 2008
Wednesday, June 11, 2008
Hot Broads, Sweet Dudes
It’s a common phrase among us dudes, “the chicks at that bar are super-hot.” The claim is that some bars night in and night out host better looking women than others. Now I can think of a lot of reasons why this statement may be deluded, most of them having a lot to do with alcohol consumption, but I’ll let it be true. I have no real way of measuring, and I have experienced similar feelings (which means slightly more than nothing). Let’s grant it’s true and fool around with the implications.
Since we live in a relatively free society, I’ll knock out the possibility that male bouncers filter through the female applicants and systematically turn down the less ocularly pleasant.
OK, so the hot women must collectively choose a bar to patronize for this to work. Let’s take a normal population with a normal distribution of lookers compared to not-so-lookers. Given this population of female nightlife-seekers, more good looking girls choose a particular bar over another. Therefore, by implication a pretty woman must share similar preferences with other pretty women but these preferences must be distinct to the preferences of the ugly, at least on average. We need these different and distinct preferences to get this result.
So how do you as a bar owner go about attracting pretty women? Easy, you say. Make the place look really nice. Offer drink specials on martinis. Make it swanky, sexy, and trendy. Make it clean. Make it give off an aura of luxury. OK, sounds good. But wait, won’t this attract all women? what makes these things attract only good looking women?
Ah hah, I’ve got it. These are all nice things, but what hot women really want is men. Not just any man but a rich man, and maybe he’ll look ok and talk alright too. But in order to attract men, what do you signal or advertise? I would assume men don’t much care what the place looks like as long as the hot women are present. So the bar can go right ahead and mainly signal towards women’s desire with minimal consideration of men’s preferences (except the one preference).
Back to the rich part though. I’m not going to get into debate about what women value on average the most in men. I’ll just say it’s tough to screen men for anything other than wealth. And although wealth may not be the most important quality of a man, I’d make the safe bet that women on average would prefer a man with wealth over a man without it if all of their other qualities were exactly the same. So a bar can screen for rich men. How? Why charge high prices of course. Seems like a strange business model and certainly one with offsetting incentives at some point, but it certainly may help in weeding out the poor. After you charge high prices, put luxury items all over the place so the wealthy look more wealthy, and there you’ve got it—a room full of rich men. And what good is a room full of rich men with a normal distribution of looks, wit, charm? Well, it’s better than a room full of poor men with a normal distribution of wit, looks, and charm.
But wait a second; won’t the less than hot women prefer the room full of rich men better as well? Men don’t necessarily want rich women (not a bad thing), they want HOT women, especially when alcohol is involved. And since we can't restrict the supply, we’re back to square one.
Unless we delve into psychology and its games. Consider an ugly woman’s perspective. Let’s say that an ugly woman knows she’s ugly. She says to herself: “Men like hot women, women like rich men, therefore, many women will want to go the rich man’s bar. Men know that women like rich men. A rich man knows he’s rich, therefore, he will demand a better looking woman than had he not been rich. With these higher expectations, I [an ugly woman] will have less of chance of finding a mate at the rich man’s bar.” Or at least she’ll have to work a lot harder to showcase her other talents. You see it’s though this pyschologic process of circular expectations that an ugly woman may view her chances less favorably at the rich man’s bar.
[Tangent: If there weren't these cirular pychological expectations the first, say, 100 would get in the rich man's bar. The ability to show up early doesn't screen the population so a normal distribution exists. The ugly woman would have the same chances as she does in a normal population plus richer men to choose from so wouldn't be particularly disuaded from entering (they have no expectation that rich men have higher standards). So if these circular expectations are untrue or don't influence behavior much, this model breaks down quickly]
She also knows that poor men like hot women as well, but they have less to choose from (hot women know they’re hot so more go to the rich man’s bar due to higher expectations of success) so her relative status will be higher at the poor man’s bar. So if the ugly woman has a 10% chance of hooking it at the rich man’s bar and a 50% chance at the poor man’s bar, she’ll make her decision based on how much she values that differential between the two types of men. So within this framework, we could conceivably get a result where some bars have better looking women, on average, than others.
So do the swankier, more expensive bars have hotter women? I don’t know, all I can say is “maybe, probably” based on experience. This simple analysis opens up a wild world of signals and countersignals.
Example, ok I’m a rich man. I know that these swanky bars are going to have hotter women. But these women are going to expect me to be rich. I may be rich, but I don’t like that expectation. I want them to like me for my charm, wit and looks, not my money. And I especially don’t want them to expect me to buy them something expensive every other minute. So even though I’m rich I’ll go to the poor man’s bar and seek out the few good looking women there.
Or another. Ok I’m poor. I know the hot women like the rich guys, but I like hot women. I’m going to the rich man’s bar and living over my means for a night to score with a hot woman (and go back to her place of course, cause I live out in the suburbs). But women have heard about these “fakers.” So in the end if you play this game you are caught in and endless dance of signals and countersignals.
Fuck it, I quit. I’m not playing this stupid game [some crowd will say]. I’m above these petty signals. And here’s where you get your freaks in varying degrees. People seeking to send signals that they don’t send signals. They go to weird bars (and there’s a whole continuum of weirdness). Or maybe just dirty bars, dives. We of the dive bars don’t play games. Except we all play the game to see who can play the least games.
So are there hot-chick-bars? Maybe, but if you go, don’t look at your credit card statement in the morning.
Since we live in a relatively free society, I’ll knock out the possibility that male bouncers filter through the female applicants and systematically turn down the less ocularly pleasant.
OK, so the hot women must collectively choose a bar to patronize for this to work. Let’s take a normal population with a normal distribution of lookers compared to not-so-lookers. Given this population of female nightlife-seekers, more good looking girls choose a particular bar over another. Therefore, by implication a pretty woman must share similar preferences with other pretty women but these preferences must be distinct to the preferences of the ugly, at least on average. We need these different and distinct preferences to get this result.
So how do you as a bar owner go about attracting pretty women? Easy, you say. Make the place look really nice. Offer drink specials on martinis. Make it swanky, sexy, and trendy. Make it clean. Make it give off an aura of luxury. OK, sounds good. But wait, won’t this attract all women? what makes these things attract only good looking women?
Ah hah, I’ve got it. These are all nice things, but what hot women really want is men. Not just any man but a rich man, and maybe he’ll look ok and talk alright too. But in order to attract men, what do you signal or advertise? I would assume men don’t much care what the place looks like as long as the hot women are present. So the bar can go right ahead and mainly signal towards women’s desire with minimal consideration of men’s preferences (except the one preference).
Back to the rich part though. I’m not going to get into debate about what women value on average the most in men. I’ll just say it’s tough to screen men for anything other than wealth. And although wealth may not be the most important quality of a man, I’d make the safe bet that women on average would prefer a man with wealth over a man without it if all of their other qualities were exactly the same. So a bar can screen for rich men. How? Why charge high prices of course. Seems like a strange business model and certainly one with offsetting incentives at some point, but it certainly may help in weeding out the poor. After you charge high prices, put luxury items all over the place so the wealthy look more wealthy, and there you’ve got it—a room full of rich men. And what good is a room full of rich men with a normal distribution of looks, wit, charm? Well, it’s better than a room full of poor men with a normal distribution of wit, looks, and charm.
But wait a second; won’t the less than hot women prefer the room full of rich men better as well? Men don’t necessarily want rich women (not a bad thing), they want HOT women, especially when alcohol is involved. And since we can't restrict the supply, we’re back to square one.
Unless we delve into psychology and its games. Consider an ugly woman’s perspective. Let’s say that an ugly woman knows she’s ugly. She says to herself: “Men like hot women, women like rich men, therefore, many women will want to go the rich man’s bar. Men know that women like rich men. A rich man knows he’s rich, therefore, he will demand a better looking woman than had he not been rich. With these higher expectations, I [an ugly woman] will have less of chance of finding a mate at the rich man’s bar.” Or at least she’ll have to work a lot harder to showcase her other talents. You see it’s though this pyschologic process of circular expectations that an ugly woman may view her chances less favorably at the rich man’s bar.
[Tangent: If there weren't these cirular pychological expectations the first, say, 100 would get in the rich man's bar. The ability to show up early doesn't screen the population so a normal distribution exists. The ugly woman would have the same chances as she does in a normal population plus richer men to choose from so wouldn't be particularly disuaded from entering (they have no expectation that rich men have higher standards). So if these circular expectations are untrue or don't influence behavior much, this model breaks down quickly]
She also knows that poor men like hot women as well, but they have less to choose from (hot women know they’re hot so more go to the rich man’s bar due to higher expectations of success) so her relative status will be higher at the poor man’s bar. So if the ugly woman has a 10% chance of hooking it at the rich man’s bar and a 50% chance at the poor man’s bar, she’ll make her decision based on how much she values that differential between the two types of men. So within this framework, we could conceivably get a result where some bars have better looking women, on average, than others.
So do the swankier, more expensive bars have hotter women? I don’t know, all I can say is “maybe, probably” based on experience. This simple analysis opens up a wild world of signals and countersignals.
Example, ok I’m a rich man. I know that these swanky bars are going to have hotter women. But these women are going to expect me to be rich. I may be rich, but I don’t like that expectation. I want them to like me for my charm, wit and looks, not my money. And I especially don’t want them to expect me to buy them something expensive every other minute. So even though I’m rich I’ll go to the poor man’s bar and seek out the few good looking women there.
Or another. Ok I’m poor. I know the hot women like the rich guys, but I like hot women. I’m going to the rich man’s bar and living over my means for a night to score with a hot woman (and go back to her place of course, cause I live out in the suburbs). But women have heard about these “fakers.” So in the end if you play this game you are caught in and endless dance of signals and countersignals.
Fuck it, I quit. I’m not playing this stupid game [some crowd will say]. I’m above these petty signals. And here’s where you get your freaks in varying degrees. People seeking to send signals that they don’t send signals. They go to weird bars (and there’s a whole continuum of weirdness). Or maybe just dirty bars, dives. We of the dive bars don’t play games. Except we all play the game to see who can play the least games.
So are there hot-chick-bars? Maybe, but if you go, don’t look at your credit card statement in the morning.
Tuesday, April 15, 2008
A late in coming conclusion
Tonight I was reminded of a time in school when I gave a presentation on US health care regulation. I tried to lay out its forms, vehicles, and operations. It was such a complex topic that I struggled greatly to adhere to the time limit. In the end it was a pretty pitiful performance. Not one of my better efforts, but in truth I didn’t feel anyone would appreciate it even if it was. At the end of the presentation I was asked if I had a conclusion. “No not really.” I stammered. “It’s an important issue and it is important to be informed”—was all I could muster.
Although I did have a conclusion. However, I was reluctant to give it since its presentation would reveal my bias which could question the integrity of my research. (I think I have learned now that we all have a bias and not to reveal it is the real signal of questionable integrity). So if I had the question again the following would be my answer.
My research was presented with the intention of drawing a focus to the myriad of regulatory complexities that our health care/health insurance industry is riddled with. The chief effect of this regulation is a loosening of the association of cause with effect. It is through clear feedback mechanisms that intelligent beings are able to change a course of behavior in hopes of creating improved outcomes. Just as punishment of a dog an hour after it has overstretched its bounds is futile, paying for health benefits through tax revenues and insurance programs also confuses the costs of prior behavior. The regulatory complexity removes health decisions from the universe of practical everyday decisions. These sorts of decisions are feasibly within human abilities. Granted errors are made constantly, but on average people are able to decide which products work best for them; and in the process reward those goods and services that hold value. This simple, but essential mechanism is constantly under attack in the realm of health care.
But you say: “Health care is different from other goods. We NEED it. Without it we would die.” Would you die without food? shelter? clothing? And if so are you able to reliably find those goods with high quality and at low costs? And what sort health care would you really die without? There are rare incidences when people suffer from a critical circumstance, but every trivial health benefit is covered in these third party plans; and the benefits are growing all the time. And what does “need” mean anyways? Does need mean if it was cheaper you would consume no more of it? Does need mean that you would sacrifice literally everything you own to obtain it? With any procedure there are costs and benefits, but we seem to be unable to consider the alternative that for any procedure the cost could exceed the benefit. Yes, these procedures still have the same costs no matter who pays for them. It’s a scary thought to think of someone empowered with the ability to consume without any regard for the costs. But a scarier thought is that this disincentivizing trend will continue and we will fail to reward innovation that leads toward health care advances.
Although I did have a conclusion. However, I was reluctant to give it since its presentation would reveal my bias which could question the integrity of my research. (I think I have learned now that we all have a bias and not to reveal it is the real signal of questionable integrity). So if I had the question again the following would be my answer.
My research was presented with the intention of drawing a focus to the myriad of regulatory complexities that our health care/health insurance industry is riddled with. The chief effect of this regulation is a loosening of the association of cause with effect. It is through clear feedback mechanisms that intelligent beings are able to change a course of behavior in hopes of creating improved outcomes. Just as punishment of a dog an hour after it has overstretched its bounds is futile, paying for health benefits through tax revenues and insurance programs also confuses the costs of prior behavior. The regulatory complexity removes health decisions from the universe of practical everyday decisions. These sorts of decisions are feasibly within human abilities. Granted errors are made constantly, but on average people are able to decide which products work best for them; and in the process reward those goods and services that hold value. This simple, but essential mechanism is constantly under attack in the realm of health care.
But you say: “Health care is different from other goods. We NEED it. Without it we would die.” Would you die without food? shelter? clothing? And if so are you able to reliably find those goods with high quality and at low costs? And what sort health care would you really die without? There are rare incidences when people suffer from a critical circumstance, but every trivial health benefit is covered in these third party plans; and the benefits are growing all the time. And what does “need” mean anyways? Does need mean if it was cheaper you would consume no more of it? Does need mean that you would sacrifice literally everything you own to obtain it? With any procedure there are costs and benefits, but we seem to be unable to consider the alternative that for any procedure the cost could exceed the benefit. Yes, these procedures still have the same costs no matter who pays for them. It’s a scary thought to think of someone empowered with the ability to consume without any regard for the costs. But a scarier thought is that this disincentivizing trend will continue and we will fail to reward innovation that leads toward health care advances.
Friday, April 4, 2008
Hidden Gem
I confess a bit of a music obsession. I have consumed a good proportion of my life randomly following my melodic interests. Typically the search isn't completely random but confined to my usual time period (around 1966 to around 1972). I'm pretty biased towards this time period. Really enjoy blues music and its initial fusion with rock to make the greatest of all genres: blues rock. Big fan. Of course within this genre there a tons of styles.
One of the better bands that I have become familiar with recently is called Free. I'm sure this name isn't news to anyone with much interest in the period. This was Paul Rodger's band before he started Bad Company. "All Right Now" is the familiar hit. So the band isn't so much of a hidden gem, but I'm going to make the case that their first album is.
The album is called "Tons of Sobs" released in 1968. In many ways it is a typical bluesy release that many bands were putting out around this time. In fact it may have been a bit behind the curve. Not exactly original or highly creative. But what I am praising here is just plain blues rock excellence. I guess it all starts with Paul Rogders. He has a nice soothing voice if you'll remember from Bad Company. Sounds nice, maybe a little plain, and even though he is British sounds pretty American (that is the description that comes to mind when I think of Bad Company). But if you take Paul Rodgers for granted you might miss something. When he lets it loose he's amazing. I will say that I actually know nothing about music. However, his voice seems capable of great range while maintaining depth, and it just sounds really nice everywhere. But more than that he sings blues how (I think) its supposed to be sung. You really understand while listening to this album how blues grew into hard rock. Its loud, emotional, and perhaps honest. See blues music has more of an honest feel to me than other music from the era in contrast to psychedelic influences. Don't get me wrong I love psychadelic music and am all for mixing it up and creating new sounds, but I will always be drawn to the honest simplicity of blues music, its pureness of expression.
Other highlights of the group include the guitarist, Paul Kossoff, and the bassists Andy Fraser. Simoun Kirke is the drummer who also stayed with Rodgers through Bad Company. Kossoff is real good. His guitar is high flying. He was your typical drug and alcohol shitshow, and sadly his life ended early because of it. Andy Fraser was 16 when he joined the band and released this album. Before joining the prodigy was the bassist for (the great) John Mayall and the Bluesbreakers. What's even more impressive about him though was that he was the group's chief song-writer at such a young age. Although he contributed on only three songs on this album he quickly established himself as the main lyrical force in the outfit. Another impressive fact about this album (especially for blues music) is that all the material is original except for two covers "Goin' Down Slow" and "The Hunter" (which are both great).
If you listen to one song on this album listen to "Walk in My Shadow" and for Godsakes play it loud.
One of the better bands that I have become familiar with recently is called Free. I'm sure this name isn't news to anyone with much interest in the period. This was Paul Rodger's band before he started Bad Company. "All Right Now" is the familiar hit. So the band isn't so much of a hidden gem, but I'm going to make the case that their first album is.
The album is called "Tons of Sobs" released in 1968. In many ways it is a typical bluesy release that many bands were putting out around this time. In fact it may have been a bit behind the curve. Not exactly original or highly creative. But what I am praising here is just plain blues rock excellence. I guess it all starts with Paul Rogders. He has a nice soothing voice if you'll remember from Bad Company. Sounds nice, maybe a little plain, and even though he is British sounds pretty American (that is the description that comes to mind when I think of Bad Company). But if you take Paul Rodgers for granted you might miss something. When he lets it loose he's amazing. I will say that I actually know nothing about music. However, his voice seems capable of great range while maintaining depth, and it just sounds really nice everywhere. But more than that he sings blues how (I think) its supposed to be sung. You really understand while listening to this album how blues grew into hard rock. Its loud, emotional, and perhaps honest. See blues music has more of an honest feel to me than other music from the era in contrast to psychedelic influences. Don't get me wrong I love psychadelic music and am all for mixing it up and creating new sounds, but I will always be drawn to the honest simplicity of blues music, its pureness of expression.
Other highlights of the group include the guitarist, Paul Kossoff, and the bassists Andy Fraser. Simoun Kirke is the drummer who also stayed with Rodgers through Bad Company. Kossoff is real good. His guitar is high flying. He was your typical drug and alcohol shitshow, and sadly his life ended early because of it. Andy Fraser was 16 when he joined the band and released this album. Before joining the prodigy was the bassist for (the great) John Mayall and the Bluesbreakers. What's even more impressive about him though was that he was the group's chief song-writer at such a young age. Although he contributed on only three songs on this album he quickly established himself as the main lyrical force in the outfit. Another impressive fact about this album (especially for blues music) is that all the material is original except for two covers "Goin' Down Slow" and "The Hunter" (which are both great).
If you listen to one song on this album listen to "Walk in My Shadow" and for Godsakes play it loud.
Tuesday, March 25, 2008
Put the Onus on the Company
I’ve recently been getting real cool and studying for the CFA (Chartered Financial Analyst) test. Going through the accounting sections can be mind numbing. But I have gotten a better idea of some hairy details of accounting for financial statements and reporting to the SEC. This by day and hearing about financial troubles by night has got me thinking about transparency and reporting. I’m going to provoke a bit of a thought experiment in financial reporting from a stance that no one else seems to be willing to take (especially at these times). However, I am at liberty to take such a stance mainly due to ignorance, inexperience, and maybe a hint of stupidity.
Ever since the SEC was formed, shortly after the crash of 1929, there has been push toward the mandating increasing transparency on public companies. Seems like a great idea. The more information people have the better investment decisions they should be able to make. I am going to hit the issue from another perspective, however, and argue it may not be such a good idea, especially as the economy becomes increasingly dynamic. The main thrust being; what if we put the onus on companies to supply us information and not on regulators? Instead of regulators trying to devise ways for every public company in every industry to conform to some universal standards what if companies decided to choose a way that fit their company and industry best? Well, I’ll admit, so far this sounds like idealistic horse-manure, but there are some hidden incentives here.
Investors will demand information of companies. If they don’t provide information, they will receive no capital. And in this way, this approach may unleash a competition for the most accurate and transparent disclosure. Companies may be more directly compensated for excellent standards than in today’s environment where essentially everyone is given either the stamp of approval or are under investigation. With the SEC model there are only two options, yes or no, good or bad. A company may have an incentive to cheat as much as possible while staying approved. Once approved all companies are basically on the same playing field. Information quality is viewed by most (but not the savvy) as uniform in quality. Do we really want uniformity in quality? What is the incentive for providing superior quality?
Cheating as much as one can while staying within the guidelines can be found in off-balance sheet accounting. It is perfectly legal, although it may be perfectly deceptive. There are loopholes to be exploited as there always will be. Especially as the nature of business changes more rapidly—the only thing we can be sure of in the future.
So let’s put the onus on the corporation. “No, I’m not going to give you rules. You give me the information. If I don’t like it I won’t invest. Furthermore, I’m going to see what your competitor does. If it does it better, well fat chance you’ll get anything.”
You may say this is too much of a burden for an ordinary investor. And it may well be. But there is already an industry for this, and this industry (one that I am quite fond of, to include my bias) is independent research. If there is no SEC, then independent research would become all the more important. This private industry is capable a moving at the speed of its focus industries. Specialization, superior flexibility (in comparison to a legislative timescale), new entrants, quick adoption of technology, etc. are all reasons why this industry could perform quite well. Will there be conflicts of interests? Sure, there always are (even at the SEC). But just as there is pressure to exploit conflicts of interest, there is always pressure to decouple conflicts of interest in order to enhance reputation.
Ever since the SEC was formed, shortly after the crash of 1929, there has been push toward the mandating increasing transparency on public companies. Seems like a great idea. The more information people have the better investment decisions they should be able to make. I am going to hit the issue from another perspective, however, and argue it may not be such a good idea, especially as the economy becomes increasingly dynamic. The main thrust being; what if we put the onus on companies to supply us information and not on regulators? Instead of regulators trying to devise ways for every public company in every industry to conform to some universal standards what if companies decided to choose a way that fit their company and industry best? Well, I’ll admit, so far this sounds like idealistic horse-manure, but there are some hidden incentives here.
Investors will demand information of companies. If they don’t provide information, they will receive no capital. And in this way, this approach may unleash a competition for the most accurate and transparent disclosure. Companies may be more directly compensated for excellent standards than in today’s environment where essentially everyone is given either the stamp of approval or are under investigation. With the SEC model there are only two options, yes or no, good or bad. A company may have an incentive to cheat as much as possible while staying approved. Once approved all companies are basically on the same playing field. Information quality is viewed by most (but not the savvy) as uniform in quality. Do we really want uniformity in quality? What is the incentive for providing superior quality?
Cheating as much as one can while staying within the guidelines can be found in off-balance sheet accounting. It is perfectly legal, although it may be perfectly deceptive. There are loopholes to be exploited as there always will be. Especially as the nature of business changes more rapidly—the only thing we can be sure of in the future.
So let’s put the onus on the corporation. “No, I’m not going to give you rules. You give me the information. If I don’t like it I won’t invest. Furthermore, I’m going to see what your competitor does. If it does it better, well fat chance you’ll get anything.”
You may say this is too much of a burden for an ordinary investor. And it may well be. But there is already an industry for this, and this industry (one that I am quite fond of, to include my bias) is independent research. If there is no SEC, then independent research would become all the more important. This private industry is capable a moving at the speed of its focus industries. Specialization, superior flexibility (in comparison to a legislative timescale), new entrants, quick adoption of technology, etc. are all reasons why this industry could perform quite well. Will there be conflicts of interests? Sure, there always are (even at the SEC). But just as there is pressure to exploit conflicts of interest, there is always pressure to decouple conflicts of interest in order to enhance reputation.
Tuesday, March 11, 2008
That Damn Fed
Here's a good quote from Steve Forbes:
"One reason the Fed is feeding inflation is that it thinks it's grappling with a conundrum: Inflation is rising, and the economy is weakening. How can our central bank stimulate the economy without risking even more inflation? Rotten ideas never seem to die. The Fed's notion that it must choose between economic growth and inflation is absolutely false. Experience has repeatedly shown that there is no tradeoff between inflation and a vigorous economy. We can have both excellent growth and a stable currency"
"One reason the Fed is feeding inflation is that it thinks it's grappling with a conundrum: Inflation is rising, and the economy is weakening. How can our central bank stimulate the economy without risking even more inflation? Rotten ideas never seem to die. The Fed's notion that it must choose between economic growth and inflation is absolutely false. Experience has repeatedly shown that there is no tradeoff between inflation and a vigorous economy. We can have both excellent growth and a stable currency"
Thursday, March 6, 2008
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