Longreads + Open Thread

Longreads

• Noah Kreutter at Verdad Research bites the bullet: volatility is actually a pretty good measure of risk. The intuition against this is that risk is the probability of a permanent loss of capital, and something can be volatile day-to-day without having that. It's easy to see the converse—take a product that has a 99% chance of increasing your wealth by 1% a day and a 1% chance of dropping to zero, and its volatility will be very low until it blows up. But it turns out that among traded assets, volatility has been a great proxy for the odds of such blowups. And one useful thing about volatility is that it allows you to sample from the distribution of perceived blowup risks rather than from the necessarily smaller distribution of actual blowups. So it's outsourcing some cognition to other people, which is a practice that ought to be done judiciously. On the other hand, blindly refusing to do so means assuming that everyone else is wasting their effort when they trade in and out of assets in volatility-creating ways. (In other words, if volatility doesn't connect with risk, don't bother with carefully researching individual companies in order to take long-term positions in undervalued stocks—just sell puts and see how that goes.)
• Grid.News has a good overview of the how the world has aged, and will continue to age. One surprise: in 1980, the world's oldest countries were all in Europe, but now Japan is the world's oldest country, and China is the place where aging will have the biggest impact because of numbers and because the country's high savings rate can't persist if the workforce shrinks while consumption doesn't. An especially important point in the story is that India is a relatively younger country, and will remain so for a while (but it, too, has below-replacement fertility as of 2020).
• Tyler Cowen has a fantastic interview with economist Glenn Loury. It's less about economics than about excellence, and how to live life well. Especially worth reading are Loury's reflections on drug use: "I realized that there was no doubt about the euphoria. The euphoria was certainly there, but my obsessive pursuit of it, which had nearly destroyed me, was a way of living that was just undignified and contemptuous."
• Nilay Patel interviews Satya Nadella on search and AI (Disclosure: long MSFT). One thing that stood out in the press tour: Satya is clearly having a great time. And why wouldn't he? He works at what is apparently the only big tech company with both PR and regulatory permission to openly talk about crushing its competitors! He makes some notes that are doubtlessly causing all sorts of disturbances at Google HQ, like "on Windows, Google makes more money than all of Microsoft. So let’s start there." It feels like, separate from the technology itself, AI is actually a catalyst for an end to big tech's End of History.
• Arpit Gupta writes about the new geography of jobs, a thorough and data-heavy post. One important point, (also argued in this newsletter ($)) is that hybrid work means that the commutable radius to a given city is wider than it used to be; if you work from home a third of the time, you can increase your average commute 50% and still have the same weekly commute you had at five days a week. One notable geographic skew is that the West coast is suffering more than the East; this may be because of differences in employers, or differences in labor market liquidity, but either way it's an important trend since expensive cities create more economic specialization.
• This week's Capital Gains explainer walks through George Soros' theory of reflexivity, the paradoxical argument that asset prices can drive fundamentals rather than the other way around. And in other Capital Gains news, if you subscribe you can join the referral program, with rewards that include membership in our new Discord. This week had a lively discussion of big tech and AI, which bled into some more general questions about how each of the big tech companies thinks differently about strategy.

Books

• Money for Nothing: This book is partly a history of the South Sea Bubble, but it's really an intellectual history of how the bubble came about. Packed with surprising information—the introduction of coffee to England apparently made everyone massively increase their writing output, so we have excellent records. Lots of fun details, too: in the early days of life insurance, a popular use case was betting on the death of an important politician as a way to hedge against unfavorable policies, for example. The actual bubble has some recent echoes: prices for the company's stock were set through secondary offerings in which investors put only some of the cost down, paying the rest over time. This made the shares equivalent to an option, and of course added lots of buying pressure. More recently in crypto, offering highly levered products has had a similar effect.

Open Thread

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