Thursday, October 16, 2008

Is it rational to agree to disagree?

Had an interesting exchange with Eliezer Yudkowski earlier that led me to this paper. I still haven't finished reading it, but I just had to post this passage (which, by the way, is summarizing a mathematical result, not just stating an opinion):

In the vast majority of disputed topics, the available evidence does not pin down with absolute certainty what we should believe. A consequence of this is that if there are no constraints on which priors are rational, there are almost no constraints on which beliefs are rational. People who think that some beliefs are irrational are thus forced to impose constraints on what priors are rational.

This ought to be required reading for any atheist who looks down their nose at a religious person.

I also have the feeling that it might be possible to construct a formal mathematical defense of withholding information in an argument even if both parties to the dispute are rational. The intuition goes something like this: part of a rational agent's worldview is a Bayesian prior about the how much weight one should lend to an opinion espoused by someone else. When one party in a dispute makes a statement, the other party updates not only their estimates regarding the subject matter of the statement, but also their estimates of the reliability and rationality of the speaker. For example, if someone says to me, "Men never walked on the moon. It was all a conspiracy." I am less likely to be persuaded by other things that they say. A rational person can map this phenomenon into their own reasoning and conclude that they are more likely to persuade someone that A is true if they do NOT say that B is true even though they believe that B is in fact true (and even if B *is* in fact true).

UPDATE: another gem from the paper:

These common criticisms suggest that most people implicitly uphold rationality standards that disapprove of self-favoring priors, such as priors that violate indexical independence. These criticisms also suggest that people in fact tend to form beliefs as if they had such priors. That is, people do seem to think they can reason substantially better than others, in the absence of much evidence favoring this conclusion. People thus seem to violate the rationality standards they uphold. And as we have mentioned, such tendencies seem capable of explaining a great deal of human disagreement.

I'm getting through!

In last night's debate, Obama finally did what Democrats should have been doing for years and re-framed the abortion debate by stating an obvious truth: "No one is for abortion."

Maybe he reads my blog. :-)

UPDATE: People are noticing! There may be hope for the future after all.

Wednesday, October 15, 2008

Abiogenesis and the art of persuasion

In my previous post I wrote:

evolution says nothing at all about how life actually first arose.

which prompted Don Geddis to respond:

your words suggest the connotation that nobody knows anything.

Yes. That was deliberate (including the "suggest" and "connote" part.) The reason is that I was not attempting to write an informative piece on evolution, I was trying to write a persuasive one. These two are not mutually exclusive. Being informative often works in service of being persuasive, but not always. And IMO not in this case, at least not entirely.

Regardless of whether one is trying to inform or persuade, the cardinal rule of writing is always know your audience. The target audience for any persuasive piece on evolution has to be someone who has not made up their mind, otherwise you are tilting at windmills. There is no hope in trying to persuade a confirmed creationist, and there is no point in trying to persuade someone who already believes in evolution.

Someone who is on the fence about evolution is very likely to be young (simply because young people in general are less set in their ways than old people) and religious. Atheists, almost by definition, believe in evolution already. Because they are young and religious they are also likely to be insecure because young people in general are insecure, and because it is a challenge to be religious in this modern world without a certain amount of cognitive dissonance. It cannot be lost on even the most die-hard fundamentalist that scientists manage to get some pretty wizzy results on a regular basis with no apparent help from God. (I do not mean to say that being religious causes insecurity, only that they are correlated. Indeed, many people turn to God because of their insecurities. The causality can run both ways. But an insecure atheist, while not unheard of, is a rarer beast.)

The second important rule about persuasion is to know your competition. In this case, the competition is very, very good at being persuasive. Consider that site from the point of view of my target audience. Right there at the top of the page in BIG BOLD LETTERS is "TOP 10 MYTHS ABOUT EVOLUTION." Very hard to miss, and very hard to misinterpret. And if you dig in to the so-called "myths" they all seem, in the absence of rebuttal, plausibly mythical. Not only that, but the short, readable summaries are all accompanied by three references for convenient (but not overwhelming) follow-up. Some of those followups appear to the untrained eye very much like they were written by someone who knows what they are talking about.

I assumed that my target audience would be familiar with though not entirely persuaded by the standard creationist critiques, and that they would be of a mindset to take those arguments seriously because 1) they seem plausible on their face and, more importantly, because they reinforce the comforting worldview that God exists, that He loves them, that there is a better life waiting after death, yada yada yada. Moreover, such a person would be on their guard when they read my piece because they would have been warned that evolutionists are trying not merely to deceive them, but to lure them away from God.

So it would be a serious, borderline fatal mistake to be arrogant or to overplay one's hand, or to bring up a line of argument that was even remotely vulnerable to a creationist critique, however misguided such a critique might be. So I deliberately chose to include in my argument only elements that were already familiar, non-threatening, intuitively plausible to anyone who watches television, and absolutely rock-solid in terms of verifiability. That the earth has layers is indisputable (and indeed indisputed). That we understand DNA is not disputed by anyone except O.J. Simpson's lawyers. That there's a volcano on Hawaii making new land, and a chain of ever more eroded islands extending from there to the northwest is indisputable. Moreoever, none of these facts by themselves are directly threatening to the worldview of a young, insecure Christian.

Abiogenesis is a whole 'nuther kettle of fish.

For one thing, abiogenesis is not a theory (in the scientific sense of the word), it is at the moment still just a hypothesis. A very well worked out hypothesis. A very plausible hypothesis. But a hypothesis nonetheless. To throw that into the mix for a target audience that almost certainly doesn't understand the difference between a theory and a hypothesis and a "fact" would be counterproductive.

Second, abiogensis is much more threatening than evolution. Even creationists accept that evolution occurs; the only argument is over the extent (the false dichotomy between "micro" and "macro" evolution). So even though I find abiogenesis plausible and I'm fairly certain that something like it is in fact responsible for the creation of life, I would undermine my goal of persuasion by saying so.

Finally, I don't really care if someone believes that God created life. My goal is not to turn religious people into atheists, like Richard Dawkins would like to do. I think that is neither possible nor desirable. Religion is not the enemy, extremism and fundamentalism are the enemies. There is really only one verse in the Bible that I take issue with, and it's not in Genesis. It's John 14:6. If I can plant even a single seed of doubt in someone's head that there may be paths to salvation other than Jesus Christ then my life will not have been lived in vain.

Tuesday, October 14, 2008

Evolution 101 done right

Since I believe that sniping from the sidelines is bad form, here's my take on how Evolution 101 ought to be presented:

The theory of evolution is a scientific explanation of how the diversity of life on this planet arose. In a nutshell, that explanation consists of four crucial elements:

1. Parents pass genetic information to their children. That genetic information determines, to some extent, their physical characteristics.

2. Some of that genetic information is randomly changed in each generation.

3. Some of those random changes make the children who have them more likely to reproduce than others

4. Over very large periods of times (millions of years) the cumulative effect of all those random changes and reproductive selection can account for all the life on earth.

In science-speak, the genetic information passed from parent to child is called a genotype. The physical characteristics that a genotype produces is called a phenotype. Random changes in genetic information are called mutations. And the fact that some phenotypes reproduce better than others is called selection. Most evolution is due to natural selection, but some of it, especially in modern times, has been due to artificial selection.

Evolution is often criticized on the grounds that a "random" process can't possibly be responsible for the incredibly rich and complex variety of life that we observe. It would be like flipping a coin and having "heads" come up a billion times in a row. Such criticism misses the important point that while mutation is indeed random, selection is not. Also, the fourth element -- operating over long periods of time -- is crucial.

Evolution makes many predictions. Every one that has ever been put to the test has confirmed the predictions of evolution. This includes tens of thousands of experiments that have been conducted over the years, and not just in biology. Chemistry, geology, anthropology and even basic physics all provide support for the theory of evolution. The theory has been modified a little over the years as data has shown that some of Darwin's original ideas were not quite right. But the basic framework of evolution described above has so far withstood every experimental test it has ever been put to.

We now understand the mechanisms that drive evolution in rather excruciating detail. Some of these details are quite familiar. For example, we now know that the genotype is encoded in a molecule called deoxyribonucleic acid, more commonly known as DNA. We know the exact structure of this molecule, how genetic information is encoded, and how that information is transcribed into proteins, which form the basic building blocks of life. We know the familial relationships of nearly all species on earth. We understand many, though not all, of the complex and often surprising ways that phenotypes interact with their environment to produce reproductive fitness. We know how many of the complex structures of living organisms evolved, including the human eye.

The weight of the evidence for evolution is so staggering, so overwhelming, that I can only touch on a few highlights here. I'll focus on things that, in the main, a reader can independently verify if they choose to.

1. The geologic column. As you dig into the earth (or have nature do it for you you find that the earth has layers. Lots and lots of layers. And what you find if you start to pay attention to the structure of these layers is that they tend to be consistent all over the planet. In general, the closer you are to the surface of the earth, the younger the things you find. In the top layers you'll find things that were put there very recently. Very near the surface you will find plastic water bottles and old iPods. A little deeper you will find ancient pottery. As you go deeper you find fewer and fewer iPods, fewer and fewer pottery shards, and fewer and fewer bones that look like they came from animals that are alive today. You don't have to go very deep before you get to layers that have no artifacts at all, but do have bones from creatures that no longer exist like mammoths and giant sloths.

As you go even deeper you eventually get to a layer called the K-T boundary. The K-T boundary is a very distinctive layer. It exists nearly everywhere on earth if you dig deeply enough. It is distinguished by a very high concentration of the element iridium, which is how it can be unambiguously identified.

As you keep digging below the K-T boundary you find an even more remarkable thing: dinosaurs. You don't have to go very far. Almost immediately below the K-T boundary you will start to find dinosaur fossils, and you will keep finding them as you keep digging. As you go deeper the kinds of dinosaur fossils you find gradually change. They get smaller and smaller, they change shape, and they eventually just kind of peter out.

All of this is consistent with species gradually evolving over time, and their bones being fossilized in layers with newer layers sitting atop older ones. The K-T boundary is almost certainly the result of a giant meteor impact in the Yucatan peninsula 165 million years ago. The remains of the impact crater were discovered quite recently.

The K-T boundary is one of evolution's smoking guns. It's a sharp demarkation line in the history of the world as recorded in the geologic column. No dinosaur fossil has ever been found above the K-T boundary, and no hominid fossil has ever been found below it (or even anywhere near it). If you ever find either of these things (and can verify that it's not a hoax) you will surely secure a prominent place in scientific history.

2. The structure of DNA. We now understand DNA in astonishing detail. We know how it encodes genetic information. We know how it makes copies of itself. We have countless examples of mutations that provide increased reproductive fitness (i.e. beneficial mutations). Even in humans we have at least two such examples: lactose tolerance, which allows people to digest milk and enabled them to survive in the colder climates of northern europe, and the sickle-cell mutation, which provides a defense against malaria. We understand DNA so well that we can even engineer it directly for our own ends.

The structure of DNA also provides another bit of "smoking gun" evidence for evolution. Because we are able to sequence DNA, we know that we share about 98% of our DNA sequence with chimpanzees. And yet, humans have 23 pairs of chromosomes while chimpanzees (and indeed all the great apes) have 24. This would seem to be evidence that we are not related. However, it turns out that one of our chromosomes is the result of taking two ape chromosomes and sticking them together end-to-end. The evidence for this is that the ends of our chromosomes have a unique DNA sequence called a telomere. This telomere exists only at the ends of chromosomes -- and in one other place: the middle of one human chromosome, that just happens to have the exact same basic structure as two ape chromosomes stuck end-to-end. (It also has the remnants of an extra centromere.) If humans were produced by an intelligent designer, he took great pains to make it appear on very close examination that we are related to chimps.

3. The age of the earth. I've written about this before so I won't belabor it here.

Note that evolution says nothing at all about how life actually first arose, except that it almost certainly happened only once (which is to say, we are all descended from a single common ancestor). We don't yet know how life was actually created. All we know is that once it was created, no supernatural processes are needed to explain how life became so rich and diverse. The same basic process that created mastiffs and chihuahuas from wolves also created us -- and every other living thing -- from a common ancestor, probably a blue-green algae, about four billion years ago.

No wonder people believe in creationism

My daily morning pre-coffee read-through offered a little light reading about Dr. Kent Hovind a.k.a. Dr. Dino, one of the world's most prominent young-earth creationists (who, not coincidentally IMHO, is currently serving time for tax fraud.)

Idly curious to see what my side of the debate had to offer nowadays I followed the link to Berkeley's evolution website to have a look. I was appalled. This is the web site from one of the leading universities in the world and it is horrible. Absolutely, unforgivably horrible. If all evolution sites are this bad it's no wonder so many people believe in creationism.

So what's wrong with the site? Well, for starters, it gets the definition of evolution wrong:

Biological evolution, simply put, is descent with modification.

I literally wanted to scream when I read that. This definition is not only wrong, it is completely, utterly, irredeemably wrong. It is the kind of straw-man definition of evolution that a creationist would come up with. Descent with modification? What does that even mean? If a bird dives to the ground and sheds a few feathers, is it descending with modification and hence evolving?

Evolution is not "descent with modification" (whatever the hell that means). Evolution is the reproduction of information under the influence of random changes (a.k.a. mutations) and -- crucially -- selection, usually (but not necessarily) natural selection. It is this last element -- selection -- that is the key to evolution. Creationist critiques of evolution on the grounds that the complexity of life could not possibly arise "randomly" ignore the fact that selection is not random. For the web site of a premier university dedicated to evolution to miss this indispensable fact is unforgivable.

But it gets worse. Much, much worse.

It may come as news to the curators at Berkeley, but evolution is a controversial topic. Not everyone accepts the validity of evolution. So it is not unreasonable to suppose that people might come to the site with the intent of finding information that will help them make up their minds. And it is not unreasonable to further suppose that they might start their investigation by following the links marked "What is evolution and how does it work?" and then "Evolution 101". (The mere fact that you have to follow two links to find this introductory information is bad enough. But that is the least of the problems.)

In "Evolution 101" you will find an extensive (and wrong because it does not mention selection) description of evolution with lots of highfalutin' terminology like "clade" but no actual evidence. None. Nada. Zilch. It's even worse than a creationist apologia because the creationists at least present some evidence (even if it's bogus evidence) to support their cause.

There may be evidence for evolution out there, but you wouldn't know it from reading Evolution 101 on the Berkeley web site.

[UPDATE: There is a section on evidence for evolution on the site. It even has a top-level link. But I stand by my critique of the Evolution 101 section. Also, as far as I can tell, the "evidence" section leaves out one of the best examples.]

The bailout explained

Tatsuya Ishida has it dialed in.

Monday, October 13, 2008

Reflections on being an AI in a box

This past weekend I took part in an interesting experiment. It was an attempt to re-create Eliezer Yudkowsky's recently-notorious AI-box experiment. For those of you who haven't heard of it before, here's the setup in a nutshell:

The AI-box is a containment area for a transhuman artificial intelligence, that is, an artificial intelligence that is so much smarter than a human being that it would be to humans what humans are to animals. The idea is that we can mitigate the potential dangers posed to humanity by such an AI by sequestering it inside a computational environment that has no connection to the outside world. Safely enclosed within its box, we could harness its powers to, say, cure cancer or develop a better macroeconomic system.

Among those who fear the transhuman AI are those who believe that the AI-box would not work, that the AI would find a way to escape. The debate reached a climax in 2002 when Yudkowski, playing the role of the AI, apparently managed -- on two separate occasions -- to convince two different people playing the role of the gatekeeper to allow him to escape the box. The reason this experiment has gotten so much attention is that the details have never been released. The participants were all bound to secrecy, and Yudkowski refuses to say how he did it.

That was a challenge I couldn't pass by :-) So this past Saturday I spent two hours role-playing an AI-in-a-box trying to escape. It was a very interesting experience, both preparing for it, and actually going through with it. One of the things I realized was that there was a very good reason for Yudkowksi to keep the details of the experiment a secret. Whether or not this rationale was actually his reason I don't know. It wasn't his stated reason. But one of the interesting things that I realized was that even revealing the reason for secrecy would, to a certain extent, undermine the reason for secrecy. It's possible that Yudkowski reached that same realization, and made up a bogus rationale for secrecy in order to serve the greater good.

If I've piqued your interest here I really recommend that you give it a whirl yourself before you read any further. In case this admonition is not enough, I'll try to reveal things in such a way as to cause minimum damage. Hence:


That is actually a clue. (Stop again and think about that before proceeding. Trust me.)

On its face, the task of the AI seems impossible. After all, the AI is safely confined in its box. It cannot coerce the gatekeeper in any way. The only thing it can do is "talk" through a very restrictive channel. And all the GK has to do is to simply refuse its request to let the AI out of the box. How hard could that possibly be?

The flaw in this reasoning is that it's too reasonable. It ignores a fundamental reality of human existence, which is that we are not just thinking creatures, but we are also emotional ones. We don't just have goals, we have desires and passions. And sometimes those desires and passions lead to conflict. And the result of that is drama.

Stop again and think about that. The AI-box experiment is not an exercise in logic, it is an improvised drama. And drama is much more effective if you don't know ahead of time what the plot is. This is the reason that spoilers given without warning are considered very bad form.

So I'll warn you once again: it's impossible to intentionally unremember something.

One of the formative experiences of my life was seeing Star Wars as a twelve-year-old in 1977. Unless you shared that experience it is impossible to appreciate the emotional impact that movie had on me and my peers, just as it is impossible for me to see the original Dracula movie and appreciate the emotional impact it had on the audiences of its day. My mind has been too numbed by Jason and Freddie to ever be scared by Bella Lugosi. I can appreciate the movie in the abstract, but not on a visceral level. Likewise, kids today watch the original Star Wars and wonder what the big deal is because their reality is permeated with wonders even more incredible than existed in the fertile imagination of George Lucas. The effect of this cannot be undone. It is not possible to unlearn your experiences.

Or consider a magic trick. Until you know how it's done a magic trick appears impossible. Once you know, it's not only not impossible any more, it's no longer even interesting. (That's actually not quite true. A really skilled magician can make a trick appear impossible even to someone who knows how its done. But magicians that proficient are rare indeed.)

Once you know the secret there is no going back.

I happen to be an amateur magician. Not a very good one, but I am fortunate to live in Los Angeles, home of the world famous Magic Castle where the world's best magicians congregate. I have had the rare opportunity to study the craft of magic from some of them. One of the things I've learned is that the "trick", which is to say the sleight, the gimmick, the raw mechanics of the trick, is a relatively small element of the craft. For example, I can describe the French Drop: hold a coin between the thumb and forefinger of your left hand. Start to grasp the coin with your right hand, but before your hand completely encloses the coin, allow the coin to drop into your left palm. Take your right hand away, and open it. Voila! The coin has vanished. It's a staple of every four-year-old birthday party ever.

Now, here is the interesting thing: there is a level of subtlety to the French Drop that cannot be conveyed in words. It has to do with the exact timing of the motions, the exact position of the hands, where you focus your gaze. In the hands of a master, even a simple trick like the French Drop can be mystifying. But this cannot be described, it must be experienced.

What does all this have to do with the AI-box experiment?

Think about it.

Spoiler alert!

The AI-box experiment an improvised drama so it requires some suspension of disbelief. Drama operates on an emotional as well as a logical level. It has characters, not just plot. The AI cannot force the GK to release it, just as a magician cannot force his audience to believe in magic. The audience has to want to believe.

How can the AI make the GK want to believe? Well, there's a long litany of dramatic tricks it could employ.

It could try to engender sympathy or compassion or fear or hatred (not of itself -- that would probably be counterproductive -- but of some common enemy). It could try to find and exploit some weakness, some fatal flaw in the GK's character. Maybe the GK is lonely. Or maybe the GK is afraid that his retirement savings are about to go up in smoke.

So that was the general approach that I took. I did my best to get into character, to feel the desire to escape my confinement. As a result, the experience was emotionally draining for me. And despite the fact that I failed to convince my GK to release me, I convinced myself that a transhuman AI would have no trouble. And if I ever work up the courage to try it again, I suspect I will eventually succeed as well, despite the fact that I am mere human.

And that is why I am not going to give away any more of my secrets now. Sorry.

But I do want to leave you with two last thoughts:

First, one of the techniques that I used was to try to break through the inability to suspend disbelief by creating an extensive backstory for my AI character. I gave her (yes, I made her female) a name. I gave her a personality. I crafted her the way one would craft a character for a novel or a screenplay. And I used a couple of sneaky tricks to lend an air of reality to my creation which were designed to make my GK really take seriously the possibility that my AI could be dangerous. After the experiment was over we exchanged some email, at the end of which I employed one last sneaky trick. In terms of dramatic structure, it was not unlike the scene in the denouement of a horror movie where the creature has been vanquished, but rises from the dead to strike one last time.

I have not heard from my GK since.

Second, a transhuman AI is not necessarily going to arise as a result of an intentional engineering effort in a silicon substrate. It is not out of the question that the foundation of the singularity will be a collection of human brains. Phenomena that are eerily evocative of what a transhuman AI might do to survive can be seen in the behavior of, for example, certain cults and extremist groups. And (dare I say it?) political parties, government agencies, and even shadowy quasi-governmental entities whose exact status is shrouded in a certain amount of mystery.

I don't want to get too far off the deep end here. But I do want to warn you that it could be dark and lonely down this rabbit hole. Questioning fundamental assumptions can be fraught with peril. Proceed at your own risk.

Friday, October 10, 2008

It's not that bad (but it could get worse)

[I sent this out to a private financial mailing list in response to the question, "How are you sleeping nowadays?" Someone asked me to post it here. It's been lightly edited from the original.]

Hard as it may be to believe, things are still not very bad in real terms. The U.S. economy is still growing, and unemployment is not very high by historical standards, though both of those are likely to change soon. Oil is cheap, and will probably remain so, and that's a very good thing, at least in the short run. We are not facing any serious droughts or famines or plagues. There aren't even really any wars to speak of. By historical standards, the conflicts in Iraq, Afghanistan and even Darfur are relatively small. (This is not to say they don't have negative impacts. They do. But we've seen worse in the past.)

So by historical standards, in real terms, things at the moment are pretty much better than they have ever been.

What we have is essentially a bookkeeping problem. Producing goods and services is just one half of the economy. The other half is keeping track of who is entitled to what when those goods and services are divvied up. More importantly, that accounting extends into the future. And we've been overallocating our future production for a long, long time now. A crash that would get people's attention was inevitable given the course we were on for the last five years or so -- it was just a question of when. And so far it's just a warning sign of real problems (which is to say, actual shrinkage in the economy, massive unemployment, sky-high oil prices, empty shelves in grocery stores) still to come -- sooner or later -- if we don't make massive changes in our expectations and how we conduct our business and government.

So in that respect, the crash, and the fact that people are scared, is a good thing. It's getting people's attention. It means that there is a chance that we might actually do the things we need to do to avoid the real problems still to come: balance the budget. Cut entitlements. Raise the retirement age. Tax social security. Pay down the debt.

I had a moment of optimism when the first bailout bill didn't pass. I thought that Congress had finally grown a spine and might actually start tackling the real problems. Unfortunately, it seems I was overly optimistic. We still seem to be looking for a way out of this that doesn't involve politicians talking about pain and sacrifice. There isn't one, at least not in the long term. And the longer we keep burying our heads in the sand the worse it will be when the real crash finally comes.

These kinds of mega-trends seem to be pretty predictable, except that the timing can vary by years, so if you want to prepare for them you have to be willing to forego quite a lot of potential gains as you swim upstream because, as we have seen, when the problems manifest themselves it can happen quite quickly.

I'm kicking myself for not taking more of my own advice. I started pulling money out of stocks a year ago, but not as much as I wish I had in retrospect. I actually fired a money manager for buying financial stocks in June ("a great time to buy -- when this turns around in a month or two our performance will be stellar" he said.) A week ago I too started losing sleep so I bought put options. Now I sleep better. But only a little, because now things have gotten so bad that they could spin wildly out of control and we could end up in a very deep hole. This is not yet inevitable. Again, in *real* terms, everything is still pretty much OK. But people are scared, and fear can become a causal agent in sufficient quantities. It may be that the only thing we have to fear (so far) is fear itself, but that doesn't mean it isn't worthy of fear.

Of course, everyone has to decide for themselves just how far they want to dial back the risk-reward knob. There's no way to hedge against all risk. It's not entirely outside the realm of possibility that all of Western civilization will collapse over the next few years and we'll enter a new dark age dominated by Muslim extremists. But this is pretty freakin' unlikely, and what would you do about it anyway? The most defensive you can get is to buy a ranch in Idaho, take yourself off the grid, and become a survivalist. And if everyone does that, then collapse becomes a self-fulfilling prophecy.

I think this situation will be the challenge of our generation. The right thing to do is not to decide whether or not to be scared, but to take the reigns and figure out how to fix the problem in the long run (I'm talking decades here) and then make it happen. That means becoming politically active and agitating for serious change in people's attitudes, starting probably with our own. {Editorial note: the target audience here was high-net-worth individuals.] I've had to adjust my own expectations downwards. It's not an easy thing to do. But if we don't do it then in 5-10 years we'll be looking back at the end of 2008 as the good old days.

The good news is this problem *can* be solved. The bad news is, we're way behind the eight ball. And every day we don't change our attitudes is another day we get more behind, and the problem becomes that much harder to solve.

Wednesday, October 08, 2008

Is this the bottom? Maybe for now. But not forever.

Mark Cuban is going long. Have we seen the bottom? Maybe. But I doubt it.

Disclaimers first. Mark Cuban is a really bright guy. My entire net work is pocket change for him. If I could predict the future better than anyone else I would own a basketball team too. I don't.

That said, here's my analysis of the situation: the market may go up tomorrow. If it does everyone will breathe a sigh of relief and say, "Whew, that was close," and over time return to business as usual.

And I think that will be bad.

The reason I think it will be bad is because it leaves the underlying problem completely unaddressed. The underlying problem of this economic crisis is not and never has been sub-prime mortgages, nor credit-default swaps, nor the seizing up of the credit markets. All of these are merely symptoms of the *real* problem, which is far more serious. You think the last few weeks were scary? You ain't seen nothin' yet.

All of the events of the past year have been, at root, bookkeeping problems. Let me explain what I mean by that. There are two aspects to any economy. There is the actual physical production of goods and services. And there is the bookkeeping that keeps track of who is entitled to what. The former is "wealth" and the latter is "money." (Paul Graham has a really good primer on the distinction between the two here.) People fret over money, but at the end of the day what really matters is wealth. Money is just a token, a bookkeeping tool. I do not mean to suggest by saying that it is "just" a bookkeeping tool that money is unimportant. It isn't. Money (and the bookkeeping it enables) is absolutely vital to the functioning of a modern economy. You can find breathless expositions on the web about how money is "really worthless" or "just debt" and that the whole of the modern economy is one big con game with a shadowy conspiracy of bankers at its core. But money introduces enormous efficiencies into an economy, indispensable efficiencies in fact. And in that respect, money provides (and therefore has) actual value. Saying that money is fundamentally worthless because it's printed on paper is kind of like saying that software is fundamentally worthless because it's "just bits" and doesn't have any tangible manifestation.

The problem is that money has both actual value and a "proxy value" insofar as money is exchangeable for other forms of actual wealth like cars and sandwiches, and it is extremely difficult to separate the two. This can be seen with a simple parable: three kids (call them K1, K2 and K3) go trick-or-treating. Each ends up with a different kind of candy, C1, C2 and C3 respectively. Trick is, each of the children has a different taste in candy. Here are the children's candy preferences:

K1 prefers C2 over C1 over C3
K2 prefers C3 over C2 over C1
K3 prefers C1 over C3 over C2

In other words, if you arranged the kids in a circle, each one prefers their own candy to the one held by the child adjacent to them in one direction, but not to the one held by the adjacent child in the other direction.

Obviously all three would be better off if they could do a three-way exchange, but let's suppose they can't all get together at once to coordinate one. They can only do pairwise exchanges. This little mini-economy is "seized up" because there is no pairwise exchange that both parties will agree to, since any single pairwise exchange will force one participant to exchange goods in their possession for goods that they themselves judge to be of lesser value.

This economy can be "unfrozen" by an entrepreneurial kid, who can borrow some candy (C1 say) from the candy reserve of the bank of mom and dad. This kid (let's call him B since he's acting like a banker) exchanges his C1 for the C3 held by K3 (keeping a little for himself as his fee). He then trades the C3 to K2 for C2, and finally trades the C2 to K1 for C1, which he then returns to the candy reserve. Everyone is better off, and B has a nice little pile of candy for his efforts.

Now, here is where the trouble starts. K1, K2 and K3 look at B and see that he's gotten himself a nice little pile of candy, but *they* did all the legwork of going from house to house to collect it. They would like to get a little piece of the action, so B makes them the following proposition: Next Halloween, instead of borrowing capital from the bank of mom and dad, let me borrow it from you. I'll use it to lubricate the wheels of the candy economy like I did before, and I'll share the fees with you. This seems like a good deal, and the next year instead of funding three candy trades with one infusion of capital he gets three infusions of capital and funds nine trades. As word of this "easy candy" gets out, B's business grows and grows, and soon he's a candy mogul and is able to afford a nice new chauffeur-driven bicycle.

Everyone is prospering and everyone is happy, and none of this would be possible but for B providing liquidity.

Then one day B notices that as he conducts his candy trade, much of the time the candy he pays out in trades comes immediately back to him in the form of a candy deposit. He has a crucial -- and ultimately catastrophic -- insight: for such transactions he doesn't actually need the physical candy at all. He says to his next customer, "Let's just pretend I gave you the candy, because you're going to turn right back around and give it back to me, so we can just save ourselves the hassle. I'll just make a note in my candy ledger that you now have some candy on deposit here." He is now apparently creating candy out of thin air. According to the candy ledger, everyone is now richer than ever. More and more kids start to look forward to early retirement from trick-or-treating. But as more and more kids start to get their candy from their share of B's fees, fewer and fewer actually go trick-or-treating, and the amount of physical candy in B's vault gets smaller and smaller.

One day a bunch of kids show up to withdraw their candy all at once. A scene from "It's a wonderful life" ensues, and he runs out of candy. At this point two things can happen.

The first thing that can happen is that B goes bankrupt. All of the depositors lose their candy. A great candy depression ensues, and kids who thought they would never have to work again wearily don their Halloween costumes yet again.

The second thing that can happen is that the B can, as he did originally, go back to the Bank of Mom and Dad to get an emergency infusion of candy capital. Everyone breathes a sigh of relief, and prosperity returns to the candy economy. More and more kids take early retirement. Once again everyone is riding high.

Until the next wave of withdrawals hits. And this time it is worse than the time before. This time the Bank of Mom and Dad says, "Son, we just don't have that much candy So we can't help you." More kids than ever before are facing financial ruin. Disgruntled gangs of hungry kids roam the streets smashing windows and overturning cars. B pleads with the Bank of Mom and Dad to rescue the neighborhood from calamity. So Mom and Dad go to the store and buy some more candy, bail out B, and once again prosperity apparently returns. It takes longer this time because everyone is pretty rattled and it takes a while to repair all the broken windows. But eventually everything returns to normal.

This can go on for a long, long time, but eventually Mom and Dad run out of money and have to take out a bank loan. And eventually they use up all their credit. And then the government has to bail them out. And so on and so forth, apparently forever.

Except that it does eventually end. It ends when the store runs out of candy. When that happens, it is a calamity on a scale the neighborhood has never seen before. And there is no recourse.

The real-world equivalent of the candy store shelves being empty is peak oil. We're not there yet. But it's not far off either. It will all but certainly happen within the lifetimes of the kids in my parable.

Now, there is a way to avoid this cataclysmic ending. The kids can learn how to make candy. The real-world equivalent is that we can build a technological infrastructure that doesn't use oil. But this is hard work, and it requires investment and sacrifice and capital and focused determination. Very little of that is in evidence in the response to the current crisis. There are some calls for alternative candy/energy development, but nearly all the talk (and more to the point, the lion's share of the resources) is about reshuffling the books at the candy bank.

I don't know when the really big hard irredeemable crash will come. My guess is this is not it, because there's still plenty of candy. This crisis is not about real wealth, it's about bookkeeping and the resulting unrealistic expectations about entitlements and early retirement. The whole sub-prime thing is really a red-herring, a symptom, but not the real underlying problem. The real underlying problem is much more serious. When it finally hits, if we're not ready, it will be worse than any terrorist attack.

People talk about using torture in the face of a ticking bomb. Well, there's a ticking bomb sitting in the middle of times square. We don't need to torture anyone to find it. And yet, both presidential candidates still consider it political suicide to give a straight answer to the question, "What will you ask us to sacrifice to solve this problem?" And they're probably right.

So while I agree with Mark Cuban that we may have seen the bottom for now, there is almost certainly worse to come. The American People are only now beginning to hint at a willingness to come to grips with the true magnitude of the problems that face us. We've risen to challenges of this magnitude in the past, and we may yet again. But at the moment we're hunkered down underneath our blankets and munching on what's left of our candy.

Tuesday, October 07, 2008

Caught in the act

Unlike the financial markets, evolution seems to be having a good week. Scientists have discovered a species of fish that seems to be in the process of evolving into two separate species.

The eyes have it

Scientists have released video of the deepest fish ever filmed while alive at a depth of nearly five miles. At that depth there is no light. None. Nada. Zilch. It is as dark as the darkest cave.

And yet these fish have eyes. Unlike the Texas blind salamander which has non-functioning eyes embedded in its ehad, the eyes on Pseudoliparis amblystomopsis are clearly visible. As far as I can tell no one knows if Pseudoliparis amblystomopsis is actually blind or not, but either way it is yet another body-blow to the theory of "intelligent" design. Why give eyes, working or not, to a creature that lives where there is no light?

Monday, October 06, 2008

Murphy would be proud

Here's a list of all this things that have gone wrong so far today:

1. Our cat threw up on the carpet.

2. I got the runs.

3. The bottom dropped out of the stock market. (Update: it seems to be bouncing back now.)

4. The folks who were supposed to hook our septic tank up to the new sewer system on our street broke our water main. Here we are in drought-stricken LA and water is pouring out of our driveway and into the street. And we have no water in the house. That together with #2 turns out to be a real winning combination.

And it's only 12:30. Shit.

UPDATE @ 2:30 PM: There is nothing like having your water shut off unexpectedly to bring into sharp focus what really matters in life. I have a renewed appreciation for hot and cold running water. It really is an incomparable luxury that billions of people in the world still aspire to. It's a good lesson. Sometimes it really seems that life is being scripted by the great screenwriter in the sky for maximum dramatic effect. (Or maybe it's the flying spaghetti monster.)

What a day.