Irregular Roundup, 13th May 2024

We begin today’s Irregular Roundup with effective altruism.

Effective Altruism

Joachim Klement took a look at effective altruism (EA), now ruined by  Sam Bankman-Fried (SBF). He began by quoting John Lanchester in the London Review of Books:

An unlikely bet with a huge pay-off could well offer a higher [expected value] than something which looked smaller and more sensible. Say, a charitable exercise has only a one in a billion chance of succeeding, but if it does succeed, will save humanity […]

You have $25,000 to give. Should you give it to a political party, to help fund your sick neighbour’s cancer care, to build wells in Africa, or to this one-in-a-billion long shot?

The [effective altruism] calculation is that it costs $5000 to save a life, so your long shot represents good value. The [expected value] of your bet is $35,000: 7 billion lives x $5000 each, divided by a billion for probability.

SBF thought that crypto trading gave him a long shot at making billions, which he might then have given to charity (or possibly not).

• Why let a little bit of fraud get in the way, and no need to worry about the investors he was cheating in order to help strangers.

EA is part of utilitarianism:

The ends of maximising utility justify the means of getting there.

You can contrast utilitarian approaches or the broader concept of consequentialist approaches (where actions are guided by their consequences) with deontological approaches (where actions are guided by some commonly accepted rules).

The prime example is Kant’s categorical imperative which tells us to only act in such a way that if others acted the same way it would be acceptable to us.

The problem with these approaches is defining the group you feel part of.

• Most of the lefty hippy protest movements of today define the group as widely as possible, including all people – of whatever intention towards me and my way of life – and sometimes extending the group to include animals, plants, or even the whole planet (which is surely indifferent to human life).

Joachim looks at a new trolley problem study which examines how well the trolley behaviour predicts behaviour in other situations.

In a utilitarian world, everyone would flip the switch [to kill one person rather than three]  because killing one person is better than killing three, but in practice, only about three in four people flip the switch.

The study used real money to get subjects to choose between utility-maximising behaviour and rules-based (moral/ethical) behaviour. There are three results:

1. The trolley problem has no correlation with how people behave in real life. 
2. Whether people choose a utilitarian/consequentialist course of action or a deontological/rules-based course of action depends on the situation at hand. People are not consistent.
3. The dictator game reliably predicts real-world actions.

The dictator game is the one in which you decide how much of a windfall goes to the stranger you are paired with.

• If they think your offer is too low, they will reject it and you both get nothing, so you need to share near-equally.

Joachuim calls this calculation empathy, but it feels like game theory to me.

• You need to anticipate your opponent’s (or for him, your partner’s) move to work out your own best approach – a form of minimax.

You can conform to societal norms and still maximise utility.

• SBF just forgot about the norms, or more likely decided they did not apply to him.

Familiarity bias

For the FT, Lex looked at familiarity bias.

You use and like a product. Does that make it a good candidate for investment? Legendary investor Peter Lynch thought so. “Buy what you know” was a keystone of his investing philosophy — one that earned the Fidelity Magellan fund a benchmark-beating 29 per cent annualised return under his 13-year stewardship.

And lots of firms like to have their customers on board as shareholders.

• It hasn’t worked out for Reddit fans (I’m a long-term user, and got an invite to subscribe, only to discover that the offer was US-only) so far, but it’s only been a month.

Uber and Airbnb set aside allocations for eligible drivers and hosts respectively in their IPOs. Ocado offered customers shares when it went public in 2010; so too did investment platform AJ Bell, broker Hargreaves Lansdown and, more recently, fintech PensionBee.

Research shows that shareowners are more loyal, spend more, and tell their friends.

• They also know about the firm they have invested in.

The downside is that they over-allocate to their favourites, hitting diversification.

• And if the company works at keeping these customers sweet – or even offers perks to shareholders – it might hit profitability.

FTSE all-time high

John Authers noted that the FTSE-100 hit a new all-time high, above 8,000.

• It’s only 14 months since the previous high, but the UK has been lagging behind more celebrated indices, such as the Nasdaq.

It’s not all good news, though:

Once it’s put in an international context, the performance looks far less impressive and owes much to the long-term deterioration in the pound. In dollar terms, it’s still far below a high set in late 2007.

It’s the same story if we compare the UK index to the world ex-UK (a benchmark introduced in 1994 and which still doesn’t have an ETF attached, though there are OEICs):

The rot set in long before Brexit or the Kwarteng budget.

• John pinpoints the collapse of Nothern Rock in 2007 as the beginning.

He ends on a bright note, with the possibility of further support from cuts to the UK interest rate in advance of the US Fed.

• I’m not convinced these will happen, as they would further weaken the pound, and risk us importing inflation.

But it is an election year, so all bets are off.

Bitcoin halving

John has a new assistant, Richard Abbey, who wrote about the Bitcoin halving.

• At the moment, it looks like the event was priced in, as the BTC price is at $66K, well below the peak of $74K in March.

But:

Proponents pointing to past halvings believe that it’s too early to dismiss the impact of this year’s event.

The having has been good for the BTC miners, as transaction fees have shot up.

• The day after the halving, miners made $107M in revenue, beating the previous record of $79M from March.

CryptoQuants data showed that transaction fees jumped by more than 730% to $250.

As well as the halving, a flurry of meme coins pushed up transaction costs:

Through a process called Rune Protocol people can create their fungible tokens on the blockchain. To get their hands on these tokens, users pay extra high fees to Bitcoin miners.

I don’t understand but perhaps the publicity around the halving makes it a good time to issue meme coins. The windfall for miners could be short-lived:

The halving cut the amount of Bitcoins that miners can earn daily for validating transactions to 450 from 900. The current price of digital assets could spell revenue losses of around $10 billion a year for the industry as a whole.

So traders are shorting the miners:

Top mining companies like Marathon Digital, CleanSpark, and Riot Platforms are the most shorted.

Labour watch

The Economist wrote about what fiscal rules Britain should have and looked at those proposed by Labour.

• The idea behind these rules is to prevent politicians from borrowing too much and leaving the next government to sort out the mess.

The problem is that they change too regularly, and are too easy to game.

Between 1992 and 2021 [Britain’s] fiscal rules have lasted, on average, for under four years. Fiscal rules gain power with age: bond markets take ever-changing promises less seriously, which means higher borrowing costs. 

Rachel Reeves will keep the main existing rule, that the ratio of government debt to GDP falls in the fifth year of the five-year forecast from the OBR. But:

Five-year forecasts are imperfect. The OBR‘s past growth projections have missed the mark by 0.9 percentage points on average.

This rule also has the problem that years 1 to 4 can be ignored, with the clock reset each year.

• Jam is always five years away, and The Economist would prefer a three-year rule.

Reeves will change the second rule, replacing a 3% of GDP borrowing cap with a balanced budget on day-to-day spending (eg. welfare) but excludes borrowing for infrastructure etc.

• The Economist likes this separation, but I worry about what Labour might deem “infrastructure”, particularly in the area of the energy transition.

She also plans to use public sector net worth (PSNW) as a measure, which should work against selling assets to raise money.

• If you want a smaller public sector (as I do), this is a step in the wrong direction.

She has said nothing about making OBR forecasts more realistic:

The OBR is bound to take the government’s stated intentions at face value. This protects the watchdog’s independence but strains its credibility. Since 2011 successive chancellors have pledged to raise fuel duty, for example; none has done so, yet the OBR must pretend they will.

More scenario planning (fuel duty is not raised, etc) would be helpful.

Quick Links

I have just two for you this week:

1. Following up on a previous link, Bloomberg explained How Could the Death Bets Make Money?
2. And UK Dividend Stocks looked at The FTSE 100’s record highs: Bubble or new bull market?

Until next time.