Tuesday, November 30, 2010

Small Steps Toward a Much Better World

Today I am highlighting a blog recently added to my blog roll: Marginal Revolution. Economists and authors (econo-web-loggers?) Tyler Cowan and Alex Tabarrok write mainly about how insights gained from economic data may be used to nudge the world toward a dramatically better state. Note the emphasis on achieving dramatic (revolutionary) outcomes from seemingly small, carefully selected actions taken in the margin.

According to game theory, there are two common strategies that people employ in their approach to competitive situations. One is summarized by the slogan, "Play to win." This strategy is aggressive, offensive, oriented on running up the score. The other could be described as "Play not to lose." This strategy is defensive, with the goal being to create and sustain a solid base and, rather than rushing to the finish line, merely stay one step ahead of the competition. We're talking about greed and fear.

I really like the blog because the two authors cover a very wide range of interesting issues. They occasionally highlight one or both of the two perspectives I described above: that is, to maximize the best possible outcome, or to minimize the worst possible outcome. Whether a person is fearful or greedy depends on many different factors. Two different people might take very different strategies in the exact same circumstances, so personality (risk-seeking, risk-averse) is one factor. Others might include time horizon, margin of safety, etc.

For example, you may want to maximize the return on your investment portfolio. To accomplish your objective of higher returns, you might take on higher risks, including options strategies and real estate investment trusts and commodities trading. After losing big in the housing collapse, you might switch to a risk-averse strategy of defensive investments that are unlikely to lose value. Of course, they also have very limited upside potential. Over time, and with experience, you might adopt a portfolio of investments that allows you reach your return objective without excessive risk. The curve that represents the balance between risk and return in a maximization function is called the "efficient frontier." Cowan and Tabarrok speak to sliding along the efficient frontier to get the maximum return without excessive investment.

Minimization functions are a little different, in that there is more emphasis on avoiding pain. The key question is how best to delay the worst possible outcome, be that on a global, national, regional, local, or even personal level. As a father, I consider it part of my job to push Armageddon to the right just long enough to ensure that my children get a shot at a good life.

Cowan and Tabarrok are fairly neutral in their outlook. I identify with their "play to win" philosophy when they are writing about optimization problems. They keep fear and greed in balance, sliding along the efficient frontier in what strikes me as a consistently reasonable manner. They also write very plainly about some of the more stark and dismal aspects of modern life. The problem of overcrowding in Chinese cemeteries caught my eye as one example. When it comes to major cultural impacts of small changes to death rituals, a "play not to lose" strategy is needed.

Check it here: Marginal Revolution

Tip o' the hat to Angelo for bringing this blog to my attention.