Brian Keng

  • A Slot Machine Riddle

    Here is a riddle I came across while reading a speech by the wise Charlie Munger (transcribed by Whitney Tilson):

    “You own a small casino in Las Vegas. It has fifty standard slot machines. Identical in appearance, they’re identical in the function. They have exactly the same payout ratios. The things that cause the payouts are exactly the same. They occur in the same percentages. But there’s one machine in this group of slot machines that, no matter where you put it among the fifty, in fairly short order, when you go to the machines at the end of the day, there will be 25% more winnings from this one machine than from any other machine. Now surely I’m not going to have a failure here. What is different about that heavy winning machine?”

    Now before you read ahead for the answer think about it.  I sure did, and didn’t really come up with a good solution.  Here’s a hint: it involves a psychological factor.

    Give up? Well, let’s reason through it.  If one slot machine in particular keeps making more money, more people must be playing it (and losing).  But why are they playing it more?  Well, since the machines look identical, it must be something involved with the slot machine game mechanics.  But they are all paying out at the same rate.  So what’s left that could vary?  The human factor.  People are playing it more because everytime they lose, it’s a near loss!  Cherry… cherry… grapefruit.  “I almost won, I’ve got to keep going!” they’ll say.

    The point Charlie is making here is that there are several simple principles that make sense out of our irrational human tendencies, and going through life without understanding them is like “a one legged man in an ass-kicking contest.”  Despite learning about logic and quantitative calculations, there’s still much to learn about logically thinking about the illogical systems (i.e. human systems and interactions).  And much of the difficult problems in life can be attributed to this one topic.

    As for me, I think I’ll be just fine so long as I can avoid landing on my butt too often.

  • Fortunetellers, Stockpickers and the Former Chairman of the Federal Reserve

    Here’s a question, what’s the difference between the three of them?  Here’s a hint: not much.  Here’s an excerpt from an interview with Alan Greenspan, former chairman of the Federal Reserve:

    “I’ve been in the forecasting business for more than half a century.  If I get it right 70 percent of the time, I consider that very successful.  People don’t realize that we cannot forecast the future.  What we can do is have probabilities of what causes what, but that’s as far as we go.  And I’ve had a very successful career as a forecaster, starting in 1948 forward.  The number of mistakes I have made are just awesome.  There is no number large enough to account for that.
    …
    Forecasting our futures is built into our psyches because we will soon have to manage that future.  We have no choice.  No matter how often we fail, we can never stop trying.  The ancient Greeks had the Oracle of Delphi … And then there’s Nostradamus, two millennia later… Fortunetellers and stockpickers today make a reasonably good living.  Physical scientists can forecast with some precession.  But in economics, we are extraordinarily fortunate that we succeed a majority of the time.”
    Alan Greenspan Interview, Business Week dated Aug 13-26, 2012.

    Although many blame Alan Greenspan for the financial crisis, there is no doubt that he is a highly intelligent fellow and an excellent economist.  During his 18 1/2 year tenure at the Fed, he undoubtedly had access to the best information regarding the entire economy.  Even with this massive advantage, he still couldn’t get it right more than about 70% of the time.  Just the fact that he celebrates this number should give you an idea of the predictive power of the “science” of economics (and stockpicking and fortunetelling).  Next time you see an economist on TV, ask yourself, is this guy smarter than Alan Greenspan or does he have access to more information than the Federal Reserve?  If not, better not bet on what’s he’s saying to come to pass.

    Despite this massive deficiency in the predictive power of economics, it’s the best we got.  Better to have 70/30 odds rather than 50/50.  The main problem really is the people who try to convince you that it is a hard “science” — it is decidedly not.  Just like the fortuneteller or the stockpicker who tells a convincing story about how you’re going to win the lottery, or about the next big things, so do economists spout their fancy tale that the economy will go up, or down, or sideways, or maybe not even be here tomorrow.  Just as Warren Buffett famously said:

    “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

    Looks like it’s going to be sunny this weekend, better bring my umbrella…

  • You Suck at Happiness

    “Most people don’t know the basic scientific facts about happiness—about what brings it and what sustains it—and so they don’t know how to use their money to acquire it.”
    — E. Dunn, D. Gilbert and T. Wilson. “If money doesn’t make you happy, then you probably aren’t spending it right,” Journal of Consumer Psychology.

    I’m sorry to tell you, you suck at happiness.  You have some vague idea of how to get it, but you have no idea how to maintain it, what is going to make you happy in the long term, or what even it really means.  In other words, you suck at it.  Of course, what I really mean is that most people don’t have a very good understanding about what makes them happy in the long term or how to get it.  As that quoted paper suggests, we can buy happiness but not in the way you’d expect.  Jeff Atwood has an excellent summary on the topic.

    Human nature being what it is, most of us would not readily admit that we have a problem with happiness.  Who needs to teach you how to be happy?  It’s just one of those things that we innately know… right?  Well, I disagree.  It’s one of those human quirks where we can’t reason rationally when it comes to ourselves (everyone’s an above average driver you say?).  That’s where the almighty science comes in to give us a hand about what we’re really after.

    Two important lessons that really stood out for me are from Jeff’s article:

    Buy experiences instead of things.
    Things get old. Things become ordinary. Things stay the same. Things wear out. Things are difficult to share. But experiences are totally unique; they shine like diamonds in your memory, often more brightly every year, and they can be shared forever. Whenever possible, spend money on experiences such as taking your family to Disney World, rather than things like a new television.

    Buy many small pleasures instead of few big ones.
    Because we adapt so readily to change, the most effective use of your money is to bring frequent change, not just “big bang” changes that you will quickly grow acclimated to. Break up large purchases, when possible, into smaller ones over time so that you can savor the entire experience. When it comes to happiness, frequency is more important than intensity. Embrace the idea that lots of small, pleasurable purchases are actually more effective than a single giant one.

    This is interesting because this is a bit counter-intuitive to how the conventional (consumer-driven) thinking about happiness goes.  So a two-week vacation in Hawaii is better than a brand new Porsche, and a variety of less expensive meals is better than the super expensive French restaurant.  Makes you think about whether that last big purchase was really worth it.  All I know is that I’m going to start spending my money where it makes me the most happy.  Now where did I put that iPad…

     

  • The Rich Getting Richer

    “There is only one class in the community that thinks more about money than the rich, and that is the poor. The poor can think of nothing else.”
    — Oscar Wilde

    Ever heard of the term rat-race? Wikipedia defines it as “an endless, self-defeating or pointless pursuit.  It conjures up the image of the futile efforts of a lab rat trying to escape while running around a maze or in a wheel.”  Sound familiar?

    I believe one of the biggest fallacies in building wealth is that a high paying salary is important.  My argument for this is that in most developed countries (including mine), the highest marginal tax rate on salaried income is almost half your income (about 48% in Ontario)!  This means that even if you’re working your butt off to make $500k/year, every extra dollar you make will only net you 50 cents.  The rest is going to pay for our government services, healthcare, transportation etc. (Thanks rich people!)  Another more theoretical point is that, it is almost never the case that you can grow your salary exponentially.  You are typically paid in some proportion to the hours you work, and you only have so many hours.  Despite this, for some strange reason there are (what seems like) an overwhelming number of very wealthy folks out there.  How?

    Well this article from inc.com has at least part of the answer.  Here’s how the top 400 income earners in 2009 made their money (in the US):

    • Wages and salaries:  8.6%
    • Interest: 6.6%
    • Dividends: 13%
    • Partnerships and corporations:  19.9%
    • Capital gains: 45.8%

    This distribution is very telling.  The salary/interest/dividend column is the smallest, while the bulk of their income came from businesses and capital gains.  This should come as no surprise as the former category gets taxes heavily (at least in Canada), while the latter enjoys a much more favorable tax rate.  It should also be no surprise that the former categories are the easiest ways to make money, while the latter ones are much more difficult or risky. So the conclusion is, want to get rich?  Start a business or find an asset to invest in.  How to do it?  Ah, there’s the rub.  You’ll have to figure that out on your own.  If you’re not up for it, I hear there’s an opening for a position as a test subject; requirements: must like cheese.

     

  • PhD Grind

    Ever wonder what it’s like to go through a PhD?  Well, Philip Guo has written an amazing 122-page account of his experience doing a PhD in computer science at Stanford.

    Despite the story being about his personal experience, his PhD experience resonates (according to other comments on the internet) with many other technical and scientific fields.  My experience was eerily similar to his as we’re in very similar fields (computer engineering vs. computer science).  It’s quite funny how despite the wide variety of different things that PhDs around the world go through, there still are some commonalities.

    I highly recommend you read it.  Here’s a teaser:

    If you are not going to become a professor, then why even bother pursuing a Ph.D.? This frequently-asked question is important because most Ph.D. graduates aren’t able to get the same jobs as their university mentors and role models — tenure-track professors. There simply aren’t enough available faculty positions, so most Ph.D. students are directly training for a job that they will never get. (Imagine how disconcerting it would be if medical or law school graduates couldn’t get jobs as doctors or lawyers, respectively.)

    So why would anyone spend six or more years doing a Ph.D. when they aren’t going to become professors? Everyone has diff erent motivations, but one possible answer is that a Ph.D. program provides a safe environment for certain types of people to push themselves far beyond their mental limits and then emerge stronger as a result. For example, my six years of Ph.D. training have made me wiser, savvier, grittier, and more steely, focused, creative, eloquent, perceptive, and professionally effective than I was as a fresh college graduate. (Two obvious caveats: Not every Ph.D. student received these bene fits — many grew jaded and burned-out from their struggles. Also, lots of people cultivate these positive traits without going through a Ph.D. program.) Here is an imperfect analogy: Why would anyone spend years training to excel in a sport such as the Ironman Triathlon — a grueling race consisting of a 2.4-mile swim, 112-mile bike ride, and a 26.2-mile run — when they aren’t going to become professional athletes? In short, this experience pushes people far beyond their physical limits and enables them to emerge stronger as a result. In some ways, doing a Ph.D. is the intellectual equivalent of intense athletic training.

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A Little Bit of Slope Makes Up for a Lot of Y-InterceptJuly 25, 2015
A Slot Machine RiddleDecember 11, 2012
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Lucky or smart?July 28, 2013

Past Posts