Thinking Fast & Slow by Daniel Kahneman

I was turned onto this book by an online book group; it sounded interesting. I enjoyed the writing–it was very easy to read. Amusingly, given the subject of so much of the book, I found it read easily enough that it was a quick skim rather than sticking deeply to mind. To a certain point, that’s intentional–the author talks about it as getting better at water cooler discussions, and it seems like the overview that sticks (so far) could be very handy for that purpose.

For half of the book, the discussion is about Systems 1 and 2. System 1 is automatic, visual, great at averaging, vigilant for danger, etc. It functions automatically and often has opinions that can feel like considered judgement. System 2 is analytical and detailed, but lazy. It has trouble with any computation trickier than multiplying two two-digit numbers together. The trick is that we all think of our lives as mostly System 2 phenomena… but it’s usually System 1 throwing up an answer, with system two giving it a casual “yup, looks fine” certification.

There are a lot of interesting ideas that get explored at pop-culture length. (Which is probably all I could handle, since that both fields are distant fro my own.) There are a lot of fascinating asides and details, like intensity matching (which gets abused by System 1 for everything from evaluating how much to support a cause, or how long a prison sentence should be), WYSIATI (what you see is all there is), which leads to consistent biases in evaluation depending on “irrelevant” criteria like the order of presentation or adding extraneous, useless information, and more. One of the trickiest things is that S1 hates not having an answer… so, instead of prompting you to think hard, it answers a similar but related question. A trivial example is that “How is your life overall these days?” usually gets reduced to “How do you feel at this moment?”

Less of the book is devoted to two further persistent, consistent flaws. In the field of economics, there are a lot of assumptions about rational agents (ie, everyone) and how they act. Humans fail against that baseline in consistent ways. For example, reading contracts thoroughly is unusual–and while an Econ doesn’t care about the font size, Humans do. A huge effect is anchoring–we care more about how things are relative to our current status than absolutely. Which means that you can twist things, just by presenting something as a gain followed by a wager for a degree of loss, or just presenting it as a wager from current standings. (People are risk and loss averse.)

It’s a book that I’m glad I read, and I hope that some of it sticks, despite how easy it went down.

The deluge : the Great War, America, and the remaking of global order, 1916-1931 by J. Adam Tooze

I read this book to follow a reading group. It’s a fascinating time that I’ve mostly skimmed over–Diplomacy taught me that WWI was mostly “trench warfare”, which sounded horrific and boring.

The book begins before the US entry in WWI, discussing the leaders of the various Entente powers, their goals and motivations. Initially, Britain, France and Russia are struggling shoulder to shoulder, with Britain taking the lead on financing for the team. Russia’s implosion into civil war in 1917 made things even trickier…

The politics within the three nations (and Germany!) were opaque to me before now, but came alive and were fascinating. Britain’s relations with its colonies are tricky–particularly in India, where Muslim unity with the Hindu majority suddenly undercuts the story Britain’s been telling itself about why it’s needed. Ireland has to be bribed into supporting the war with home rule… it’s so much messier than unthinking “how the empire acts” history sits in my mind.

Wilson is more a hindrance than a help, and comes across as… too ivory towerish? He’s a man of theory, with goals that are perpendicular to the world he’s trying to interact with. His striving to establish peace without victory has some very unfortunate parallels to our intervention in modern day Syria–with a similar damning of the belligerents to longer misery. He swoops in to accept the German armistice, ignoring his allies in the war–and making Germany resent being treated like they lost the war when officially they hadn’t.

The 1920s had been flappers and war profits investigation to me; the international scene, particularly America’s insistence on repayment of the debt their allies had built up defending themselves before the US entered the war, had been much hazier. While I don’t 100% trust his take on China and Japan, there’s a lot more going on along that front than I’d put together. China was divided–differently in different years. The chapter about Chiang Kai-shek’s beginning as Soviet trained and his coup where he purged the communists out of his resistance movement was all new to me.

In fact, everything Russia seemed new. I’d never heard of Brest-Litovsk, had no idea how abject the collapse of the Russia front had been, what the internal politics of the new regime were and how they had to face democratic populists while they were struggling to get established. Similarly, Ukraine and the Baltics seemed quite happy to escape the Russian Bear… if not for long.

Long story short, it’s a good book and I learned a lot. Further, it’s written for interested amateurs–if you want a broad overview of the world almost exactly a century ago, it’s a great place to start.

Liar’s Poker by Michael Lewis

An interesting tale of life inside a big brokerage house, where the strangest behaviors are normal… if you’re a big swinging dick. It’s a weird dip into a very different life, as the author acknowledges.

It’s half a memoir; the classes and story are told from his perspective, but he takes long asides to explain the politics and organization charts that drive the activity. It sounds like the whole organization underwent a tremendous transformation shortly before he arrived, changing from a partnership with strong controls into a corporation. The older people, who’d worked in the partnership environment, stay decent for a while–out of habit and intertia–but the new kids aren’t locked in as partners, making it much less costly to defect.

A great part of the story was about the beginnings of the residential market and its CMOs. They are kissing cousins to the CDOs that featured so prominently in the 2008 crash… but I never heard of CMOs before this book.

It also demonstrates 2 decades early exactly why the brokerage firms resisted listing prices on an index. Back in the early 80s, the Solomon Brothers middlemen were able to take a huge bite–like 5%–out of mortgage trades where only they knew the prices. That lack of transparency helped drive mortgages from an ignored remnant to 40% of the profit in less than 5 years. But, as soon as their rivals had access to the prices [mostly via defectors], the margins collapsed quickly.

The relations he describes makes the movies about Wall Street sound like documentaries, instead of the wild exaggeration for the screen that I’d hoped. It’s an amazing tale, with corruption at hand at every turn. It’s amazing that he was able to avoid enough of the snares to escape… with a hefty bonus, but without permanently taking on the trader’s worldview.

What’s scary is how many of the very same things played out in the 2008 crisis–also driven by “financialized” versions of mortgages sliced into tranches. It’s crazy how much is familiar…

Anyway, well written, with terrifying foresight baked in.

Why Popcorn Costs So Much at the Movies by Richard McKenzie

An interesting book, but the forward is terrible and almost made me put it down. (Grand claims about Evolutionary Psychology in an Economics books was a huge red flag. Fortunately, by the time I got to the final chapter, he turned out to be claiming less– I guess an edgy start was his marketing plan.)

He does a good job of introducing puzzling prices we encounter in our daily lives and offering interesting explanations (or a good hypothesis) for each. The various demand curve discussions a little murky in text, but often backed up with a sketch appropriate to the situation, so it would up being clear in the end. Even better were the additional facts that informed many of the specific issues.

The title issue was easy to see as soon as he introduced the fact that movie producers, rather than charging a flat fee for a movie reel instead charge a high percentage of the ticket revenues (often 70-95%). If 95% of ticket sales are going to the movie producer, then yeah, the theater has to pay for everything from something– and really, drinks and popcorn is what’s left. If they lose 70%+ of their ticket price, their incentive to hike admission rates should be small (since they get less than $1 per $3 increased)– but with most theaters showing $10+ movies already, it’s hard to imagine prices continuing up. Or at least it’s hard to imagine people still buying the theater’s popcorn when the cost of admission has eaten their whole entertainment budget.

The Myth of the Rational Market by Justin Fox

An interesting look at the evolution of several approaches to the market, economics equations, and schools of thought designed to address economics mysteries. The careful tracing of specific professors and their students makes for quite a complex geneology of ideas– but it’s fascinating to see the players of today, the schools and clumps of association that led to development of theories.

The easy takeaways are that markets may not be rational– but in the ways that are bad for an individual investor, you might as well assume they are. People don’t leave money on the table if they can help it– so if you spy an opportunity, it’s always best to try to figure out what you’re overlooking. The increasing influence of behavioral economics seems “fringy” to the mainstream– really, they mostly seem to be providing formulas and quantification that match the pre-1940s economist’s caveats, just expressed in math instead of disclaimers.

I like the idea of behavioral economics research– testing where the limits of human rationality and patience are and figuring out which systematic biases we have. It seems like a fruitful line of investigation, and a good corrective to the all seeing market… at least for now.