Capitalism and Hyperbolic Discounting

(Draft from 2013)

Capitalism is a way for society to determine how resources are used.  Say there exists some amount of raw material like wood.  And we determine how much wood is used for building houses vs. coffee tables in the marketplace.  If it was all used for houses, someone would find that if he made 1 coffee table, he would have an enormous margin/profit on that 1 table.  So he continues to make coffee tables until he can no longer keep these huge margins.  And thus, the wood goes to the highest bidder.  This is how in the long-run, capitalism will result to a close to optimal proportion of wood used for houses vs. coffee tables.

Hyperbolic discounting is the human tendency to overvalue the short-term.  We would rather have $100 today than $1000 in 34 yrs (7% discount rate).  We like to go party in our teens and college years, even though we know that an hour of work in our younger years can save us much more time in the future. ie, studying a little bit now might get us a higher GPA and lead us to a higher paying job, which greatly increases our expected life income.  Also, the higher the discount rate, the higher we weigh the short term.

Combining these ideas together, I think the world is likely to be consuming raw materials way too quickly.  In the grand scheme of things, is oil really worth 10x more today than 34 years from now?  Does capitalism help us allocate resources well over time?  There are arguments that prices will incentivize people to research new energy sources or discover more natural resources.  But discounting decreases our return on investment, and natural resources are finite while our population growth has thus far been exponential!  *Also, a high discount rate is a disincentive to researching new energy sources.

I guess my conclusion is that we live in a very peaceful state of the world in which there is very little competition over resources (at least for developed countries).  And that I might live to see a day where there will be increased competition or some sort of war over the limited resources of our planet.  

Decision Points

I was playing a board game yesterday called Ticket to Ride: Europe.  While we were learning the rules, my intelligent friend says "Okay, what can I do on my turn? What are my decision points?" It took me a little by surprise.  Instead of trying to learn all of the rules of the game (which were numerous), he was focused on his possible courses of action.  And the truth is, if you break the game down, you have 4 options over the course of maybe 40-60 turns.

In games, decision points are very important.  There is likely to be a random element, but the only things we can have influence is during a decision point.  A part of the random element may be influenced by other players, but that's where game theory also comes into play.

So what are the decision points in our lives?  Do we choose our values or do our parents and our society choose them for us?  Did you choose to go to college or not?  Did you choose your group of friends or were they the most available?  How did you choose your hobbies?  

What are the major decision points in life?  What are the range of possibilities and how do we come upon those possibilities?

Stonks go up

"Stonks go up" is today's meme phrase of what actually is a great strategy. The better sounding version goes like, "markets climb a wall of worry (and therefore you should stay invested)."

The best way to build wealth is to hold assets that compound wealth over time. Cash does not compound wealth over time. I too get drawn into thinking about rich valuations and near term risks and sometimes it doesn't feel great to be 100% invested in stocks. But the truth is that over the next 40-50 yrs, stocks will all certainly make thousands of new all time highs. If stocks return 9% a year for the next 40 yrs with a 2% dividend yield, then an investment in the sp500 today at 3270 should turn into 50,000 by 2060 and 100,000 with dividends reinvested. 

https://imgur.com/a/qXQm1W9

Stonks go up.