The Difference Between Risk and Uncertainty

This piece by Ben Hunt, The Three-Body Problem, is very good. It starts with fascinating insights into how bees prepare for and survive winters in the northeastern US where Ben lives.

My notes from Ben’s piece are below:

One must understand the difference between risk and uncertainty

Risk is when you have a decent sense of the odds and payoffs. You can apply statistical methods to these decisions, especially when you will be able to make this decision many times.

Uncertainty is when you do not have a good sense of the odds and payoffs. In this case, relying too much on statistical models could kill you, especially if you don’t know how many chances you have or the number of chances is limited. In this situation, game theory needs to be incorporated.

The Three-Body Problem

This is when it is impossible to predict where three variables will be in the future using algorithms that look at the variables’ history. Instead, your only chance of approximating where they will be in the future is by solely looking ahead.

Today, a characteristic (e.g. high-quality company) leading to better performance in that company’s stock is overwhelmed by the actions of a third variable: the monetary policy of central banks.

One’s best strategy in this scenario is to diversify across geographies and asset classes, and, instead of attempting to maximize return, seek to minimize maximum regret (‘minimax’). Each person’s minimax regret is subjective. For some, it might be financial ruin. For others, it may be earning a lower return than their peers.

                It’s important to not rely on computer algorithms to make our decisions during this stage. We’re hardwired pattern-seeking machines, but we must think beyond that. Be humble in knowing we will never understand how a chaotic system like this works, but we can approximately try.

It’s tough to resist The Answer because we want there to be an all-knowing, all-useful solution. Closed-form solutions like this don’t exist though.

Hurdles to Electric Cars Taking Over the World

This summary from the NY Times outlining what has to occur for electric cars to be the dominant automobile on the planet was terrific. I wanted to condense it here:

#1: The cost to construct the motors and components must come down further: The prices for the batteries that go in electric cars have fallen by more than 50% since 2011. However, the powertrain for an electric car still costs $16,000 compared to a $6,000 cost in a car with an internal combustion engine (ICE). It could be another 6-7 years before the costs are equivalent.

#2: The elements needed to make batteries need to be in large supply working through an efficient supply chain: The resources used in batteries for electric vehicles include cobalt and lithium, commodities that have little use in conventional cars. There are two potential issues here: first is mining enough supply to match the fast-growing demand, and second is where the resources are located. For instance, most of the world’s cobalt comes from the Democratic Republic of Congo, a historically unstable area.

#3: More charging stations, lots more charging stations. And the charging needs to be faster: The number of charging stations in the US has gone from several hundred in 2010 to 16,000 today. That’s a good start, but it is still far behind the 112,000 gas stations located in the States.

#4: Users must adjust to the differences of driving an electric car: There is no engine sound, or smell of gas or exhaust. They accelerate faster, and hug lower to the ground. It will be cheaper to maintain over time. Some of these are positives, but drivers will still need to adapt.

#5: Car companies are going to need to invest a lot of money upfront: And we don’t know what the auto transportation environment will look like by the time electric and hybrid vehicles become more mainstream. How cars are sold by dealers and how they’re used by consumers is still up for debate.

The Optimal Way to Use Facebook

ZeroHedge pointed out a blog post from Facebook’s director of research specifying how a person’s mood could worsen or improve depending on how they use the social network.

If a person is just reading through others’ posts on Facebook, they are significantly more likely to be in a worse mood than the average person at the end of that day.

However, if a person is active when logged in to Facebook through posting and talking to friends, they tend to feel more supported and less lonely.

So if you’re going to use Facebook, really engage with the people you’re connected with on the platform.

Social Media Trends for 2018

This is a good synopsis of social media trends heading into the new year. Some numbers that stuck out:

— Video messages are far better retained by consumers than text.

— 80% of consumers would rather watch live videos from a brand than read posts.

— Gen Z (individuals born between 1995 and 2012) use YouTube even more than they use Instagram or Snapchat.

— Influencer marketing is the fastest growing marketing channel. 94% of those using influencer marketing find the format effective.

— Influencers bring a 10x increase in conversion rate, and half of Twitter and Instagram users rely on influencers’ recommendations.

— Global smartphone users will increase another 8% in 2018, to almost 2.5 billion.

— Time spent on social networks in US, mobile vs desktop:

  1. Facebook: 68% mobile, 32% desktop
  2. Instagram: 98% mobile
  3. YouTube: only 40% mobile; 60% desktop
  4. Twitter: 86% mobile, 14% desktop
  5. LinkedIn: 26% mobile, 74% desktop
  6. Snapchat: 100% mobile
  7. Pinterest: 92% mobile

— Last, Facebook Messenger (1.2 billion msgs) has almost caught Whatsapp (1.3 billion) as the global leader in social messaging. WeChat (0.9 billion) is not far behind in the #3 spot.

Where Millennials Are Buying Homes

ZeroHedge posted a good piece with a map from showing the percentage of millennials that are homeowners in major metro areas around the US. It’s not a surprise that the west and northeast coasts are the most expensive with the lowest millennial homeownership rates while the midwest is the most affordable with the highest homeownership rates.

Where millennials are buying homes

The top 10 metro areas for affordable homes that already have high millennial homeownership:

  1. Minneapolis-St. Paul
  2. St. Louis
  3. Detroit
  4. Louisville
  5. Pittsburgh
  6. Indianapolis
  7. Kansas City
  8. Nashville
  9. Oklahoma City
  10. Baltimore