The Black-Scholes-Merton Options Pricing Equation
A superb video on the history and mathematics of options pricing from Veritasium.
Your friendly AI assistant (it’s happening)
Klarnas AI assistant, powered by @OpenAI, has in its first 4 weeks handled 2.3 m customer service chats and the data and insights are staggering: – Handles 2/3 rd of our customer service enquires – On par with humans on customer satisfaction – Higher accuracy leading to a 25% reduction in repeat inquiries – Customer resolves their errands in 2 min vs 11 min – Live 24/7 in over 23 markets, communicating in over 35 languages It performs the equivalent job of 700 full time agents…
Link here.
19th century British economic thought (another outline for my class)
1760-1830, typically considered peak of Industrial Revolution
Malthus, first decade of the 19th century
Ricardo’s Principles, 1817
Theory of rent
Theory of comparative advantage
The machinery question
Ricardo, The High Price of Bullion, 1810
Bullionist debates, Napoleonic wars, Ricardo and Malthus and Thornton
Ricardian equivalence, thinking in terms of systems and models
The Ricardians: James Mill and James Ramsey McCullough
The reign of classical economics, Nassau Senior
Poor Law debates
Unions and working hours
Ricardian socialists
John Stuart Mill: 1806-1873
Synthesis with French and Germans
Karl Marx
It’s happening
Is DNA all you need?
In new work, we report Evo, a genomic foundation model that learns across the fundamental languages of biology: DNA, RNA, and proteins. Evo is capable of both prediction tasks and generative design, from molecular to whole genome scale. pic.twitter.com/BPo9ggHhmp
— Patrick Hsu (@pdhsu) February 27, 2024
Tuesday assorted links
1. Dan Klein responds to my Casablanca review. Of course my view is that what Dan sees in the movie is also there.
2. Do standard error corrections exacerbate publication bias?
3. Mr. Beast as talent evaluator (short video).
4. My Bloomberg column on the very high value of open source software.
5. “What is Éire accelerationism and why does it matter?” A new podcast episode from David McWilliams.
Genetic Insurance
Genetic testing identifies disease risk, enabling individuals to dodge environmental triggers, optimize treatments, and improve planning. Yet, the fear of increased insurance premiums deters many from undergoing tests. Genetic testing offers societal benefits but also presents significant distributional challenges. To address this, my 1994 paper proposed the idea of genetic insurance.
For a small fee genetic insurance would insure against the possibility of a positive test result. If the test came back positive the customer would be paid a large sum of money, enough to cover the expected costs of his disease or equivalently enough to allow him to purchase health insurance at the new risk premium. If the test turns out negative the customer would lose his genetic insurance fee but would gain the results of the test and also lower health insurance premiums. Those who have positive tests results would be paid enough money to pay their health care costs and would also benefit from being able to plan in accord with the test results. Under this proposal average insurance rates will fall and everyone will be made better off.\
Genetic insurance is insurance against changes in the cost of health insurance due to genetic information. John Cochrane would later generalize this idea to show that it’s possible to insure against changes in the cost of health insurance due to any new information. Cochrane called this time-consistent health insurance or health-status insurance; it’s a way of creating long-term health insurance contracts without binding an individual to a firm.
In an interesting paper, Helene Schernberg extends my 1994 paper. Schernberg shows that even if an individual has full-health insurance that can’t be taken away, there are other reasons to want genetic insurance. She focuses on the planning aspect. Genetic insurance could be used to shift consumption earlier, to better health states and thus improve life-time allocation.
Genetic testing could soon be a routine part of your medical journey. It offers insights into inherited disorders or susceptibility to various conditions. For example, if you are a woman with a BRCA mutation, you have a 55 to 72% lifetime risk of breast cancer.
… This suggests that genetic information is valuable while providing a theoretical argument in favor of genetic insurance. The mechanism is described in Tabarrok (1994): Individuals purchase genetic insurance before taking a genetic test, thus receiving a compensation upon being identified as a high-risk. Tabarrok (1994) relates this genetic insurance payment to the need to cover expensive health insurance premia. I show that it also relates to the fact that a temporally risk-averse individual wishes to insure against the lifetime utility losses she may experience when her health prospects deteriorate after taking a genetic test.
Monopolized organ collection
The nation’s 56 organ procurement organizations collect organs — mainly kidneys — from deceased donors at hospitals and arrange for them to be transported to surgeons at the 250 U.S. medical centers that perform transplants. Each procurement group holds a government-guaranteed monopoly over a swath of U.S. territory where it operates.
Some have failed for years to collect enough organs to meet demand, according to government records. But the Centers for Medicare and Medicaid Services, the part of HHS that licenses the nonprofits to operate, has never decertified one. In response to critiques, the CMS issued new benchmarks that will allow the agency to weed out poor performers beginning in 2026.
Now many of these organ collection groups are under investigation for fraud and overbilling the government.
Do high interest rates get people down?
Unemployment is low and inflation is falling, but consumer sentiment remains depressed. This has confounded economists, who historically rely on these two variables to gauge how consumers feel about the economy. We propose that borrowing costs, which have grown at rates they had not reached in decades, do much to explain this gap. The cost of money is not currently included in traditional price indexes, indicating a disconnect between the measures favored by economists and the effective costs borne by consumers. We show that the lows in US consumer sentiment that cannot be explained by unemployment and official inflation are strongly correlated with borrowing costs and consumer credit supply. Concerns over borrowing costs, which have historically tracked the cost of money, are at their highest levels since the Volcker-era. We then develop alternative measures of inflation that include borrowing costs and can account for almost three quarters of the gap in US consumer sentiment in 2023. Global evidence shows that consumer sentiment gaps across countries are also strongly correlated with changes in interest rates. Proposed U.S.-specific factors do not find much supportive evidence abroad.
That is from a new NBER working paper by Marijn A. Bolhuis, Judd N.L. Cramer, Karl Oskar Schulz, and Lawrence H. Summers.
What international issues become national interests worth fighting for, and why?
That sentence starts the abstract, here is the rest of it:
Contrary to conventional wisdom, I argue that issues without clear economic value, such as barren lands, are more likely to be perceived as national interests because they do not benefit any single domestic group. Since who benefits is unclear, politicians have an easier time framing such issues as benefiting the whole nation. I test this argument using survey experiments on the American public. The results show that first, issues providing diffuse benefits to citizens are more likely to be considered national interests than issues providing concentrated benefits to certain domestic groups. Second, issues with clearer economic value are harder to frame as having diffuse benefits because they are more easily associated with specific beneficiaries. This study proposes a new theory of national interest and offers a potential explanation for why people frequently support conflict over issues without obvious benefits.
That is from a new paper by Soyoung Lee, via the excellent Kevin Lewis.
Monday assorted links
1. Sociopaths remain underrated (NYT).
2. Claims about Asian birth rates, speculative but not to be dismissed.
3. The “science is getting less disruptive” paper does not replicate. And the full critique.
4. Why people fail to notice horrors around them (NYT).
5. New paper on supermodular goods, by Divya Siddarth, Matthew Prewitt, Glen Weyl.
The Maniac
I enjoyed Benjamin’s Labatut’s The Maniac. Conventionally regarded as a “biography” of John von Neumann but more accurately a series of short, quick vignettes, recollections, and reconstructions told by people around von Neumann and centered on the many ideas he touched, including the metaphysics of logic, quantum physics, the nuclear bomb, the meaning of rationality, the fundamental structure of life and especially artificial intelligence. The recollections are what might be called creative non-fiction; based on real life interviews but written as if the speaker were a novelist. For example, Feynman uniquely watching the first atomic test without goggles, but told even more vividly than Feynman told the story.
As Tyler noted, many of the stories will be familiar to MR readers, but a few were new to me. Sydney Brenner, for example, the Nobel prize winning molecular biologist who hypothesized and then proved the existence of messenger RNA reports with wonder and astonishment that von Neumann had earlier understood from theory alone how any such system must work.
Fear and awe in the presence of great intelligence is a running theme of the book. Polya famously described fearing von Neumann after seeing him solve a problem in minutes that he had worked on for decades (again the story is jeujed up in The Maniac to great effect.) Eugene Wigner who knew him from childhood and who himself won a Nobel prize in physics is “quoted” (recall this is fictionalized but based on the record):
It was a burden growing up so close to him. I often wonder if my horrific inferiority complex, which not even the Nobel prize has diminished in the slightest, is a product of having known von Neumann for the better part of my life.
…I knew Planck, von Laue, and Heisenberg, Paul Dirac was my brother-in-law, Leo Szilard and Edward Teller have been among my closest friends, and Albert Einstein was a good friend too. But none of them had a mind as quick and acute as Janos von Neumann. I remarked on this in the presence of those men, several times, and no one ever disputed me.
Only he was fully awake.
Another theme is the seemingly close relationship between rationality and insanity–Labatut develops this both in theory around Godel’s theorem but also in practice with the many rationalists who went crazy. What does this mean for artificial intelligence?
The MANIAC refers not to von Neumann but to von Neumann’s creation the Mathematical Analyzer Numerical Integrator and Automatic Computer Model, the first computer built using von Neumann’s architecture, which all computers use today. From the MANIAC we get to artificial intelligence and again the awe and fear. After Gary Kasparov loses to Deep Blue he become despondent and fearful, thinking that there must have been a human in the machine. Lee Sedol losing to AlphaGo and soon retiring thereafter. Ke Jie being annihilated by Master, the successor to AlphaGo and reporting “he is a god of Go. A god that can crush all who defy him.” And then the creators of AlphaGo take off the training wheels, they remove all the human games that constrained the earlier models to a foundation built on thousands of years of human knowledge and the result crushes the human-limited model.
We are reminded of what von Neumann said on his death bed when asked what would it take for a computer to begin to think and behave like a human being.
He took a very long time before answering, in a voice that was no louder than a whisper.
He said that it would have to understand language, to read, to write, to speak.
And he said that it would have to play, like a child.
The Maniac is a good read.
How I listen to music
Ian Leslie writes to me:
I’m wondering, have you ever done a post about how you listen to music? Hours per week, times of day, technologies, degree of multi-tasking, etc…and how you choose what to listen to at any given moment. I’d be interested.
I go to plenty of concerts, but that is for another post. And I’ve already written about satellite radio. As for home, I like to listen to music most of the time, noting that if I am writing a) the music doesn’t bother me, and b) I don’t necessarily hear that much of the music. A few more specific points:
1. I don’t like to listen to “rock music” (broadly construed) in the morning.
2. I won’t listen to Mahler, Bruckner, or Brahms in the morning. They are evening music.
3. Renaissance music is best either in the morning or the evening.
4. I don’t listen to much jazz at home any more, though I am no less keen to see a good jazz concert live. Having already spent a lot of time with the great classics, at current margins I am disillusioned with most “jazz as recorded music.”
4b. The same is true of most “world music,” if you will excuse the poorly chosen label. I do subscribe to Songlines, a world music magazine. I buy some of the recommendations on CD, but try out many more on YouTube or Spotify. That is my primary use of those services, at least for music. That is one case where I am sampling to see if I run across new sounds.
5. I don’t like earbuds and never use them.
6. Bach gets the most listening time.
7. For a classical piece I really like, I might own five or more recorded versions, occasionally running up to a dozen. Listening to a poor or even so-so recording of a very good piece is to me painful and to be avoided.
8. Contemporary classical music — which many people hate — gets plenty of listening time. Though not when Natasha is home. Some of those recordings, such as Helmut Lachenmann string quartets, seem to create problems for Spinoza, noting that he is rarely not at home. Perhaps they will be shelved for a few years.
9. I buy new classical music releases recommended by Fanfare, and occasionally from the NYT or Gramophone or elsewhere. As for “popular music” (a bad term), mostly I wait until December and then buy CDs extensively from various “best of the year” lists. I do some Spotify sampling then too, again from those lists.
10. The main stock of recorded music is kept in the basement. There is a separate shelf upstairs for what I am listening to actively at the moment. That shelf might have 200 or so CDs, with some of them scattered on tables, and with some LPs nearby as well.
11. Periodically I go down into the basement and choose which discs will be “re-promoted” to the active shelf upstairs. And if I am done listening to a disc, it goes down to the basement, with some chance of being re-promoted back to upstairs later.
12. If I don’t like a disc, I throw it out, as space constraints have become too binding. (It is cruel to give it away, and no one wants it anyway.) As time passes, I am throwing out more discs. For instance, I love Cuban music but I don’t lilsten to it on disc any more.
Overall, I view this system as optimized for getting to know a core repertoire. It is not optimized for browsing or random discovery. I feel I have a lot of discovery in my musical life, but it comes from reading and information inflow — both extensive — not from listening per se.
And to be clear, I am not suggesting that these methods are optimal for anyone else.
Solve for the equilibrium?
At $US15,000, BYD’s new Qin EV is already being touted as a “Corolla killer”, as the world’s second largest EV maker continues to disrupt the global auto market.
Launched earlier this week in China, the all-electric Qin Plus has five variants priced between 109,800 RMB to ($A23,300) to 139,800 RMB ($A29,700).
The Qin Plus comes with a 100 kW motor and the option of either a 48 kWh battery providing 420 km CLTC range or a 57.6 kW hour battery with 510 km range.
Mobility consultant James Carter wrote on LinkedIn the new offering is the $15,000 car that incumbent OEMs (car makers) hoped would never come.
“The new BYD Qin Plus EV Honor Edition is the car that makes EVs way cheaper than ICE vehicles and blows open the mainstream market,” he wrote.
Here is the full article. So will U.S. and EU car prices fall? Or will protectionism result? Aren’t they planning to make a bunch of these cars in northern Mexico? Will America invent some new kind of trade restriction?
Sunday assorted links
1. Military lessons from the Ukraine war. Very good piece.
2. Merve Emre.
3. Rootclaim, lab leak, and a $100,000 bet.
4. You can pre-order the new Carola Binder book
5. Why do East Asian firms value drinking?
6. Markets in everything: special flights for eclipse viewing.
What should I ask Fareed Zakaria?
Here is Fareed’s home page, here is Wikipedia:
Fareed Rafiq Zakaria…is an Indian-American journalist, political commentator, and author. He is the host of CNN‘s Fareed Zakaria GPS and writes a weekly paid column for The Washington Post. He has been a columnist for Newsweek, editor of Newsweek International, and an editor at large of Time.
He was managing editor of Foreign Affairs at age 28, briefly a wine columnist for Slate, and much more. His new book Age of Revolutions: Progress and Backlash from 1600 to the Present is very classically liberal, and in my terms “Progress Studies”-oriented.
So what should I ask him?