Algorithms to Live By

August 12th, 2017 by Potato

I recently read Algoirthms to Live By: the Computer Science of Human Decisions and enjoyed it. It takes a few important problems for which algorithms are used in computer science, explains what they do and some of the challenges associated with them, and then relates that back to everyday life.

This is the sort of book where I am clearly the intended audience: the authors do a decent job of making everything understandable and relatable, and there’s some humour… but you’re going to have to have some interest in the foundational problems or you will likely lose interest. That’s not to say that you have to have a math or computer science background, they do explain it all, you should just come to this with some interest and not just my recommendation.

To give you an idea, they spend the first chapter on the Secretary Problem. They explain the problem (you want to hire the best possible secretary, but have to balance that against not wanting to spend forever interviewing; oh, and after you interview and reject someone you can’t go back to them), and how this might crop up in different situations in your life (if you want the best tomatoes at the grocery store might be one example of a secretary-like problem in action). Then some practical insights from the solutions in computer science — in this case, the optimal answer is likely 1/e, or about a third. That is, if you have 100 candidates for your job, you may want to interview the first 30-40 or so with no intention of hiring them just to get an idea of the quality of the field, then after that hire the first one that’s better than any of those previous ones.

A great take-away is from the chapter on caching. In particular, the least recently used (LRU) algorithm is the scientific justification for why your desk is covered in papers where the only organizational principle is that you dropped them there, and the ones you need more are in the pile closer to your keyboard. “What might appear to others to be an unorganized mess is, in fact, a self-organizing mess.”

I also really liked the description of thrashing and context-switching in the discussion on scheduling tasks. This is not unique to this book — lots of time-management books and articles talk about having set times to handle tasks (“interrupt coalescing”), and to turn off your phone and email notifications to handle time-intensive tasks. But for some reason this one resonated a bit more for me — when I read their description of a processor thrashing I was like “this is happening to me right now.” Of course, that’s likely idiosyncratic to me and the fact that at the time I read it, I was struggling with low productivity because I had a large number of small, equally urgent tasks (vs. the usual case of having one big important project on my plate to balance with a few smaller fires) and had to keep dropping something to…

A neat new term I came across in the book to apply to some aspects of the housing bubble is “information cascade.”

“[…] under the right circumstances, this mixing of private and public data can prove toxic.

Imagine the bidders are doubtful about their own estimations of the value of an auction lot—say, the right to drill for oil in some part of the ocean. As University College London game theorist Ken Binmore notes, “the amount of oil in a tract is the same for everybody, but the buyers’ estimates of how much oil is likely to be in a tract will depend on their differing geological surveys. Such surveys aren’t only expensive, but notoriously unreliable.” In such a situation, it seems natural to look closely at your opponents’ bids, to augment your own meager private information with the public information.

But this public information might not be nearly as informative as it seems. You don’t actually get to know the other bidders’ beliefs — only their actions. And it is entirely possible that their behavior is based on your own, just as your behavior is being influenced by theirs. […]

Just as with the tragedy of the commons, this failure is not necessarily the players’ fault. An enormously influential paper by the economists Sushil Bikhchandani, David Hirshleifer, and Ivo Welch has demonstrated that under the right circumstances, a group of agents who are all behaving perfectly rationally and perfectly appropriately can nonetheless fall prey to what is effectively infinite misinformation. This has come to be known as an “information cascade.”

[…] imagine there are ten companies that might bid on the rights for a given tract. One of them has a geological survey suggesting the tract is rich with oil; another’s survey is inconclusive; the reconnaissance of the other eight suggests it’s barren. But being competitors, of course, the companies do not share their survey results with each other, and instead can only watch each other’s actions. When the auction begins, the first company, with the promising report, makes a high initial bid. The second company, encouraged by this bid to take an optimistic view of their own ambiguous survey, bids even higher. The third company has a weak survey but now doesn’t trust it in light of what they take to be two independent surveys that suggest it’s a gold mine, so they make a new high bid. The fourth company, which also has a lackluster survey, is now even more strongly inclined to disregard it, as it seems like three of their competitors all think it’s a winner. So they bid too. The “consensus” unglues from reality. A cascade has formed.

No single bidder has acted irrationally, yet the net result is catastrophe.”

This immediately reminded me of bidding wars in Toronto, where a common algorithm is to count the number of noses at the table and multiply by some constant, say $10,000, and add that to the phony asking price. An extra bidder (or 10) should not in any way affect your perception of value for the house, yet there are many instances where this sort of bidding strategy is reported.

The quotation above also shows the one caveat — it is a slightly academic style, with references and names dropped throughout (though quite readable despite that). This is great for being authoritative, but can slow the read down.

Burn Your Mortgage

August 12th, 2017 by Potato

So this is going to be a review of Burn Your Mortgage, and TLDR, it’s mostly going to be me ranting and nitpicking so if you don’t want to get into that, just know that most of it is fine but there are some particular issues. This image sums it up:

Figure from page 9 of Burn Your Mortgage. The caption reads: Canadian real estate prices have been trending upward over the past 25 years. That’s more than we can say about the stock market over this same time. A commentary is superimposed showing that the stock market return goes off the scale of the real estate one before the halfway point in the data displayed, proving the caption wrong.

Before getting to the book itself, some quick background on the tale. Sean is famous for buying a place, living in the basement, renting out the rest, and working super-hard to pay off the mortgage before he turned 31. The Sean Cooper Story boils down to: guy makes $150-200k/yr, lives cheaply in a basement apartment, saves up $500k over 7 years. Yawn. Oh wait, he didn’t just save and invest that money: he bought a house and then burned the mortgage. Now that’s a marketable story!

The biggest problem with Cooper’s story is that it happened at all. In the book and several articles, Sean has said that the reason he was so motivated to burn his mortgage was because of his mother and how she struggled to pay off the mortgage. He had a nearly irrational fear and distaste for debt.

So what should a debt-averse single person who is frugal and content living in a basement apartment do? Rent, of course! No, wait, I meant buy a house you don’t need! Then you can rent out the top floor while you live in the basement apartment, adding risk, losing your principal residence exemption, stressing about the mortgage and pouring everything into paying it off. I have referred to this as Cooper’s Folly.

Indeed, back when Sean first set off on the journey I pointed out that renting out the top floor of his house wasn’t as good a deal as he made it out to be — he was effectively paying something in the neighbourhood of $800-900/mo to live in a basement apartment based on the numbers he was publishing, which is what basement apartments cost anyway. In hindsight, the Toronto real estate market has been on fire, but because he didn’t stay crazy levered, he actually would have been wealthier if he had just rented a basement apartment, saved himself some stress and worry over debt and space heaters, and invested in a diversified portfolio (thanks to the markets also having a great 5-year run — over 12% annualized for an aggressive e-series portfolio vs ~9%/yr for Toronto real estate).

Anyway, this is just the background to the book: Sean bought a house, rented most of it out, lived frugally, worked an insane amount, and paid off the mortgage in 3 years (or, because the downpayment was also significant, the alternative title might be “local man works three jobs, lives in basement, saves $500k over 7 years.”).

The first chapter relates that story, and talks generally about buying a house, while barely even analyzing whether anyone should be buying a house or if renting might be better in their situation. Where it does touch on the topic, it does an egregiously bad job of it, so if you happen to know something about how to compare the options it comes across as extremely biased towards buying. The figure above says volumes about the dismissive tone towards renting and investing. He takes a dig at bears (throwing shade at Garth Turner in particular), but then sets up a strawman version of the rent-and-invest thesis to then make a show of toppling. Sean ignores interest in the rent-vs-buy comparison (implying it’s insignificant), then on the same page says that mortgage interest is a compelling reason to pay down your mortgage (implying it’s an important factor). Within a few pages he talks about the power of leverage as a reason to buy over renting (indeed, 2 of his 8 pros to buying relate to leverage)… then excoriates the reader to not use leverage and burn the mortgage.

MegaMaid from Spaceballs. She’s gone from suck to blow!

After that, the rest of the first section is generic advice on frugality, with a lot of lists… Most of it is fine, but parts of it read weirdly. To take one particular example, he suggests that you could save $500/yr on gas by planning your trips better and driving more efficiently. I spent $400 total on gas last year. Yes, I don’t drive much and have a pretty efficient car, but even with a normal car getting 10 L/100 km, that would take about 4500 km/yr of “extra trips” to get that kind of savings — it really just isn’t realistic. Similarly, who spends $1000/yr on taxis (actually, more than that, if they can save $1000/yr by cutting back or splitting with friends)? A lot of what he talks about in the frugality tips are outside his expertise and it shows.

Weirdly enough, there’s only ~4 pages on work ethic and time management. This really could have been almost the whole book, as the side hustle thing is a huge part of how Sean did what he did and is within his circle of competence to talk about. In some of his better times, Sean made more in a month (on top of his regular job!) than I made in a year as a grad student.

Let’s not understate this: he’s a very hard-working guy. He worked 80+ hr weeks for years at a time — not just a few months holding the world together while his wife was sick or ahead of a major deadline. And he kept that grind up without burning out.

Part of why I didn’t like the book is because of the massive missed opportunity there — I kept expecting to hear how I could also burn my hypothetical mortgage by hustling to earn more than my day job income, and how to fit all those hours in a day and avoid burning out. But the formula for success remains a secret. There is a side hustle appendix at the end, but it’s almost an insult, full of vacuous tips like “Childcare: Look after other people’s kids.” Yes, that is seriously the entire tip. He also suggests donating plasma for money, but there are only two clinics in Canada that do that (Moncton and Saskatoon), and Canadian Blood Services does not and will not pay for donations (though Wayfare is only alive because of the work of ~200 blood/plasma donors, so please do that one anyway). The rest of the list serves similarly as a brainstorming session with no regard to practicality — and clearly isn’t the way that he did it.

Anyway, from the generic middle we come to the FOMO section:

“Although foreign buyers help prop up the economy, many locals are finding themselves being priced out of the market. It’s probably wise, if you’re in the financial position to do so, to buy now while you can still afford to.”

Yep. He also suggests turning to the bank of Mom & Dad, so they can tap a HELOC on their house to help you buy one. Or buy with a friend (“great way to build equity and get your foot in the door” — BTW there will not be a giveaway as I threw up on my copy).

Only late in the chapter, after fanning the FOMO, does he include a note of temperance: “Buying a home is a good long-term investment — most of the time. But it doesn’t always make good sense. (With a book title like Burn Your Mortgage, I bet you weren’t expecting me to say that.) In fact, you may jeopardize your financial freedom if you buy a home before you’re ready and end up selling it within a year, say.” I for one, could have done with a lot more temperance.

The book pays a fair bit of lip service to buying what you can afford and staying within your budget, so it seems like a huge gaping hole that it’s not until much later that he does actually provide a rule-of-thumb on what affordable means. Though that gets immediately undercut because after introducing the figure for affordable, he says to spend more in a pricey market (no justification on how that’s still affordable, or why you couldn’t spend more of your income in a less hot market).

There’s actually a lot of detailed information after that on buying a house, features of a mortgage, and getting wills and insurance, and there’s a lot of promise here… except the FOMO stuff makes it hard to recommend. Not just on getting in before being priced out, but things that are very Toronto/Vancouver red-hot market centric like going in with a “clean” offer, or a bully offer for good measure.

Here’s where I want to take a bit of a side-bar discussion: this is a dumb thing to do. If you actually need financing to close, then you have to including a financing condition, because if for whatever reason you can’t get a loan (which could be due to an unforeseeable event like changes to mortgage regulations or a weak appraisal), you can’t close and are liable for damages that can be costly without that condition as an out.

Realtors put a positive spin on this and call it a “clean” offer, but you might as well call it a “naked” one (and that gets into another sidebar about the incentive to make a deal happen vs. protect a client). Now, in a flaming hot real estate market (such as Toronto has seen up until recently), those are the lengths buyers have been driven to. So if you want to give advice to people that helps them “win” a bidding war and get a house, you have to be pragmatic with the prevailing conditions and suggest they put in a naked offer. And that’s one approach and I get that and it’s fine — but it should also come with the appropriate warning label, and at the very least acknowledge that most readers in the country are not facing such dire competition and can proceed with more sense.

The other approach is to try to give people unpopular advice to protect them, in which case you can acknowledge that the stupid thing is happening, and tell people not to do it. It’s a small risk, sure: most deals close and the buyer finds a way to finance; most pre-construction purchases end with the market flat or higher and a buyer is able to get a mortgage and close. But in a book that also suggests buying life insurance for young healthy people, this is a comparable risk and deserves similar discussion. As a bestseller, it could have helped turn the tide on foolishness. Besides, in markets where you “have” to go in with a naked offer and completely expose yourself to the risks of not being able to close, the price-to-rent might favour renting anyway.

Conclusion

Burn Your Mortgage is mostly harmless. The lead-in ignores the alternatives and serious risks involved in buying, it has a strong pro-buying bias throughout, and there are better sources to go to for frugality hacks, budgeting advice, and side hustle tips. But if you’re going to buy a house anyway, the middle section does have a fair bit of handy information on what’s involved in the purchase and financing process. To be fair I’ve focused on nit-picking the other sections, so the truly helpful middle chunk is not reviewed in detail.

Footnote:

And just as this post was being put up, this from the Star: “Others, who bought unconditionally, have discovered they can’t get the financing to meet their purchase obligation. In some cases, the bank appraisal has come in at a value below what a purchaser agreed to pay, leaving the buyer scrambling to make up the difference.”

The One-Page Financial Plan

August 29th, 2016 by Potato

Carl Richards’ book The One-Page Financial Plan has been out for a little over a year so this isn’t exactly a fresh review. It’s a very quick and easy read, punctuated with Carl’s simple but illuminating sketches.

I want to both sing the praises of this book and damn it, sometimes for the same parts.

The part I loved is the philosophy towards planning, which is to seek a balance between mapping the future out in great detail (impossible as the future is inherently uncertain) and just living for today and playing it by ear. Carl tells us to just make a guess about where we’d like to go in the future. “Don’t be committed to the guess, be committed to the process of guessing.” […] “Once we’ve accepted that a lot can happen between now and the future, financial planning boils down to making the best guess we can about what goals will help us live the life we want. Don’t worry about getting it ‘right.’ You can — and should — simply course-correct your guess when you notice yourself going off track.”

The part that causes me the most dichotomous feelings is the title: a one-page financial plan. I was really excited to see what his one-page plan was, because I really tried to simplify my example plan and it was still over two pages. Here is his “plan”:

Time with family doing things we love!

  1. Fully fund all retirement accounts each year
  2. Fund kids’ education account each year
  3. Save for house

Those are a list of priorities, and this fits so well with the kind of planning that Sandi describes in her library talks, about goals and direction. This is a fantastic exercise to do and I think it’s great that the book covers it so well — this is an easy thing to overlook when trying to plan.

And then I get angry because it’s not a plan, or at least not what you expected a plan to be going in, so the title feels like a cheat. Then there’s a great analogy about putting together a children’s toy, and the picture on the box vs. the detailed step-by-step instructions, which makes me love it again. But that still doesn’t make the picture on the box a plan. Grr!

Anyway, if you were expecting to walk out with a step-by-step guide for creating a detailed financial plan that mapped out how much you had to save in which baskets, you’ll be disappointed. However, it’s a short read, and thinking about your goals and priorities is an important part of the planning process, so it’s still worth your time.

The Long Earth and Foraging

June 7th, 2016 by Potato

I’m partway into the last book of the The Long Earth Series and I just had to take a break to rant about part of it.

Don’t get me wrong, it’s an interesting premise and there’s a good story in there — after all, I have stuck with it through three and a half books now. The idea is that there are multiple parallel worlds, each differing a tiny bit from the last. But humans only developed on “datum Earth”, so when people “step” to a parallel world they find the world as it would have been, without the effects of millennia of humanity. Forests where cities stand, mammoths roaming North America. So people spread out to colonize the new parallel worlds, with full knowledge of where the gold and oil is hidden.

However, the point the authors then try to ram home multiple times and that just doesn’t catch with me — that’s immersion-breaking for me — is that beyond that, a great many people decide to drift further and further into the parallel worlds and become hunter-gatherers, living off the untouched land. They try to make it sound like an idyllic life, that the plants will provide, and all the squirrel you can eat. So many people are drawn by this new/old way of living that civilization is being hollowed out and at risk of collapse.

Sure, there would be more big game without over-hunting, many of which would have no fear of humans, but people would be giving up all our infrastructure: clean water, shelter, the internet, medicine. I just can’t see it.

I mean, yes, part of why this is immersion-breaking for me is just how much I am not that foraging type, so every time they try to sell that point about half of humanity just walking away from everything civilization offers I go “hells no!” There are some people even in the city who are all about foraging, with jealously guarded secret spots in the Don Valley where edible mushrooms and wild chives grow. That’s not me — I can barely deal with you-pick-em apples/strawberries at an orchard/farm where they are ripe and ready and thick upon the plants. And I’m still like “This is too much work just to eat, someone give me something to edit and I’ll hit the grocery store later.”

If you’re really, really into hunting (and all the nasty business of skinning and butchering that comes with it) then maybe, but I can’t swallow the notion that wandering into the forest and living on the fruits and berries you find is in any way appealing. Without humans spreading the plants we like, there wouldn’t be that many of them to make foraging all that easy. Moreover, plants and berries just don’t work the way they say — most of what we eat has been shaped by human cultivation. If I could barely be buggered to pick delicious Royal Gala or Empire apples from a tree in full ripeness, ancestral corn (pitiful and tiny), wild bullrushes (technically edible), black spruce (who doesn’t love a good black spruce porridge?), stinging nettle (nope), dandelion (they grow wild in my lawn and I pick them anyway and I still can’t be bothered to eat them), or wild grapes (you thought the seeds were a problem when you accidentally bought the non-seedless cultivated grapes) would just be giant fuck yous.

Sure, if you had no other choice, many of those things are technically food. If you pathologically loved the open, empty world, you may run off to a parallel universe and live off the land. But I absolutely cannot see something like half of earth’s population abandoning industrialized farming to go forage in the long earth. There are many other interesting potential calamities the authors could have explored based on the discoveries. For example, what would happen to climate change if we could tap three or four Ghawar and Permian Basin oil fields from neighbouring earths, and put all the CO2 into our atmosphere? What economic shocks would happen if precious metals were no longer quite so rare? What tensions would there be between establishing suburbs in the “parallel footprint” of existing cities, versus using those areas for farming (as many of our cities were founded on prime farmland)? Some of these issues are touched on lightly in the books, but nothing is hammered as hard and as often as the hollowing-out of humanity for the call of foraging.

To give you an idea of how hard they try to sell the idea, here’s a blockquote to leave you with:

“Valhalla is a city supported by combers. Hunter-gatherers. The logic is elementary. Intensive farming can support orders of magnitude more people per acre than hunting and gathering. On a single world a comber community, even if natural resources are rich, would necessarily spread out, diffuse; the concentration of population needed to sustain a city would be impossible. Here, it is sufficient for the combers to be spread out, not geographically, but over many stepwise Earths — over a hundred parallel Valhallas, left wild for hunting. […] The city is a product of a layer of worlds, each lightly harvested, rather than the product of a single intensively farmed world. This is intensive gathering: a uniquely post-stepping urban solution.”

Air Miles Suck (and Have Effectively Expired Already)

May 3rd, 2016 by Potato

I was one of the first to sign up for an Air Miles card when they were offered at my local Dominion over 20 years ago. All I had to do was carry around a little piece of plastic and shop like I normally did (with maybe a few extra rounds of stocking up when bonus offers came around) and I’d get free movie tickets? Sweet deal.

And of course, over the years the points got devalued, and the bonus offers weren’t as good so they didn’t accumulate as fast. Then the deathknell: air miles cash points. I should have read the tea leaves and switched over right away, but I didn’t, because for a short time movie passes were still an option. Quite rapidly over the last two years, air miles have stripped away virtually all of the things you could use your points on. And they don’t allow you to convert your stranded dream points to cash points, so they’ve effectively become worthless.

There are some news stories out this week making a splash about how air miles points will start expiring soon if they’re old, but really, it’s already happened. If you have a big stockpile of “dream” points, go ahead and see what you can get, but it will be a frustrating experience on many levels. Not only because all the stuff you may have got or been saving up for before (gift cards, movie passes, zoo passes, electronics, magazine subscriptions) is gone, but also because of how slow the air miles site is. Plus it’s all cluttered up with stuff to buy with cash rather than redeem your miles for, which is highly frustrating. I don’t know if that’s just a bait-n-switch (I clearly clicked on the section for redeeming my points, air miles, so why are you pitching me on ways to spend cash and get more stupid points?), or if it’s to have something in those categories because otherwise the possible redemptions are really sad looking, or if they just don’t even know what they’re doing over there any more.

How sad? Under house & home there are zero items you can redeem your points for unless you are a Gold member or want to use one of their terrible, scammy “cash + points” deals. Under electronics there is one item. Kitchen and dining has two, one of which is a hideous woodgrain grain mill, something I know is at the top of everyone’s kitchen wishlist </sarc>. Personal care & lifestyle has a few items left… but only two are under 2000 points and again, weird, underwhelming items no one would want.

So whether they officially take them away in the coming weeks or not is just semantics — if you weren’t paying attention (and I wasn’t), your air miles have already expired.

I think this devaluation of points and the effective elimination of the “dream” option was a huge mis-step for air miles. There’s no longer a reason to bank points, which means people don’t feel good about getting their statements and seeing ridiculous amounts on there. Instead they’ll save a few bucks here or there, $10 at a time, and the program will lose its ability to act as a loyalty/incentive/draw. Making points only usable for cash makes the value completely transparent, and that doesn’t work in their favour (the return is poor relative to other points plans).

The program is so bad now that it’s working in reverse: instead of a store offering air miles being a perk and a reason to shop there over competitors, a store offering air miles is just a sad reason to keep air miles alive. I don’t shop at Pharma Plus because they offer air miles — I haven’t cut up my air miles card because I still shop at Pharma Plus. When MoneySense offered me bonus air miles to renew my subscription (a subscription I got in the first place by redeeming miles which is no longer an option), I wanted to write in and ask if they could just stuff the air miles and give me a few bucks off instead. In part because they burned us, air miles are a bit of an annoyance, and in some cases I’d rather avoid stores that offer them.

And as a final note: don’t transfer your points to someone else. They “offer” the ability to transfer your points to another person, but it is a scam. They charge 15 cents per point to do it, when the points are only worth about 10 cents each in the first place! If you have points expiring, trying to combine with someone else will not work out for you unless you just need a few more points to reach some threshold for redemption (not that there’s much left to redeem for).