Stumbling and Mumbling

Lily Allen & decision theory

chris dillow
Publish date: Wed, 08 Jan 2014, 02:22 PM
chris dillow
0 2,773
An extremist, not a fanatic

A tweet from Lily Allen raises some interesting economic issues:

About 5 years ago someone asked me to stream a gig live on second life for hundreds of thousands of bitcoins, 'as if' I said. #idiot #idiot.

This reminds us that tail risk - the small chance of extreme outcomes - isn't just on the downside. It's also on the upside. Which raises the question: is it wise to chase such upside risk, as Nassim Nicholas Taleb advises in The Black Swan?

Sometimes, the answer's yes: getting out and going to parties exposes us to the small chance of meeting someone who'll greatly enrich our lives. But sometimes, the answer's no. In stock markets, stocks with the small chance of big gains are overpriced on average; this is one reason why the Aim has under-performed for so long.

I suspect that Ms Allen's case falls near the latter camp. Anyone who's in the public eye gets hundreds of requests from timewasters, twats and parasites who won't pay for their time in proper money. The only way Ms Allen could have accepted the Bitcoin offer would have been to accept countless other idiot proposals. But this would have left her exhausted and poorer as she neglected proper paying work.

In this sense, there's a big difference between judging actions ex ante and ex post - between being rational and being right. Ms Allen was rational to reject the gig, even though she now feels she wasn't right to do so.

Which raises the issue of regret. The cost of that rejection is the regret at not getting the £60m+ she would have made had she accepted and kept the Bitcoins.

However, it's curious that Ms Allen should single this out for regret. Why doesn't she regret, for example, not buying ASOS shares when they were under £2, or countless other missed oportunities?

Every choice we make (or don't) closes off some opportunities; all choice carries an opportunity cost. We could therefore spend our lives regretting the countless shares we might have bought when they were dirt cheap, the horses we didn't back, the job offers we might have accepted, the partners we might have met had we bothered to go to that party, and so on. But if we did this, we'd just be crippled with remorse.

There's a good reason and a bad reason why we're not. The bad reason lies in a variant of the availability heuristic. Often, we don't see where the road not taken would lead, so its costs and benefits aren't available to us - and out of sight is out of mind. This heuristic, I suspect, explains why Ms Allen should single out rejecting that gig; its costs are now salient, which is unusual for a rejected option.

The good reason for not regretting so many choices is that we should ask not "was this action right?" but rather "was the rule which led me to this act rational?" For example, I don't regret missing out on shares whose prices have soared because I follow the rule "be a passive investor" - a rule which is if not optimal then at least reasonable. Likewise, the rule "reject offers from timewasters" was a rational one for Ms Allen, even though it was wrong in this one instance.

There is a point to all this. Economics is not (just) about bigthink or futurology or policy. It's about the choices we all make everyday. And this means that sometimes we can learn more from a celebrity tweet than we can from the pratings of pompous empty suits.

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