Arnold Kling writes on Econlog:
…like Charlie Brown getting ready to kick a football, we seem to have an infinite capacity to believe that it will be different this time. We think that the next top-down design introduced by government will work fine, it will never degrade, and we won’t find ourselves ten or twenty years down the road wondering how such a mess was created.
Someone out there believes that gas prices are going to fall, or at least not rise very much in the future, and Chrysler seems to believe them. The company is currently offering to pay the difference between $2.99 and whatever the current cost of gasoline is, if you get one of their vehicles.
This is interesting, and there’s been a fair amount of discussion about it online. But I haven’t seen anyone point out that this means that Pricelock/Chrysler are basically shorting gasoline over the next three years. Pricelock’s website focuses mainly on the volatility of gas prices, but this really doesn’t make sense for a three year timeframe. Pricelock could change the guaranteed price every year, or every six months, and still provide a huge buffer against changing gas prices at far less obvious risk to themselves. So, what’s going on here, given that I’ve even heard some people swearing that $10/gal gas is right around the corner?
First of all, an overview of shorting. Let’s say that I’m really sure that Nintendo and Sony are going to drive the XBox line into the ground, mini Linux-run PCs like the Asus EEE are the wave of the future, and Google’s support of the ODF format and its Google Docs platform means that Office will optional software for businesses in the future. Basically, suppose I think Microsoft is doomed. I can short MSFT today at about $29.99 - basically making a promise to buy shares at some point in the future and getting the market price per share today. Let’s say I do this for 1000 shares. Disregarding brokerage fees, if the stock becomes completely worthless, I’ve just made $29,990. If the price falls to $10 (maybe only two of my three predications came true) then I’ve made $19,990 after I spend $10,000 to keep my promise to buy shares.
But, suppose instead that Linux is proven to cause cancer, Nintendo and Sony both bow out of the console market, and Google pulls the plug on Docs, and the price of MSFT increases dramatically, to $200 a share. When I make good on my promise to buy 1000 shares, I’ll be out an uncool $170,010! People often say that shorting has “unlimited risk.” This is not literally true (it’s just plain silly to think that the market capitalization of any stock could exceed the U.S. GDP, and lots of barriers will be encountered well before that point), but shorting anything is risky.
Now, look at the $2.99 “Let’s Refuel America” deal from Pricelock. It’s short-selling, but the target is gasoline instead of the common stock of a company. Even (especially) if you consider the profit from selling the car itself, it’s still shorting, just at a higher effective price than $2.99 per gallon.
Someone is making a huge gamble here. Pricelock, the company, could hardly be more opaque. Their website seems to have been run by a domain-squatter until late last year. Here’s my guess: this company was specifically created just to make this gamble. But regardless of who’s inside Pricelock, Chrysler would not play along if it thought that they weren’t able to make good on their promise. This means either insanely deep pockets to the extent that Chrysler is sure everything will turn out O.K. no matter how high gas prices get, or Chrysler has determined that gas prices are not really going to rise that much, that fast.
Who has the best information on the demand for gas in America for the next three years? Who has “inside information”? You can make good guesses based on trends and demographics and do fairly well, but only automakers can take this and also consider inside information on the availability of super-fuel efficient cars and cars that run on alternative fuels.
So, here’s Chrysler, signaling something about what it thinks fuel prices will be. I wouldn’t necessarily bet with them — the auto industry has made plenty of boneheaded decisions in its time. But, you’d be a fool to bet against them.
Have you ever had an opportunity to bet your life on something you believe in? I’m doing exactly that, although the situation is complex, and requires a fair amount of explanation of my beliefs and my financial situation.
To begin, when I very young, my parents took out (multiple!) life insurance policies for me, with a benefit of roundabout $100,000 and premiums of about $631/yr. The idea was that I would grow up, start a family, and have cheap insurance.
Problem - I have no interest in having children of my own, and thus no reasonable beneficiary to name for these policies. I don’t see any good reason for me to have children, and I don’t exactly think I’d be passing on awesome genes. After reading a bit about the age-genius curve for men, I’m not all too sure a spouse is really all that great an idea. What were they doing before I died that they don’t have any passive income streams or career to rely on?
So with no beneficiaries (assuming I don’t die before my parents) and policies that pay only in the event of my death (as opposed to something useful, like policies that would give me money in the event of a sever maiming), these life insurance policies are utterly worthless to me. $100,000 will buy a lot of something, but nothing I can actually enjoy when I’m dead. Except, of course, that I just so happen to have an interest in cryonics, and the cost to be vitrified is (very roughly) $100,000. It’s also common to pay for vitrification by naming a company as the beneficiary of a life insurance policy.
On the other hand, I want to use the money I can receive from surrendering the policies to help me move to a better location and take classes. I figure that the present value of this lifestyle change, just from the expected improvement in income over my entire life, is $499,310 given an 8% discount rate. It’s actually probably worth a lot more.
So now, to crunch some numbers. If I lived to age 80, the cost of these policies would be $34,705. This may seem like I’m assuming I’ll live longer than I really will, but the people who publish life expectancy figures get around the problem of increasing life span by ignoring it, and you should expect to live beyond what typical online statistics would say your life expectancy is (how bizarre is that?). We honestly have no idea where medical technology is going — maybe the government will regulate improvements out of existence, and average life expectancy won’t improve a day. Maybe it will decline. Maybe they’ll be a huge leap in our understanding of longevity, and all of these calculations will be moot and I’ll live a very long time no matter what I do. The foresight exchange says there’s a 22% chance of physical immortality of some sort becoming a reality, but it doesn’t say how. 80 years is “good enough”
Now then, against this expected cost of $35K, I have to try to figure out the expected benefit from cryonics. First of all, no one knows if cryonics will ever work as intended. My gut instinct is to say that the probability that cryonics will work is P(0.02), but a more informed person hints at P(0.05). I’ll use P(0.03). An expected value is the probability of an event multiplied by its payoff (or, probabilities by payoffs, as it is). But how do you quantify “Holy crap! It’s fifty years after my death, and I’m alive again?! Yippee!”? I presume that the technology required to get someone who’s been vitrified up and running again ought to also be good enough to keep them running for a fair amount of time, at least enough for a second lifespan. The question then becomes the still difficult but at least well studied “What is the value of life?” Estimates are all over the place, but it turns out that $4.7M is a conservative value. Multiply by 3%, and the expected return on cryonics is $141K. This exceeds the $35K the insurance would cost, so it wouldn’t be a bad bet per se, but the difference is far less than the $499K that I believe the value of surrendering the policies would give me.
If I use the policies I have for cryonics, I lose ($499K + $35K - $141K = ) $390K! So, keeping the policies is a no-go, big time.
An argument given to me by the agency that originally sold the insurance (and wants me to keep it) was that fewer than 1% of term policies ever have a payout. I’ll take this as true. This leads to the second half of my thinking on the subject. The majority of term life policies are for people older than I am, and for a term of at least ten years. This means that my chance of dying in the near future is small. Very, very small. It could happen — I could suffer a heart attack, get hit by a bus, or be assassinated at random by terrorists. But the probability of that happening within, say, the next five years is negligible, much, much smaller than 1%. I’d be a fool to wager any sum of money on a random 25 year old dieing before they’re 31. This opens the door for me to have my cake and eat it too — I can, essentially, bet that I not die before I turn 31, and then begin establishing finances and other arrangements for vitrification.
Say that a 10-year policy would have a $5K cost. While I’m covered by the policy, I save away $10K a year (challenging but doable even if things don’t go as planned). Even with no interest on the money I save (absurd given the 8% discount rate from much earlier), I’d be able to afford cryonics outright when my insurance ran out. The total cost of this “manual” route is $105K. The benefit is the $499K I believe I can get from moving, the $35K I no longer need to spend on the current policies, plus the expected value of cryonics, $141K for $675K, minus the cost of this alternative plan, $105K, for $570K. Even better, when I’m 41, although I can’t do anything about the $5K I’ve spent over the previous decade, the remaining $100K is entirely within my control. If cryonics looks at that point like it’s a pipe dream, and some other life-extension technique looks much more promising, I can redirect the money however I like. Maybe I’ll have kids after all — $100K is a decent college fund, and if they don’t want to go to college, it’s cash, and can be used for anything else. Maybe I’ll use the interest I’m earning on it to take a vacation to an exotic location every year. Maybe I’ll just let the money sit around and compound in case I ever need it.
So, I bet my life, since I’m hoping I won’t die in the short-term, as “inevitable” as it may be in the very long-run.
Wikipedia says “The Apollo program stimulated many areas of technology. The flight computer design used in both the lunar and command modules was, along with the Minuteman Missile System, the driving force behind early research into integrated circuits. The fuel cell developed for this program was the first practical fuel cell. Computer-controlled machining (CNC) was pioneered in fabricating Apollo structural components.” - “Project Apollo”
In a nutshell, a lot of the technology that we have around today is a result of the space program. I posit that, one day, the One Laptop Per Child initiative will be viewed in the same way. Already, we have seen dramatic changes in thinking on what a user interface should be, what language should be used to write it, and how security permissions for a computer should work. Many older concepts of “What should a computer do, and how should it work?” have been swept away.
Specifically, I believe that within the next ten years, we’ll see the following: