Hollywood in Extremistan

In The Black Swan, Taleb originally explained Mediocristan and Extremistan to describe how many pundits, scholars, and participants had mistakenly believed that the finance industry followed a Gaussian distribution when it actually followed a Zipf-Mandelbrot power law.

Physical measurements in the world tend to have Gaussian distributions, “to live in Mediocristan,” but other domains, like finance, follow power laws, and “live in Extremistan.” In Mediocristan, the average weight of 100 random Americans won’t change much by adding the heaviest American into the sample as the 101st observation. Conversely, in Extremistan, the average income of 100 random Americans would change drastically by adding Bill Gates into the sample as the 101st observation.

Although it’s not commonly understood or discussed, Hollywood also lives in Extremistan. Successful studios, production companies, and freelancers all adopt barbell strategies.

In financial investing, a barbell strategy is a strategy in which an investor places a majority of the portfolio, maybe 90% to 95%, into extremely non-volatile assets like T-bills, CDs, cash, etc., and a minority of the portfolio, maybe 5% to 10%, into highly risky assets like stocks, venture capital, or futures.

In the financial domain, Taleb advocates for the barbell as a way of dealing with Black Swans–unexpected yet highly impactful events–by both hedging against negative Black Swans and profiting from positive Black Swans. In an extreme barbell strategy, the non-volatile majority of the portfolio might sustain small and steady losses in a bull market because T-bills wouldn’t beat the rate of inflation. T-bills are also insulated from recessions and will outperform bear markets. In both bear and bull markets however, some of the assets in the risky, volatile portion of the portfolio will sustain losses, but such losses are bounded and acceptable. The upside on the risky assets is effectively unbounded, so the highly profitable bets cover the losses for the rest of the portfolio.

What does all this mean for Hollywood? The barbell strategy is widespread.

Errol Morris, even after having won an Oscar for The Fog of War, still enjoyed and continues to enjoy working on commercials.

It’s very typical in Hollywood for client work to serve as bread and butter. Invoicing for client work is usually fee-for-service, and filmmakers don’t expect, require, or depend on any particular clients’ product enjoying runaway success.

Specialists in Hollywood are creatives though, and join the industry because they love creating. The scrounge, toil, and pull favors to make their passion projects, some of which do enjoy runaway success.

Hollywood lives in Extremistan because the physical inputs–development, pre-production, production, post-production, and marketing and distribution–are only very tenuously related to the outputs–tickets, views, à la carte VOD purchases, subscribers to subscription VOD services, etc.

Even though Hollywood’s finances are severely obfuscated, assume that the Pareto principle is in play, that 20% of films and shows generate 80% of the revenue. Matthew Ball and Prashob Menon explain that revenue has been stagnant and fragmentation of the industry has intensified.

In Vanity Fair, Nick Bilton explains how the inefficient Gaussian aspects of the industry are about to get squeezed. Silicon Valley is about to make Extremistan even more extreme.

Why does density predict political preference?

In The Righteous Mind, Jonathan Haidt cites Dave Wasserman,

Our counties and towns are becoming increasingly segregated into “lifestyle enclaves,” in which ways of voting, eating, working, and worshipping are increasingly aligned. If you find yourself in a Whole Foods store, there’s an 89 percent chance that the county surrounding you voted for Barack Obama. If you want to find Republicans, go to a county that contains a Cracker Barrel restaurant (62 percent of these counties went for McCain).

It turns out that there’s a decisive break between Democratic and Republican support at a population density of 800 persons/per square mile. Why might that be? Colin Gordon suggests,

There is, of course, a lot going on here, including a long history of regional and metropolitan patterns in partisan alignment. But a hopeful reading of the map would go something like this: People who live close to one another are more likely to know someone of a different color, a different income group, or a different sexual orientation. They therefore rely upon and appreciate the provision of public goods and public services (transit, parks, garbage collection), even as they consume fewer public dollars than their less-densely populated counterparts.

On Quora, Kelly Martin, answering a question about why Manhattan overwhelmingly votes Democratic, explains,

For the same reason that virtually every densely populated urban area in the United States overwhelmingly votes for Democrats: because Republican principles of governance would leave highly developed urban areas with insufficient tax revenue to maintain the infrastructure services without which those densely populated areas could not continue to support human habitation at those densities. (For those who don’t believe this, consider this: the third rail of Chicago city politics is snow removal, and an administration that fails at snow removal will not survive the next election.)

Population density is one of the best predictors of partisan voting outcomes: the higher the population density of a voting precinct, the more likely that precinct will vote Democratic. Indeed, the only large cities in the US that do not reliably elect Democrats are cities (such as Indianapolis, Indiana and Jacksonville, Florida) that have incorporated large tracts of lower-density suburban territory into their municipal boundaries. Manhattan is the most densely populated tract of land in the United States, and thus on that basis alone one can predict—correctly—that Manhattanites will reliably elect Democrats.

It’s a compelling argument, but it could be mistaken in one of two ways. First, greater density generally implies economies of scale, so government outlays per capita for infrastructure might be lower than in rural areas. For instance, Internet access is more costly in rural areas than urban areas.

Perhaps Martin’s unstated premise is that the output of critical infrastructure specific to dense urban areas is above the minimum long run average cost, and suffers from diseconomies of scale. Given Tiebout competition, cities might offer value in many other ways that attract and retain residents, despite an inability to minimize the long run average cost of infrastructure.

Second, even if urban-specific infrastructure would benefit from economies of scale, it’s possible that there are systematic ideological biases that obscure this knowledge from urban Democratic voters.

Might it be that the poverty and homelessness in plain view in dense cities embolden a politics of empathy via availability bias?

Might it be that cities attract and breed people who have high openness to new experiences? Linda Krueger on Quora supposes,

Those in urban areas are simply exposed to more people, more diversity, more cultures, more ideas. They know the world is made up of differing religions, beliefs, and lifesyles because they see it outside their door every day and coexisting peacefully as everyone moves through their day.

Rural areas are isolated from much of the world because the world and all its diversity is not right outside their doors. Instead they get to create a view of others and of opposing beliefs that will not be challenged to any great degree simple because their environment is more homogeneous. In that scenario fear is built on the unknown. They can assume immigrants are taking jobs even though none have taken their jobs. They can assume terrorist are just waiting to destroy them because they fear and are leery of outsiders. They can assume homosexuality is a curse to a moral society because a foundamental religious foundation gives them a sense of community, a strength of righteousness, and a guide to follow that comes from a high authority they can rely on and refer to.

Without any definitive answers, I’d guess that a difference in tolerance and openness to new experiences is what’s primarily driving the effect, and the other political beliefs follow via irrational clustering.

1 Based on research by David Wasserman of The Cook Political Report, reported by Stolberg 2011, as cited in Haidt, Jonathan (2012-03-13). The Righteous Mind: Why Good People Are Divided by Politics and Religion (Kindle Locations 6731-6732). Knopf Doubleday Publishing Group. Kindle Edition. Haidt, Jonathan (2012-03-13). The Righteous Mind: Why Good People Are Divided by Politics and Religion (Kindle Locations 5210-5213). Knopf Doubleday Publishing Group. Kindle Edition.

CC BY-ND 2.0-licensed photo “night density” by urban feel

Neo-Lamarckian confusion as a weak attack on nativism

I.

Before the modern evolutionary synthesis was established, Jean-Baptiste Lamarck posited that it was possible for an organism to pass on characteristics acquired during its lifetime to its offspring.

Lamarck’s popular example in Philosophie Zoologique was the idea of the giraffe that stretches its neck to eat from a tree, and thereby passes onto its immediate offspring longer necks, who in turn continue to stretch their necks even further.

Without any scientific evidence, Lamarck’s theory was abandoned. Mendelian genetics and Darwinian natural selection supplanted Lamarckism.

II.

Unfortunately, one of the popular misconceptions that lingers about evolution today is that it is a Lamarckian process. Even laypersons who purport to “believe” in scientific explanations as against religious explanations of the origins of life often don’t understand the process of evolution. The popular March of Progress, through iconic oversimplification, conveys Lamarckism.

By M. Garde – Self work (Original by: José-Manuel Benitos), CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=2165296

The graphic doesn’t depict any mechanism of selection pressure—it begs readers to misinterpret evolution as Lamarckian by just showing a progression of traits, absent of any other context.

III.

Perhaps it’s the folk misunderstanding of evolution as Lamarckian that bolsters an intuitive belief in the SSSM. If the claims of evolutionary psychology were merely operating in a Lamarckian way, then central planners would be able to intercept the inheritance of behaviors, beliefs, and attitudes from parent to child, and instead reëngineer society by collectivizing child rearing to create a socialist New Man.

Neo-Lamarckism is a new line of attack from SSSM advocates.

IV.

There’s been a curious resurgence of interest in Lamarckism. Guy Barry (2013) describes transgenerational epigentic inheritance in the brain as evidence of classic Lamarckian inheritance, but it’s post hoc reasoning. As T. Ryan Gregory pointed out,

Lamarck did not think that the environment imposed direct effects on organisms that were then passed on. He argued that the environment created needs to which organisms responded by using some features more and others less, that this resulted in those features being accentuated or attenuated, and that this difference was then inherited by offspring.

Epigenetics wasn’t the mechanism that Lamarck anticipated.

Why debate about a wall?

I.

What underlies the debate about building a wall on the U.S.-Mexico border?

As with so many seemingly intractable political arguments, debaters usually don’t explicitly state their premises describing which moral values are informing their position, because they rarely even realize their opponents are even operating on different moral dimensions.

II.

A compressed argument from the right might take the form:

• Premise 1: The government’s primary role is to provide security, in the form of law enforcement, to its citizens and legal aliens.
• Premise 2: A government has the right to control who enters its borders.
• Conclusion: Therefore, the government’s policy should be to spend more resources enforcing laws against illegal border crossings, and one such tool would be a wall to help prevent said illegal border crossings.

Some on the right might find the above argument completely obvious and convincing, but the argument has many unstated premises with which to disagree. A decompressed form of the argument with more premises stated explicitly, might take the form:

• Premise 1: The government’s primary role is to provide security, in the form of law enforcement, to its citizens and legal aliens.
• Premise 2: A person’s national origin conveys probabilistic information about their security risk inside the United States.
• Premise 3: Legal immigration channels provide a necessary audit of the security risks of foreigners entering the country.
• Premise 4: It is possible and practical for unskilled workers to enter the country legally and work legally, but illegal immigrants are criminals who merely prefer to cut corners.
• Premise 5: A foreigner’s proclivity to circumvent legal immigration channels into the United States demonstrates a disrespect for the rule of law and an unhesitating willingness to commit criminal acts.
• Premise 6: Law enforcement should devote resources to prevent criminal activity, including illegal border crossings.
• Premise 7: A wall would be an effective tool to restrict illegal border crossings.
• Premise 8: The marginal financial costs of a wall are less than or equal to the combined marginal economic and security benefits of a wall.
• Premise 9: Deference to authority moral foundation: Following the law is an important moral value in and of itself, so it’s wrong for rule-violators to go unpunished.
• Premise 10: In-group loyalty moral foundation: The government should grant preferential treatment to United States citizens and legal aliens in the form of economic protectionism.
• Premise 11: Fairness and reciprocity moral foundation: By selling their labor off-the-books and without paying taxes, illegal immigrants don’t contribute to paying for government-provided infrastructure and services.
• Conclusion: Therefore, the government should construct a wall on the U.S.-Mexico border.

Contrast the above argument from the right to the below argument from from the left:

• Premise 1: Harm and care moral foundation: There are desperate, impoverished people who are attempting to improve their lives by crossing the border to work in the U.S.
• Premise 2: Fairness and reciprocity moral foundation: Such impoverished people are poor from circumstances beyond their control, based on wherever they happened to be born.
• Premise 3: In-group loyalty moral foundation: There’s no special moral obligation to confer privileges, rights, or resources on the basis of national origin.
• Premise 4: Deference to authority moral foundation: It’s not particularly important to follow or enforce unjust laws.
• Premise 5: Liberty and oppression moral foundation: Laws restricting the free movement of people are oppressive.
• Conclusion: Constructing a wall to more strongly enforce an unjust law is undesirable.

Spelling out all of the unstated premises improves the discourse and reveals what exactly the impasse is. This is a similar technique to “Tabooing the words.”

III.

The argument for or against a border wall actually follows a distinct pattern observable in many other political debates. The specific “wall” debate is generalizable to more-or-less any debate about harsher crackdowns on victimless crimes.

What were the policy objectives of alcohol prohibition in the 1920s? The intended objectives were to (1) reduce alcohol consumption in order to (2) reduce the the social ills caused by alcohol consumption. Unfortunately, when governments successfully achieved (1), they made (2) much, much worse. The policy problem with prohibition wasn’t that the government failed to reduce alcohol consumption—the problem was that by harshly cracking down on a victimless crime, they drove the activity underground into a black market, fueled organized crime, and made production, sale, and consumption of alcohol much more dangerous. The costs created by prohibition proved much higher than when alcohol had been legal.

The logic of harsher crackdowns for victimless crimes almost always fails, 180° from the intended policy objectives. Some other examples:

• Modern-day marijuana prohibition
• Modern-day marijuana prohibition fuels violent, depraved Mexican drug cartels.
• There are no equivalent “tobacco cartels” or “alcohol cartels,” because neither tobacco nor alcohol are traded on a black market.
• The illegality of prostitution
• Prostitution is largely an illegal, underground business, which makes it more dangerous for prostitutes and their johns. Prostitutes or johns who find themselves in danger can’t rely on law enforcement for protection or recourse.
• Driving prostitution underground makes sex slavery and human trafficking a viable business model. Ceteris paribus, pushing the supply curve to the right with legal, regulated prostitution businesses would obliterate the slavery business model.
• Exploiting tax loopholes instead of paying taxes
• U.S. corporations hire lobbyists, lawyers, and accountants to create, find, and exploit tax loopholes—if taxes were simply lower, it would be more cost-effective just to pay the taxes. The stated intent of high corporate income tax rates is to extract more revenue from corporations, but the higher tax rates spur firms to find clever ways to pay less in taxes.
• Even though Arthur Laffer was empirically wrong about his parabola’s numerical values, his concept was more or less correct. Hauser’s law holds.

The logic of harsher crackdowns applies in the same way to human migration. By driving the victimless crime of human migration underground, the government is spurring social ills—funding organized crime through cayotaje, and making living and working more dangerous for laborers who are merely seeking to sell their labor.

IV.

Much of the immigration debate can be stripped down to two opposing outlooks. The core question is whether, on net, outsiders are:

1. Either a cost to the United States, consuming resources and predating on American citizens;
2. Or a benefit to the United States, looking to improve their lives by consensually selling their labor and participating in positive-sum economic transactions in iterated games.

The explanation from Matt Taibbi on the rise of Trump, the leftist-style economic protectionism on the right, and the “politics of resentment” applies to the immigration debate as well.

It seems like a historical accident that the left and right divided on the immigration debate in the way that they did. Why didn’t we see labor unions on the left promote economic protectionism against immigrants, and the free-marketeers on the right promote free markets for unskilled labor?

V.

One cliché heard from the right is “being only against illegal immigration, and for legal immigration,” which presumes that it’s at all possible for unskilled workers to enter the country legally. It’s not.

VI.

The same logic of 180° unintended consequences from harsh crackdowns on victimless crimes applies for “national security” concerns as well. It would merely promote cayotaje to crack down more harshly on current immigration laws before actually reforming laws to make immigration for unskilled immigrants legal.

Because immigrants are primarily seeking to sell their labor, there would be no reason migrate illegally if legal immigration were actually a viable option.

Just as the repeal of alcohol prohibition eliminated the revenue stream to organized crime during prohibition, legalizing immigration for unskilled workers would eliminate cayotaje. At the moment, potential terrorists and dangerous criminals are free to use the cayotaje infrastructure, which decreases national security.

Brands, product consistency, and the ascent of television and subscription-based VOD

One economic explanation of why brands proliferate is that brands provide consumers consistency of product. A classic illustration is a national restaurant chain. A traveler who’s passing through an unfamiliar town doesn’t know local restaurants, and the variance in quality among the mom-and-pop shops is high. Even though the quality of a chain might not be the highest in any given town, a risk averse consumer might prefer eating an average meal at a chain, rather than risking a low-quality meal at a mom-and-pop shop.

In Hollywood, it’s exceedingly difficult and rare for film studios to establish such consistency across their different marquee offerings. There are some mechanisms for doing so: moviegoers will often select films based on specific directors or actors. For more formulaic movies, sequels provide consistency for established demographics.

In the past decade, television has exploded with a vast amount of content. John Landgraf, the CEO of FX, has even worried that there is too much television. There’s more dreck, like reality television, but there is also more high production value television. Such high production value television competes with 2-hour theatrical feature films.

Story arcs are fractals. An audience will follow characters in a good story through a not only a 2-hour film, but also through a 12-episode television season, a single 45-minute television episode, or even just a 2-minute scene.

What does this mean for television? Filmic shows might contain long story arcs that follow characters across six seasons, but episodes often function as standalone short films. Episodes of The Walking Dead in later seasons often have self-contained, coherent stories that can draw in new viewers without requiring that they watch earlier seasons. Characters come and go from season to season. No additional context is required. This is a highly successful mechanism to actually create a consistent product across tens and tens of hours of entertainment content. This is more successful branding than any traditional movie studio could hope for, even one that specializes in zombie horror.

Subscription-based VOD services like HBO, Netflix, and Amazon, through their original content, have been able to establish brands in a way that film studios never quite could. Sophisticated audiences understand what it means for a show to be “an HBO show” or “a Netflix original.”

Is the brand loyalty to these subscription-based VOD services merely an artifact of their captive audiences? Subscribers who have already opted into particular subscriptions might actually be receptive to mere feature-length films, and not just entire television seasons. Economies of scale nudge subscription-based VOD services toward the production of entire television seasons rather than two-hour films, because consumers who have opted into a subscription want the most bang for their buck. There are exceptions, however—the Netflix feature film “Beasts of No Nation,” HBO documentaries like “Going Clear,” or even just shorter miniseries like “Oliver Kitteridge,” “Angels in America,” et cetera. Perhaps, insomuch as content producers own distribution channels, they can maintain attractive brands for their subscribers.

Why avoid panel data in examining social mobility?

Last week at Politics and Prose, I had the opportunity to hear Robert Putnam’s book talk for Our Kids: The American Dream in Crisis. In his book, he focuses on data that purport to show a growing divide in income inequality and social unraveling.

Putnam told a personal anecdote about his deteriorating home town in the Rust Belt. If Putnam were able to prove that the shrinking economy from the loss of manufacturing jobs in the Rust Belt proportionately reflected the larger economy in all other sectors, he might have a strong data point, but a personal anecdote is not enough. The availability heuristic is not strong evidence.

So much of the talk concerning income inequality pertains to an unstated premise about social mobility. The widespread fear is not just that the rich are getting richer, but that the rich are getting richer at the expense of the poor. The mental model assumes some fixed share of wealth that exists in the world should be divvied up fairly so as to avoid predation by the strong on the weak. Often, the evidence presented for a “fixed pie” theory is to show the shrinking share of income among the lower quintiles and the growing share of income among the higher quintiles. The problem with this methodology is that it doesn’t actually account for social mobility. To prove that capital is flowing from individuals in the bottom quintile to individuals in the top quintile, we need panel data.

If we don’t analyze with panel data, we might observe the top quintile, profiting from some entirely new high-tech sector, drastically increasing their income by 20% while lower quintiles still increase at 2%. More wealth generated at the top wouldn’t imply material loss for the bottom quintile.

In the Q&A, I pressed Professor Putnam on his methodology, specifically, to what extent he used panel data to show decreased social mobility. After his book signing, he elaborated for me.

Putnam claimed that there was some good panel data for income, but that it couldn’t be used to show current trends in social mobility.

We might suppose that the relevant panel data to measure social mobility would include income, $y_{it}$ for $i=Poor, i=Rich, t=20, t=40$.

At $t=40$ or so, we might expect people to be generating the most amount of income for their life.

The methodological issue Putnam pointed out was that individual incomes over a lifetime are highly nonlinear. If you were to track a random sample of individuals starting at t=20, very different kinds of individuals would look very similar, but both would appear in the bottom quintile. Specifically, $y_{Rich,20}$ could be -\$100,000 for a Harvard pre-law student who’s taking out student loans, and $y_{Poor,20}$ could be \$16,000 for a minimum wage job. However, $y_{Rich,40}$ might be \$450,000, while $y_{Poor,40}$ might be something like \$25,000.

Putnam pointed out that because of how this panel data is measured, the data is always intrinsically 30-40 years out of date. Wait, is this a cop out? Is this methodological laziness?

Just because any one particular study requires 40 years doesn’t mean that we couldn’t observe multiple concurrent staggered studies, with different individuals to show panel data over time. We can imagine Study A starting in 1945 with a batch of individuals at $t=0$, Study B that tracks $t=0$ at 1950, Study C that tracks $t=0$ at 1955, and so on and so forth. Then, despite nonlinearity in lifetime earnings, we would still be able to see trends in how individuals are or aren’t moving up, out of their birth quintiles.

Did F. A. Hayek understand optionality?

Nassim Nicholas Taleb writes in Antifragile,

We may be drawn to think that Friedrich Hayek would be in that antifragile, antirationalist category. He is the twentieth-century philosopher and economist who opposed social planning on the grounds that the pricing system reveals through transactions the knowledge embedded in society, knowledge not accessible to a social planner. But Hayek missed the notion of optionality as a substitute for the social planner. In a way, he believed in intelligence, but as a distributed or collective intelligence— not in optionality as a replacement for intelligence.1

Au contraire, Hayek wrote in The Constitution of Liberty, in Chapter 2: “The Creative Powers of a Free Civilization,”

It also follows that the importance of our being free to do a particular thing has nothing to do with the question of whether we or the majority are ever likely to make use of that particular possibility. To grant no more freedom than all can exercise would be to misconceive its function completely. The freedom that will be used by only one man in a million may be more important to society and more beneficial to the majority than any freedom that we all use.2

In a footnote for the paragraph, Hayek cites a comprehensive scholarly history for the idea:

Cf. Rev. Hastings Rashdall, “The Philosophical Theory of Property,” in Property; Its Duties and Rights: Historically, Philosophically, and Religiously Regarded, Charles Gore and Leonard Trelawney Hobhouse, eds. (new ed.; New York: Macmillan, 1915) pp.61-62: “The plea for liberty is not sufficiently met by insisting, as has been so eloquently and humorously done by Mr. Lowes Dickinson (Justice and Liberty: A Political Dialogue, e.g. pp. 129 and 131), upon the absurdity of supposing that the propertyless labourer under the ordinary capitalistic regime enjoys any liberty of which Socialism would deprive him. For it may be of extreme importance that some should enjoy liberty—that it should be possible for some few men to be able to dispose of their time in their own way—although such liberty may be neither possible nor desirable for the great majority. That culture requires a considerable differentiation in social conditions is also a principle of unquestionable importance.” [The full citation of the book quoted by Rashdall is: Goldsworthy Lowes Dickinson, Justice and Liberty: A Political Dialogue (London: J. M. Dent, 1908).—Ed.] See also Bennett E. Kline and Norman H. Martin, “Freedom, Authority, and Decentralization,” p. 69: “If there is to be freedom for the few who will take advantage of it, freedom must be offered to the many. If any lesson is clear form history, it is this.”3

1 Nassim Nicholas Taleb. Antifragile (New York: Random House, 2012), Kindle edition.

2 F. A. Hayek, The Constitution of Liberty: The Definitive Edition (Chicago: The University of Chicago Press, 2011), 83.

3 Ibid.