It is a strange fact that for many professions, the odds of success are extremely low, and so is the average pay. For example, many people have dreams about getting into acting, but I’ve seen estimates
"The same is true for going to college nowadays. If you sum up how much it is going to cost you, including opportunity cost, it's simply not worth it. So why is everyone still doing it?"
Really? Not having a college degree will still get your resume immediately put into the circular file of almost all HR departments - and well-paying jobs that don't require a degree generally have their own training period. (You have to train as an apprentice before you can work as a plumber, for example.) According to my parents, at least, college degrees do tend to pay for themselves in the long run.
This seems like a dumb conflation of vehicle and content. Obviously people do dream (who ever made the "mistake" of denying this?), and just as obviously what they dream about is a merely hypothetical (i.e. non-real) state of affairs.
The same is true for going to college nowadays. If you sum up how much it is going to cost you, including opportunity cost, it's simply not worth it. So why is everyone still doing it? I think it's a problem of cached thoughts.
So by this logic, why don't we see more poor businessmen working day jobs as waiters while they struggle with their low-paying business careers? It's about status, not money. Businessmen are thought very poorly of, and they're seen relatively infrequently in the media. Actors are idolized, and most people are very familiar with them.
Why do you think young children want to be firefighters and astronauts, and not investment bankers or accountants?
Performing is fun. Plenty of actors, musicians, writers, etc. "work" for literally nothing, simply because they like doing it.
I think this is crucial. A lot of people feel very successful just to be making a living at all in their field. total Utility is greater than making 3-4x as much money doing something else.
Also, to make a living at all, you have to be significantly better than the top tier of amateurs in some way, to some audience. Sometimes it's just about being significantly better at finding and satisfying a market. I know a lot of amateur and professional musicians. Many of the professionals aren't necessarily better *musicians* in the fine art sense. But they are entertainers as much as musicians and are much better at giving the audience what they want than most amateur musicians.
"It's a big mistake to think dreams are unreal and what is called real life is real."
Am I reading this correctly? I think it's trying to say [poorly] that utility derived from dreams is no less real than utility derived from material things. That is, if you're happy hoping to become a superstar, you're not fundamentally differently happy from someone who's happy with a lot of money and stuff. In essence, it's basic economics: your utility from being and actor/waiter is the sum of salary+(job satisfaction)+(utility of hope). Whatever you lose on the first one you may get on the latter two, as compared to someone who has a higher salary but has little hope at superstardom.
I don't think it will work, but it's still brilliant.
BTW, Paul Newman made $100,000,000/yr on his salad dressings. Superstar businessmen make more money than superstar actors. So by this logic, why don't we see more poor businessmen working day jobs as waiters while they struggle with their low-paying business careers?
Jonathan Alter recently wrote that we should perhaps pay teachers more, and pay their superstars a lot. I think the data suggest that if we start paying really large salaries for superstar teachers, we could pay a few of them more, but pay them in aggregate less. That is, we would have just as much supply if we offered them the hope of become very wealthy, with a lower average pay, than our current system, which pays them a rather solid pay but with very limited upside. No one with really large ambitions goes into education precisely because they top has a low ceiling. Hope is worth something, in terms of a higher price, and thus lower return.
This only works if you can amortize the high salary of the superstars over a large base of subscribers. This works with movie actors, musicians and sports stars, but not terribly well with teachers, no matter the success of the University of Phoenix.
It's kind of funny to write this comment while a famous actor sits at the table across from mine in a restaurant. He is one of the the hottest new TV stars but looks pretty plain in person... I believe that people often choose careers and investments that have below average returns because those actions require less training and mental effort. Sure, there are highly trained actors, such as myself, but there are also those who have won academy awards without ever being in an acting class. The same goes for investing - it is much easier for the average investor to pick the hot stock than to try to understand the market and make more rational decisions. I've been reading ob for a while but this is my first time commenting, so pleeeese be gentle. I'm not a rocket scientist, physicist, or mathematician, just a humble and curious artist.
Many financial assets that have the highest volatilities have below average returns, if not negative returns: out-of-the-money call options, Junk bonds, highly volatile stocks ...
Is this really true with respect to financial assets (ref.)? Most of these seem to be fairly uncorrelated with the market, so any below-avg. returns could be arbitraged away by holding a well-diversified short position. Good thing you didn't list credit-default swaps and "toxic" mortgage tranches, though.
Ken, Eli: I think the Gutman 'dreams are real' assertion relates to the fact that a significant portion of our day is in dreaming: at night (obviously), watching TV or reading books, thinking about a future that does not exist. To merely 'live in the moment', on flow, is what a non self-aware organism does. Now, to plan rationally for some feasible objective might be considered on the cusp, 'good' dreaming. But I think many of us who love the theater or sci-fi books that take us to far off lands, think their access to dreams is part of what makes them human and happy--even though it has zero affect on helping the achieve goals that change physical reality.
Now, I think this is often overdone in many parts of our lives, and one should definitely not dream with significant portions of their portfolio. But I also think many people actually do invest this way, because there's no other explanation for why people choose to invest in asset classes with demonstrably lower Sharpe ratios, other than the explanation of 'overconfidence': the average return is -x, but there's a chance you are well above-average.
In Dante's Inferno, at the Gates of Hell it says "Abandon All Hope Ye Who Enter Here". He might as well said, abandon your dreams. Such a life is Hell for most people.
"Why do you think young children want to be firefighters and astronauts, and not investment bankers or accountants?"
My brother wanted to be an investment banker.
And, as of a few weeks ago, he succeeded, becoming an employee of Goldman Sachs.
Of course, this really isn't the best time to go into investment banking...
"The same is true for going to college nowadays. If you sum up how much it is going to cost you, including opportunity cost, it's simply not worth it. So why is everyone still doing it?"
Really? Not having a college degree will still get your resume immediately put into the circular file of almost all HR departments - and well-paying jobs that don't require a degree generally have their own training period. (You have to train as an apprentice before you can work as a plumber, for example.) According to my parents, at least, college degrees do tend to pay for themselves in the long run.
"It's a big mistake to think dreams are unreal"
This seems like a dumb conflation of vehicle and content. Obviously people do dream (who ever made the "mistake" of denying this?), and just as obviously what they dream about is a merely hypothetical (i.e. non-real) state of affairs.
The same is true for going to college nowadays. If you sum up how much it is going to cost you, including opportunity cost, it's simply not worth it. So why is everyone still doing it? I think it's a problem of cached thoughts.
So by this logic, why don't we see more poor businessmen working day jobs as waiters while they struggle with their low-paying business careers? It's about status, not money. Businessmen are thought very poorly of, and they're seen relatively infrequently in the media. Actors are idolized, and most people are very familiar with them.
Why do you think young children want to be firefighters and astronauts, and not investment bankers or accountants?
Performing is fun. Plenty of actors, musicians, writers, etc. "work" for literally nothing, simply because they like doing it.
I think this is crucial. A lot of people feel very successful just to be making a living at all in their field. total Utility is greater than making 3-4x as much money doing something else.
Also, to make a living at all, you have to be significantly better than the top tier of amateurs in some way, to some audience. Sometimes it's just about being significantly better at finding and satisfying a market. I know a lot of amateur and professional musicians. Many of the professionals aren't necessarily better *musicians* in the fine art sense. But they are entertainers as much as musicians and are much better at giving the audience what they want than most amateur musicians.
"It's a big mistake to think dreams are unreal and what is called real life is real."
Am I reading this correctly? I think it's trying to say [poorly] that utility derived from dreams is no less real than utility derived from material things. That is, if you're happy hoping to become a superstar, you're not fundamentally differently happy from someone who's happy with a lot of money and stuff. In essence, it's basic economics: your utility from being and actor/waiter is the sum of salary+(job satisfaction)+(utility of hope). Whatever you lose on the first one you may get on the latter two, as compared to someone who has a higher salary but has little hope at superstardom.
There's another thing to consider:
Performing is fun. Plenty of actors, musicians, writers, etc. "work" for literally nothing, simply because they like doing it.
That is freaking brilliant.
I don't think it will work, but it's still brilliant.
BTW, Paul Newman made $100,000,000/yr on his salad dressings. Superstar businessmen make more money than superstar actors. So by this logic, why don't we see more poor businessmen working day jobs as waiters while they struggle with their low-paying business careers?
Jonathan Alter recently wrote that we should perhaps pay teachers more, and pay their superstars a lot. I think the data suggest that if we start paying really large salaries for superstar teachers, we could pay a few of them more, but pay them in aggregate less. That is, we would have just as much supply if we offered them the hope of become very wealthy, with a lower average pay, than our current system, which pays them a rather solid pay but with very limited upside. No one with really large ambitions goes into education precisely because they top has a low ceiling. Hope is worth something, in terms of a higher price, and thus lower return.
This only works if you can amortize the high salary of the superstars over a large base of subscribers. This works with movie actors, musicians and sports stars, but not terribly well with teachers, no matter the success of the University of Phoenix.
It's kind of funny to write this comment while a famous actor sits at the table across from mine in a restaurant. He is one of the the hottest new TV stars but looks pretty plain in person... I believe that people often choose careers and investments that have below average returns because those actions require less training and mental effort. Sure, there are highly trained actors, such as myself, but there are also those who have won academy awards without ever being in an acting class. The same goes for investing - it is much easier for the average investor to pick the hot stock than to try to understand the market and make more rational decisions. I've been reading ob for a while but this is my first time commenting, so pleeeese be gentle. I'm not a rocket scientist, physicist, or mathematician, just a humble and curious artist.
It's a big mistake to think dreams are unreal and what is called real life is real.
This is absolutely correct. Much of what is recognized to be 'reality', and called such, isn't real at all. And dreams are most certainly real things.
What is "beta"?
Many financial assets that have the highest volatilities have below average returns, if not negative returns: out-of-the-money call options, Junk bonds, highly volatile stocks ...
Is this really true with respect to financial assets (ref.)? Most of these seem to be fairly uncorrelated with the market, so any below-avg. returns could be arbitraged away by holding a well-diversified short position. Good thing you didn't list credit-default swaps and "toxic" mortgage tranches, though.
Ken, Eli: I think the Gutman 'dreams are real' assertion relates to the fact that a significant portion of our day is in dreaming: at night (obviously), watching TV or reading books, thinking about a future that does not exist. To merely 'live in the moment', on flow, is what a non self-aware organism does. Now, to plan rationally for some feasible objective might be considered on the cusp, 'good' dreaming. But I think many of us who love the theater or sci-fi books that take us to far off lands, think their access to dreams is part of what makes them human and happy--even though it has zero affect on helping the achieve goals that change physical reality.
Now, I think this is often overdone in many parts of our lives, and one should definitely not dream with significant portions of their portfolio. But I also think many people actually do invest this way, because there's no other explanation for why people choose to invest in asset classes with demonstrably lower Sharpe ratios, other than the explanation of 'overconfidence': the average return is -x, but there's a chance you are well above-average.
In Dante's Inferno, at the Gates of Hell it says "Abandon All Hope Ye Who Enter Here". He might as well said, abandon your dreams. Such a life is Hell for most people.
lol at Eli -- I was thinking while reading this post that Eli would have an aneurysm when he did. Dreams! Real! DOES NOT COMPUTE!