Sunday, February 15, 2004

Compounding an Error

I was a little surprised that some of my old friends and I were playing for $30,000 a hand in the Texas hold ‘em game in a rundown track house in Berkeley, but that was OK. I had just won the last pot with five aces, all different. What really caught my attention was the sign-off sermonette I could just make out through the snow on an ancient black and white TV. The Cato Institute chaplain was berating Judas for despairing at his betrayal of Christ. “Hanging himself from a fig tree did not help anybody. If Judas had bucked up and invested the 30 pieces of silver at even a lousy 3%, his heirs in 2004 would own a mass of silver approximately the size of the entire Earth.” I had no way of checking the padre’s arithmetic in a dream, of course; but even if the math were more or less accurate, there had to be something the matter with his reasoning...

It shouldn’t be a secret to anybody that compound interest is only a pencil and paper miracle. Real exponential growth, whether of bacteria, human beings, or stock prices, always and inevitably crashes. But even when people do recognize this absolutely basic fact, they go on betting on the come. If you asked people during the stock bubble whether they expected a crash, most of them said they did and then bought more Enron. O well, we also know that the continuing growth in the consumption of liquid fuels is unsustainable and that we’ll be lucky if the consequences of the looming crash is no worse than a disaster; yet we’ve prepared for this Gotterdammerung by letting our government fall into the hands of a bunch of oil industry CEOs.

These comments are intended as a contribution to the ongoing debate at the Royal Ground Coffee shop on the question of whether it is actually an advantage to have a window seat on a crashing airplane.

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