WEBVTT - Nate’s Election Model, the Trouble with Insurance, and How People Get Risk Wrong 0:00:15.604 --> 0:00:26.244 Pushkin. Welcome back to Risky Business, a show about making 0:00:26.284 --> 0:00:28.684 better decisions. I'm Maria Kanakova. 0:00:28.484 --> 0:00:31.164 And I'm Nate Silvery. Today on the show, we'll talk 0:00:31.164 --> 0:00:33.684 about my new presidential election forecast. 0:00:34.204 --> 0:00:38.364 Well also talk about insurance. Although Nate, I'm really excited 0:00:38.364 --> 0:00:40.844 to hear about your election forecasts. 0:00:40.684 --> 0:00:43.204 You might want to ensure against that feeling, Marie, you 0:00:43.244 --> 0:00:45.164 may not like what it has to say. I'm talking 0:00:45.164 --> 0:00:47.484 about our top three ways that people get risk wrong. 0:00:54.084 --> 0:00:56.324 Nate, let's talk about your election model for the twenty 0:00:56.364 --> 0:00:59.284 twenty four elections, which is out this week. You've been 0:00:59.324 --> 0:01:02.284 working on this election model, tweaking it, developing it for 0:01:02.484 --> 0:01:06.164 sixteen years, and it's been remarkably accurate. So I'm actually 0:01:06.244 --> 0:01:08.724 really excited to talk about it and get into it 0:01:08.764 --> 0:01:10.964 with you, even you told me that I really shouldn't 0:01:11.004 --> 0:01:13.004 be so, I mean, I'm a little scared, too. 0:01:12.884 --> 0:01:15.364 Careful, careful what you wish for. I want you to 0:01:15.444 --> 0:01:19.324 guess what number it has in the chance that trumpel 0:01:19.404 --> 0:01:19.964 with the election. 0:01:20.884 --> 0:01:23.324 Oh night, this is are you gonna break my heart? 0:01:23.484 --> 0:01:26.524 Is it okay? Fifty eight percent? 0:01:27.124 --> 0:01:27.404 Higher? 0:01:28.524 --> 0:01:28.804 Fuck? 0:01:29.884 --> 0:01:33.444 I don't feel the exact number because we're we chake 0:01:33.484 --> 0:01:35.284 a couple days in advance. By the time the model 0:01:35.324 --> 0:01:37.244 is released, there could be new polls and so forth. 0:01:37.364 --> 0:01:39.044 I mean, we'll see what it says when it comes out. 0:01:39.044 --> 0:01:41.484 But we're in the We're in the load of mid 0:01:41.564 --> 0:01:44.564 sixties is kind of where the where the forecast is landing. 0:01:45.084 --> 0:01:47.644 Fucking you fuck fuck fuck is my is my response 0:01:47.684 --> 0:01:49.404 to that night. You're usually the one dropping the f 0:01:49.404 --> 0:01:53.404 phones on the show, but I think it's my turn. Yeah. 0:01:53.604 --> 0:01:57.324 Look, my job here is not to tell you who 0:01:57.364 --> 0:02:00.564 you should vote for. It's to forecast the election as 0:02:00.564 --> 0:02:04.204 best I can. And I think it's disingenuous too to 0:02:04.324 --> 0:02:06.444 call the race a toss up. You can kind of 0:02:06.964 --> 0:02:11.644 squint and say, oh, if you look at national polls 0:02:11.764 --> 0:02:14.164 and Biden's maybe only down by half a pointer or so. 0:02:14.284 --> 0:02:15.884 But the problem in the US is that we don't 0:02:15.884 --> 0:02:19.244 determine elections by the popular vote. Right, if it was 0:02:19.244 --> 0:02:20.924 a popular vote, the model things it would be a 0:02:21.004 --> 0:02:24.604 toss up, or maybe Biden slightly favored. In the electoral college. 0:02:24.924 --> 0:02:27.444 There has been for the past two cycles with Trump 0:02:27.444 --> 0:02:31.764 on the ballot, a gap that favors a GOP. In 0:02:31.764 --> 0:02:35.364 twenty and twenty, Biden won the popular vote by four 0:02:35.364 --> 0:02:37.004 and a half points, which is a pretty good margin 0:02:37.044 --> 0:02:40.964 against an incumbent. But all these key states Georgia and 0:02:41.484 --> 0:02:44.124 Wisconsin and Pennsylvania and so forth, the only win by 0:02:44.164 --> 0:02:49.124 about one point. So if we're now in twenty twenty 0:02:49.164 --> 0:02:52.004 four and Biden's trailing by half a point instead of 0:02:52.004 --> 0:02:54.244 winning by four and a half points in the popular vote, 0:02:54.364 --> 0:02:57.724 that's a shift of five points. If you have a 0:02:57.764 --> 0:03:00.324 state like Pennsylvania that you win by one point and 0:03:00.364 --> 0:03:03.844 you shift it by five points, that's not very good. Now. 0:03:04.404 --> 0:03:06.644 What's happening in practice is that there's a bit of 0:03:06.644 --> 0:03:11.044 a bifurcation between the Midwestern swing states is kind of 0:03:11.084 --> 0:03:13.764 trio of rust Belt states Pennsylvania, maybe even maybe not 0:03:13.764 --> 0:03:17.124 at the Midwest per se, but Pennsylvania, Wisconsin, Michigan, where 0:03:17.164 --> 0:03:20.964 BIA's polling is closer usually within the point maybe two 0:03:20.964 --> 0:03:24.164 point Trump lead, versus the sun Belt states, the new 0:03:24.244 --> 0:03:29.044 fangled Georgia, Nevada, Arizona, where Biden's polling is very bad. 0:03:29.084 --> 0:03:33.764 He might be down five or six points. Now. If 0:03:33.764 --> 0:03:37.524 he wins Michigan and Pennsylvania and Wisconsin and holds all 0:03:37.564 --> 0:03:41.324 the other states so like New Hampshire, Virginia and so forth, 0:03:42.964 --> 0:03:45.524 then he would finish with exactly two hundred and seventy 0:03:45.564 --> 0:03:48.884 electoral votes when you need to sixty nine to win. 0:03:49.404 --> 0:03:53.084 So there is a path, but not a whole lot 0:03:53.084 --> 0:03:53.964 of margin. For aer. 0:03:55.324 --> 0:03:57.524 Nate, this is not the way that I wanted to 0:03:57.564 --> 0:03:59.964 start off my week. So I think I think we're 0:04:00.004 --> 0:04:03.364 done with the podcast, goodbye, good bye luck as I 0:04:03.484 --> 0:04:07.084 go and hide in a cave. But no, in all honesty, 0:04:07.164 --> 0:04:10.324 this is sobering news. I so don't want Trump to 0:04:10.364 --> 0:04:13.484 win because I know I think it's going to have 0:04:13.644 --> 0:04:20.244 incredibly dire consequences for democracy. So I want to kind 0:04:20.244 --> 0:04:22.444 of squint and say, yeah, but there's this path and 0:04:22.444 --> 0:04:24.004 look at these states, and we're going to do it. 0:04:24.364 --> 0:04:26.164 But I think that you need to be realistic and 0:04:26.204 --> 0:04:29.524 try to figure out, Okay, given this, there's still it's 0:04:29.564 --> 0:04:32.564 not like the election is tomorrow, right, So what can 0:04:32.604 --> 0:04:37.244 we do? What shifts in your election model would actually 0:04:37.324 --> 0:04:40.204 change that outcome and bring that percentage back down? Are 0:04:40.244 --> 0:04:43.284 there certain lovers? Are there certain things that are actually 0:04:43.284 --> 0:04:46.004 going to be kind of the most meaningful as you 0:04:46.044 --> 0:04:47.884 play around with the inputs and the numbers. 0:04:49.364 --> 0:04:54.044 Yeah, look, Biden is struggling with groups that are traditionally 0:04:54.084 --> 0:04:57.604 strong Democratic groups like younger black voters, younger Hispanic voters. 0:04:58.324 --> 0:05:01.004 That's why you see his numbers fading in states like Georgia, 0:05:01.164 --> 0:05:04.924 for instance, whereas he's actually doing okay with these older 0:05:04.924 --> 0:05:07.044 white voters. That seems to be the constituency. It's like 0:05:07.364 --> 0:05:10.804 holding up for him the best. There is a debate today, 0:05:10.884 --> 0:05:13.924 This episode's coming out on Thursday tonight. That's an opportunity 0:05:13.964 --> 0:05:18.044 for Biden to turn things around. You know, the conventions 0:05:18.044 --> 0:05:22.004 have get to happen. The concern for Biden is that 0:05:22.084 --> 0:05:27.084 the race has been extremely steady so far, the steadiest 0:05:27.124 --> 0:05:29.524 you've ever seen Poland. I think in a presidential election 0:05:30.684 --> 0:05:32.724 Biden game maybe half a point to a point in 0:05:32.764 --> 0:05:37.524 the polls following Trump's conviction on thirty However, many it 0:05:37.644 --> 0:05:42.284 was felony counts, you know. But the fact that like 0:05:42.324 --> 0:05:45.124 Trump was convicted of paying hush money payments to like 0:05:45.164 --> 0:05:50.524 at porn star adult film actress, excuse me. And that's 0:05:50.524 --> 0:05:52.284 like a real sentence I can say, And that like 0:05:53.004 --> 0:05:54.804 had half a point worth of difference. I mean, that's 0:05:55.124 --> 0:05:58.124 that's not great for Biden. I think there have been 0:05:58.164 --> 0:06:01.364 a lot of false hopes from Democrats. People say, oh, 0:06:01.364 --> 0:06:02.444 this is going to move the poles. It's going to 0:06:02.484 --> 0:06:06.564 move the polls when the economy has gotten a fair 0:06:06.644 --> 0:06:09.284 bit better over the past six months. Inflation has abate, 0:06:09.524 --> 0:06:13.684 the stock market is way up actually, but like the 0:06:13.764 --> 0:06:17.364 numbers haven't really changed very much. And I don't know. 0:06:17.484 --> 0:06:21.684 I'm sure I'll be called a fascist, biased, republican hack 0:06:22.284 --> 0:06:26.324 by every democratic strategist in the book. But the whole 0:06:26.324 --> 0:06:29.124 point of having a model is that you're applying structured 0:06:29.164 --> 0:06:31.964 thinking where where you don't go in and tweak the 0:06:32.004 --> 0:06:35.044 results once you see what it spits out. Right, The 0:06:35.084 --> 0:06:36.924 whole point of committing to a model is that like 0:06:37.844 --> 0:06:40.964 it does take the emotional component, which I have like 0:06:41.044 --> 0:06:45.804 everybody else, out of the process or reduces it. Let's say, right, 0:06:46.884 --> 0:06:49.564 I'm someone who thinks professionally, it would be great to 0:06:49.564 --> 0:06:51.004 just say, oh, it's a toss of fifty to fifty, 0:06:51.004 --> 0:06:52.964 who knows can't get in triple that way. Well, that's 0:06:53.004 --> 0:06:55.604 dishonest and it's not what the number says, and it's 0:06:55.644 --> 0:06:58.404 not what the process I followed for sixteen year now 0:06:58.604 --> 0:07:01.844 years now is two thousand and eight says right, this 0:07:01.924 --> 0:07:05.044 is not a year that looks terribly uncertain. You don't 0:07:05.044 --> 0:07:07.444 have COVID. You don't have these polls volleying up and 0:07:07.484 --> 0:07:09.964 down like you did in twenty sixteen with Clinton and Trump. 0:07:10.244 --> 0:07:14.404 They're very well known candidates, and so Trump's advantage is narrow, 0:07:15.564 --> 0:07:19.604 but it's been persistent, and he has the more robust paths. 0:07:20.764 --> 0:07:23.964 The fact that Biden has to win all three of 0:07:23.964 --> 0:07:29.044 those Michigan, Wisconsin, Pennsylvania trio, all where he probably trails 0:07:29.044 --> 0:07:30.324 by a point or so, but he has to win 0:07:30.364 --> 0:07:33.924 all three and hold these other states. The fact that 0:07:33.964 --> 0:07:36.404 like the next best wing states like Arizona for Biden, 0:07:36.444 --> 0:07:38.764 where he's down by like four or five points, that's 0:07:38.764 --> 0:07:41.924 a real deficit. I don't think you can sit here 0:07:41.924 --> 0:07:45.444 with a straight face and say you'd rather be by 0:07:45.964 --> 0:07:47.724 I think you can say you'd rather be Trump. 0:07:47.924 --> 0:07:50.484 You started off by saying that it seems that Biden 0:07:50.604 --> 0:07:53.364 is slipping amongst some of those voters who are kind 0:07:53.364 --> 0:07:57.604 of traditionally democratic, right, like the younger black voters. Are 0:07:57.724 --> 0:08:01.844 those voters actually switching to Trump or what's happening to them? 0:08:02.524 --> 0:08:06.604 So where's that loss for Biden evaporating? Two? 0:08:06.804 --> 0:08:09.964 I think there might be, you know, some permissions ructures 0:08:10.044 --> 0:08:13.484 to vote for Trump that didn't exist last time, but no, 0:08:13.564 --> 0:08:18.204 a lot of them are going to undecided, to RFK 0:08:18.404 --> 0:08:21.644 junior or out of the electorate. You know, our model 0:08:21.724 --> 0:08:24.844 projects turn out of something like one hundred and fifty 0:08:24.884 --> 0:08:27.204 million this year, which is which would be down from 0:08:28.004 --> 0:08:31.164 twenty to twenty in all the polls, the indications that 0:08:31.204 --> 0:08:34.324 there's less enthusiasm for this election than there had been. 0:08:35.204 --> 0:08:39.684 Now to Biden this credit, he actually does well. Democrats 0:08:39.684 --> 0:08:43.684 in general do well with these very reliable regular voters. 0:08:43.684 --> 0:08:46.724 So like, lower turnout might actually be beneficial for Biden. 0:08:47.044 --> 0:08:51.044 So Nate, Okay, since we since we are we are here, 0:08:51.404 --> 0:08:54.364 what are kind of if you are at the Biden camp, 0:08:54.644 --> 0:08:59.564 where should they focus their efforts between now and election time? 0:08:59.884 --> 0:09:03.204 Like give us like top top two, top three priorities, 0:09:04.004 --> 0:09:06.804 Like what should the campaign be doing to try to 0:09:06.844 --> 0:09:12.884 get those numbers back to where in more winnable territory? 0:09:13.044 --> 0:09:16.524 Maybe fire some people I don't know, certainly, fire anybody 0:09:16.564 --> 0:09:18.484 in the campaig who's telling you not to believe the polls, right, 0:09:18.524 --> 0:09:20.804 fire them and don't get them a new job. I mean, seriously, 0:09:21.884 --> 0:09:24.364 if you're down, if you know, again, if you're at 0:09:24.364 --> 0:09:26.524 a mid thirties, maybe maybe they'll got up to the 0:09:26.524 --> 0:09:28.604 low forties by the time we published the model, but 0:09:28.644 --> 0:09:32.844 probably mid thirties. If you're in that territory, then you 0:09:32.884 --> 0:09:34.924 know that's the point when again, when a baseball team 0:09:35.004 --> 0:09:37.604 is winning thirty some five six seven percent of its 0:09:37.644 --> 0:09:41.404 ballgames and it tends to fire the manager and there's 0:09:41.404 --> 0:09:43.764 been very little turnover, and like, their theory of the 0:09:43.804 --> 0:09:46.724 case is wrong. They thought that Trump would be relatively 0:09:46.724 --> 0:09:48.364 easy to defeat and they could run back the twenty 0:09:48.404 --> 0:09:51.764 twenty playbook. You're talking about democracy, democracy, democracy, over and 0:09:51.764 --> 0:09:54.324 over and over again, and that this would work. Their 0:09:54.404 --> 0:09:57.164 theory of the case is wrong. They did not expect 0:09:57.164 --> 0:10:00.484 to be down at this point, right. This is why 0:10:00.484 --> 0:10:02.484 they're still doing the RFK junior stuff, because they thought 0:10:02.484 --> 0:10:04.964 they'd be winning, and so you want to reduce variants. 0:10:04.964 --> 0:10:08.404 When you're ahead and getting RFK junior, who's a wild card? 0:10:08.404 --> 0:10:09.764 I guess you can say, off the b it is 0:10:09.804 --> 0:10:13.604 something to do that. You know. Look, I think some 0:10:13.684 --> 0:10:18.124 of this stuff that you've done tactically suggests improvement, but 0:10:18.124 --> 0:10:20.524 but I don't know. I mean, I mean, you know, 0:10:20.644 --> 0:10:25.044 for all the fucking talk about how important the election is, 0:10:25.084 --> 0:10:28.204 and I think some of that talk is we'll scrutinize 0:10:28.204 --> 0:10:29.684 that more. At some point. I think some of it's 0:10:29.724 --> 0:10:33.564 a little precious. But like if you really think that 0:10:33.724 --> 0:10:36.644 like this is the you know, the end all be 0:10:36.764 --> 0:10:38.884 all of elections, then I'm not sure really acting like 0:10:38.924 --> 0:10:41.684 it very much. You know, they're acting like people who 0:10:41.804 --> 0:10:45.884 have incentive. We're called principal agent problems. Right, you don't 0:10:45.924 --> 0:10:48.484 want to be the polster that gives the president bad news. 0:10:48.764 --> 0:10:50.484 You definitely don't want to be the polster or the 0:10:50.644 --> 0:10:53.644 advisor who tells the president, hey, maybe you should stand 0:10:53.644 --> 0:10:55.764 down to think about having someone else run, because then 0:10:55.804 --> 0:10:59.124 you lose your job. But you know, and then there's 0:10:59.164 --> 0:11:03.284 a whole Kamala Harris issue too, where I mean, I 0:11:03.284 --> 0:11:05.484 think if she were more popular, then there's some chance 0:11:05.524 --> 0:11:07.564 that Biden would have stood down and Democrats to be 0:11:07.564 --> 0:11:12.284 in better shape. So I don't know. Look, all you 0:11:12.324 --> 0:11:14.964 can say is like, if Biden loses, and there's still 0:11:15.004 --> 0:11:18.524 a pretty some chance he wins, it's not like you 0:11:18.564 --> 0:11:20.764 can't see this coming. He has been behind in the 0:11:20.804 --> 0:11:26.764 polls consistently for you know, since Midsummer last year. Voters 0:11:26.804 --> 0:11:29.804 consistently have said you are too old, you should not 0:11:29.884 --> 0:11:32.084 run again. The first term was fine, you should not 0:11:32.164 --> 0:11:36.284 run again. You know they have ignored that message at 0:11:36.324 --> 0:11:38.804 every turn, and that's because the data is ambiguous. Right again, 0:11:38.804 --> 0:11:40.364 you can squint in the right day and look at 0:11:40.364 --> 0:11:43.204 the right poles and see not just a path to 0:11:43.244 --> 0:11:45.604 it Biden victory, but like a case where his chances 0:11:45.644 --> 0:11:48.804 look pretty decent. Right, you can't look at things like 0:11:48.804 --> 0:11:52.404 the twenty twenty two midterms where Democrats did relatively well, 0:11:53.404 --> 0:11:55.164 and you can hope that the polls are biased in 0:11:55.164 --> 0:11:59.044 your favor because biased against you, rather to outperform them, 0:11:59.084 --> 0:12:03.724 because sometimes they are. But that's usually very hard to predict, 0:12:04.364 --> 0:12:06.604 and you don't need many reminders of cases where the 0:12:06.604 --> 0:12:09.404 polls were biased against Trump in stead. 0:12:10.284 --> 0:12:13.244 All right, so shake things up. I think we see 0:12:13.244 --> 0:12:15.644 the old status quo bias that we've talked about week 0:12:15.684 --> 0:12:19.364 after week after week, and firesome people focus on those 0:12:19.484 --> 0:12:22.084 key states and like, just get your ass and gear 0:12:22.684 --> 0:12:25.764 and realize that there's a very very good chance you'll lose. 0:12:29.964 --> 0:12:43.044 We'll be right back. Nay. 0:12:43.164 --> 0:12:47.004 Let's talk about some huge shifts in the home insurance industry. 0:12:48.284 --> 0:12:51.244 There has been a lot of news recently about homeowners 0:12:51.284 --> 0:12:56.004 insurance because insurers are actually getting out of multiple states 0:12:56.084 --> 0:12:59.684 multiple areas and refusing just flat out and refusing to 0:12:59.884 --> 0:13:04.404 ensure homes, which is obviously affecting homeowners, home buyers, people 0:13:04.444 --> 0:13:07.204 who need to get you know, their their home mortgage, 0:13:07.524 --> 0:13:10.964 anything like that, because they like physically cannot get their 0:13:10.964 --> 0:13:14.084 home insured. And Nate, last week, you and I talked 0:13:14.084 --> 0:13:17.604 a lot about climate change and all of those effects, 0:13:17.684 --> 0:13:20.444 and this is directly related to that. So I think 0:13:20.484 --> 0:13:23.964 that this is one way that consumers are feeling what 0:13:24.004 --> 0:13:26.004 it means to be living in a world where the 0:13:26.124 --> 0:13:28.764 risks of one off events are no longer one off events, 0:13:28.804 --> 0:13:31.044 where the storm of the century is no longer the 0:13:31.044 --> 0:13:34.684 storm of the century, where you can actually see these 0:13:34.724 --> 0:13:38.204 people who use models to try to model out the 0:13:38.284 --> 0:13:41.564 risks losing money and saying, oh shit, we don't want 0:13:41.604 --> 0:13:43.844 to ensure your home anymore. We no longer want to 0:13:43.844 --> 0:13:44.564 take this risk. 0:13:47.084 --> 0:13:50.044 So let me ask, Yeah, what might seem like a 0:13:50.124 --> 0:13:55.364 naive question, right, why can't you just price these risks 0:13:55.924 --> 0:13:58.684 in that you're in California and you know the risk 0:13:58.764 --> 0:14:02.044 of wildfires, you're in Florida, you know the risk of hurricanes. 0:14:02.084 --> 0:14:04.564 You can build a model and then it costs more 0:14:05.044 --> 0:14:08.084 than it might what's a safe state, you know, Wyoming there, 0:14:08.164 --> 0:14:11.964 like Bolcanos there and that anyway, but why can't you 0:14:12.764 --> 0:14:15.684 charge more instead of not offering the risk at all? 0:14:16.644 --> 0:14:18.444 Yeah, I mean, I think that that's a really really 0:14:18.484 --> 0:14:21.044 good point, and I think that some insurance are trying 0:14:21.084 --> 0:14:23.324 to do that and trying to charge more. But I 0:14:23.324 --> 0:14:26.764 think that some are using old data instead of new 0:14:26.844 --> 0:14:29.444 data for the models. And the problem is there are 0:14:29.484 --> 0:14:32.204 no good data, right. How do you model something that's 0:14:32.284 --> 0:14:36.084 changing so rapidly in an environment that's changing rapidly, where 0:14:36.084 --> 0:14:39.684 there's a lot of volatility, and volatility in the actual 0:14:39.724 --> 0:14:41.884 sense of the word, which means that you know, ups 0:14:41.924 --> 0:14:45.644 and downs are very extreme in a short period of time. 0:14:46.084 --> 0:14:49.644 How do I factor in the uncertainty of these risks 0:14:49.724 --> 0:14:53.084 given that we don't have any historical comps, right, given 0:14:53.164 --> 0:14:55.484 that we don't know how it's going to play out 0:14:55.484 --> 0:14:57.524 in the next ten years, because the last ten years 0:14:57.564 --> 0:15:00.724 are not representative of the years before that are not representative, 0:15:00.964 --> 0:15:05.204 and we no longer have this steady model where where 0:15:05.244 --> 0:15:07.164 we can go back and say, Okay, you know, risk 0:15:07.204 --> 0:15:11.004 of this x percent, risk of this experson. I mean, 0:15:11.044 --> 0:15:12.884 I know that one way of handling volatility is to 0:15:12.884 --> 0:15:17.164 price it even higher, but at some point you know 0:15:17.244 --> 0:15:20.124 you're pricing it so high because of the uncertainty that 0:15:20.284 --> 0:15:21.684 it might not make sense anymore. 0:15:23.244 --> 0:15:25.844 Yeah, if you go to the New York Times, they 0:15:25.884 --> 0:15:30.764 have a interactive graphic called the Home Insurance Crunch, see 0:15:30.764 --> 0:15:34.124 What's happening in your state, where it just shows every 0:15:34.164 --> 0:15:38.204 state whether home insurance has been profitable or losing for 0:15:38.244 --> 0:15:42.444 the insurers. And what you quickly discover is that you 0:15:42.564 --> 0:15:46.284 have kind of limited upside where nothing goes wrong you 0:15:46.364 --> 0:15:51.004 do make a profit, but kind of uncapped downside where 0:15:51.084 --> 0:15:56.604 one year with crazy hurricanes or flooding or wildfires or 0:15:56.644 --> 0:16:01.124 things like that can wipe out ten marginally profitable years. 0:16:01.124 --> 0:16:05.444 And in states like California and Colorado a lot of 0:16:05.444 --> 0:16:09.804 fires Florida, of course, with hurricanes like that happens pretty often, 0:16:10.364 --> 0:16:16.204 so it's hard to measure tail risks, especially if the 0:16:16.244 --> 0:16:18.724 tails are expanding. We talked on the last week's episode 0:16:18.764 --> 0:16:22.564 about how if there's even a small shift in the distribution, 0:16:23.124 --> 0:16:25.964 the part of the curve under the tail can really 0:16:26.004 --> 0:16:31.284 get shifted out where it becomes substantially more probable. Yeah, 0:16:31.324 --> 0:16:33.764 and there's also you know, there's also something called adverse 0:16:33.844 --> 0:16:36.564 selection where maybe the people who want to buy insurance 0:16:36.564 --> 0:16:39.684 are people that are worse risks for you to take. 0:16:39.764 --> 0:16:43.364 Maybe they know something about their home that it's vulnerable 0:16:43.404 --> 0:16:46.204 to landslides, for instance, And therefore you kind of have 0:16:46.364 --> 0:16:49.564 what economists we call like a market for lemons, where 0:16:49.604 --> 0:16:52.404 you don't you have information asymmetries between buyer and seller 0:16:52.444 --> 0:16:54.844 that reduce the overall size of the market. And in 0:16:54.844 --> 0:16:57.364 those cases it might be irrational to might be rational 0:16:57.444 --> 0:17:01.604 rather to not offer a product. There's not a kind 0:17:01.604 --> 0:17:02.724 of market clearing price. 0:17:03.204 --> 0:17:06.564 Wait Nate, one second, let's clarify what exactly a market 0:17:06.604 --> 0:17:07.964 for lemons means. 0:17:08.564 --> 0:17:11.124 Yeah, the term was coined, I believe by the economist 0:17:11.284 --> 0:17:15.244 George Akerlove, who I think is now at Berkeley won 0:17:15.284 --> 0:17:18.484 a Nobel Price. He talks about, I mean, Elemon is 0:17:18.724 --> 0:17:23.884 a defective used car, and it's hard to know everything 0:17:23.924 --> 0:17:25.964 wrong with the car if you take a test drive 0:17:26.044 --> 0:17:29.884 for a few minutes or something like that. But basically, 0:17:29.924 --> 0:17:34.964 it's like when buyers don't have any way to trust sellers. 0:17:35.004 --> 0:17:38.044 There's no third party vouching for the reliability of these 0:17:38.124 --> 0:17:41.404 used cars. What happens is just the volume of transactions 0:17:42.364 --> 0:17:45.244 goes way down. Right, You have dead weight loss when 0:17:45.244 --> 0:17:49.484 there's no credible way to achieve trust. So the theory 0:17:49.484 --> 0:17:51.204 here would be, like, you know, if we think that 0:17:51.844 --> 0:17:55.084 insurance is a win win transaction, right, someone's paying some 0:17:55.164 --> 0:17:57.804 expected value on average, you lose money if you buy insurance, 0:17:57.844 --> 0:18:00.644 but they protect their downside risk. Right, that's a win 0:18:00.724 --> 0:18:04.324 win on a risk adjusted basis. But if there's not 0:18:04.364 --> 0:18:08.324 reliable information you're not sure you can trust the insurer, 0:18:08.644 --> 0:18:10.844 or if you're insured, you're not sure you can trust 0:18:10.844 --> 0:18:15.564 the homeowner, then you have transactions not happening that would 0:18:15.564 --> 0:18:18.244 create utility for both sides and for society. 0:18:19.164 --> 0:18:22.484 Yeah, I think that something that I know about investing 0:18:23.364 --> 0:18:26.244 is if you're trying to kind of look at an 0:18:26.284 --> 0:18:30.764 opportunity and you're comparing upside and downside risk. Right, when 0:18:30.804 --> 0:18:35.164 you have unlimited downside risk and your upside risk is 0:18:35.684 --> 0:18:38.644 your upside is capped, that's not an investment you want 0:18:38.684 --> 0:18:41.004 to be making, right. You want it to be asymmetric 0:18:41.044 --> 0:18:43.284 the other way. You want your downside risk to be 0:18:43.364 --> 0:18:47.124 capped and your upside to actually be able to go 0:18:47.324 --> 0:18:51.044 up further, especially if you're leveraged. Right, If you're thinking 0:18:51.084 --> 0:18:52.764 about it that way, and if you're thinking about the 0:18:52.804 --> 0:18:57.164 fact that this is incredibly asymmetric risk, and this is 0:18:57.164 --> 0:18:59.124 something that they've you know, this is something they've been 0:18:59.124 --> 0:19:02.324 doing for years where it's been asymmetric in their favor, 0:19:02.644 --> 0:19:06.284 where it has been basically a capped downside because these 0:19:06.364 --> 0:19:09.684 kind of once in a lifetime events didn't happen, or 0:19:09.804 --> 0:19:12.724 they did happen once in a lifetime, and so all 0:19:12.764 --> 0:19:15.924 of your other years where you were making money paid 0:19:15.964 --> 0:19:18.484 for it. But now if you're making less money, because 0:19:18.484 --> 0:19:21.124 there's always something happening, right if you look at the 0:19:21.164 --> 0:19:25.804 news every year, there's something happening. There's you know, home 0:19:25.844 --> 0:19:30.124 destruction because of all sorts of different things, tornadoes, hurricanes, wildfires, 0:19:30.684 --> 0:19:32.524 you know, you name it, you know, we got it. 0:19:32.964 --> 0:19:36.844 And then if you have that, so in your up years, 0:19:37.084 --> 0:19:39.564 up years, you're not nearly as up and then you 0:19:39.644 --> 0:19:42.204 have these catastrophic events that are happening over and over 0:19:42.244 --> 0:19:44.844 and over. Then to me, like, as if you're a 0:19:44.924 --> 0:19:47.404 rational investors, it's a bad investment. So you end up 0:19:47.404 --> 0:19:48.084 pulling out. 0:19:48.204 --> 0:19:53.004 What's not neglect the role of dorm regulations. According to 0:19:53.044 --> 0:19:56.444 the Washington Post, in California's case, insurance companies must use 0:19:56.484 --> 0:19:59.764 historical data rather than forward looking models when they price 0:19:59.804 --> 0:20:04.484 insurance plans that means is supporting them. Their policies may 0:20:04.524 --> 0:20:06.604 not reflect the actual risk you're supposed to hedge against. 0:20:07.204 --> 0:20:11.764 That's stupid. I mean, there's no serious put laws in California, 0:20:12.084 --> 0:20:14.884 and like I happen to agree with that. Night if 0:20:14.924 --> 0:20:18.604 you can't actually like adjust for changes in the climate, 0:20:18.644 --> 0:20:21.644 which I think most people in California would care about, 0:20:21.684 --> 0:20:26.284 then you're just making the market less efficient. You know, 0:20:26.364 --> 0:20:29.604 how you optimize this function where on the one hand, 0:20:30.004 --> 0:20:34.364 you probably don't want insurers to have literally unlimited liability 0:20:34.364 --> 0:20:37.204 because they can't. No one has infinity infinity dollars, right, 0:20:37.244 --> 0:20:39.524 they won't be able to pay it. On the other hand, 0:20:39.564 --> 0:20:41.564 you know, you don't want insurance not to make people 0:20:41.604 --> 0:20:45.084 relatively whole when there is a disaster. Otherwise what's the point. 0:20:46.004 --> 0:20:48.244 But I would gather that one that like these state 0:20:48.284 --> 0:20:50.484 regulations are not always that well designed. 0:20:51.044 --> 0:20:54.564 Yeah, I think that that's absolutely right because and states 0:20:54.564 --> 0:20:56.164 are trying to step in, by the way, not just 0:20:56.204 --> 0:20:59.924 in California, right, because there are these gaps where they say, 0:21:00.044 --> 0:21:02.804 oh shit, you know, what do we do if people 0:21:02.844 --> 0:21:06.204 in our state can't buy houses because they can't get insurance, 0:21:06.244 --> 0:21:08.724 Like this is actually a big, big issue, Nate. I 0:21:08.764 --> 0:21:11.044 know that at some point point in the in the past, 0:21:11.804 --> 0:21:15.964 you were considering buying a place in Miami. Is you know, 0:21:16.124 --> 0:21:18.484 is that something where like, let's talk about this on 0:21:18.524 --> 0:21:21.004 a personal level, Like, would you do that right now, 0:21:21.404 --> 0:21:24.284 given what's happening with insurance, given what we know about 0:21:24.564 --> 0:21:27.084 the risks there, given that you probably would not be 0:21:27.124 --> 0:21:29.804 able to get insurance on the you know, on an 0:21:29.844 --> 0:21:31.164 apartment that you wanted. 0:21:32.764 --> 0:21:37.564 Honest answer, they probably wouldn't affect my decision that much 0:21:39.724 --> 0:21:45.284 because look, home insurance is negative expective value on a 0:21:45.324 --> 0:21:49.084 non risk adjusted basis, right, Otherwise it wouldn't be offered. 0:21:49.084 --> 0:21:51.644 By definition, insurance means that someone who has more capital 0:21:51.924 --> 0:21:54.884 and more risk tolerance than you makes money on average, 0:21:54.884 --> 0:21:57.884 and homeowners lose money on average. I mean, it wouldn't 0:21:57.924 --> 0:22:01.404 be great. I'll probably take the negative evy like safe bet. 0:22:03.004 --> 0:22:04.244 I mean, I'm probably not going to buy a place 0:22:04.284 --> 0:22:09.724 in Mimi for other reasons. But no, I mean, but 0:22:09.764 --> 0:22:13.484 I'm also conscious about how much of my net worth 0:22:13.564 --> 0:22:16.444 I'm tied it being real estate, right. I think it's 0:22:16.484 --> 0:22:19.844 generally a mistake, for many reasons to have a great 0:22:19.844 --> 0:22:22.484 deal of your net worth tied up in real estate 0:22:22.524 --> 0:22:24.564 as opposed to a broader portfolio of stuff. So I 0:22:24.564 --> 0:22:27.004 think I think I'm hedged enough in diverse fi it 0:22:27.124 --> 0:22:31.644 enough that, like, although not ideal, I I you know, 0:22:31.684 --> 0:22:32.924 it wouldn't be a deal breaker. 0:22:33.964 --> 0:22:37.484