or sometimes just a passing thought.

Stock Market vs. the Lottery

Date of Original Idea: I’ve been stewing on this one for years

Can the lottery, played in moderation, be a reasonable retirement vehicle?

I finally got around to (trying to) answer that question.


I’m not really sure I did the statistics right, or that I used the p-value right (should it have been t-value?). So constructive feedback is appreciated. Just comment below.

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Economic Modelling

Date of Original Idea: Today

I’m not an economist, I’m an engineer.   But everyone seems to have their own take on the economy these days– what went wrong, why it went wrong, who’s fault it is, who should pay, and so on.  My favorite are analogies made by people, especially economists.  They try to break it down to some example at “your local supermarket” or a kid running a lawn mowing business.  But no one, that I know of anyway, has taken the engineering approach to it.  So that’s today’s idea, to use not a dumb-ed down analogy, but an analogy that requires some engineering background to get.

So first.  The economy is represented as a shape.  I like circles:

And economic activity will be thought of as economic energy.  I don’t want to use “energy” too much since it sounds kinda new-agey for people that don’t normally use it in the sense of work integrated over time.  So this is, in a simple form, the farmer buying tools from the blacksmith to grow food and the blacksmith buying food from the farmer with the money used to buy the tools.

But of course, it’s more complicated than that.  It is actually a large network of flows.  I’ll keep with the circular analogy  and not go with a network model such as you’d find in an electrical or a thermal model.  So each little blue sectors, be it automotive, finance, real estate, movies, what have you, doesn’t stay only in the little area, but feeds into each other: a person working for the automotive sector spends some of his money on housing and groceries and entertainment and so on.  Ok, we all get that.  In my model the aggregate of this makes for one giant flow that keeps moving around.  This is harder to measure and harder to define, but it is the fundamental economic activity of the system.

That’s a good example of “real” energy, but there are forms of “complex” energy.  Electrical engineers know this stuff, it’s voltage, power, energy whatever that is not seen or used to do real work, but the effects of it is measurable and takes real energy away.  But it’s there.  Credit is similar.  It’s not real wealth, but it allows parallel paths of work of the economic units.  It requires some overhead and on the bottom line it only the “real” parts contribute (or should contribute) to actual wealth.  In this simple model, it is represented by flows in the third dimension (in and out of the screen).  But really I don’t need to discuss it much more so just the one picture:

So a very big economy with all sorts of activity is really complex.  Flows breaking, splitting, reforming.  Much like the gaseous swirls in the surface of Jupiter.  Every so often a Great Red Spot forms.  It feeds on itself as well as supporting, and being supported by, many smaller swirls.  It is still in the overall flow but it has much more influence than many around it.

But sometimes, often actually, it gets too large to be self sustaining and requires alot of influx from other sectors.  Problem is, this can’t last since to do so would consume the activity of all the rest of the economy.  Where is the activity going?  It’s going into the complex plane, the 3rd dimension of this analogy.  That dimension is getting out of proportion from the real plane and it is causing a great inefficiency in the system.  It is at this point in an electrical network that someone steps in and adds or subtracts complex components to the system to bring it back in line.  In the economic analysis that is similiar to adjusting the credit supply.   But if it is done incorrectly, things get very very out of whack.

And that part of the system must be shutdown and restarted, but you cannot do that to the economic system and things just go nuts.    The popping bubble leaves a void and disrupts the overall flow.  Sectors immediately downstream of the flow are hit first, then sectors that require much more trust and credit (e.g. autos).  No one knows where the flows are actually moving to and from so containment of the problem is as impossible to guarantee as fixing the problem.

The empty voids mean the economy has less going on, and the whole thing must shrink to fill the voids.  Newer voids open up here and there while the original shrinks (in reality, voids are forming and dissipating often, like cavitations in a fluid, all the time, but they don’t have much impact outside their immediate area as they don’t disrupt the aggregate flow too noticeably).  We just now have to wait for the aggregate flow to get stabilized again before we can feel comfortable.

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