Dwarkesh Patel: uncertainty

Transcript context

…I think the relevant number for the financial sector is what percentage it is of wealth, not GDP. So you’re managing wealth, and the financial sector has been a pretty constant 2% of wealth for a few decades in the United States, with bumps. Obviously, 2008 matters, but it’s more or less 2%, and that makes it sound a lot less sinister. It’s not actually growing at the expense of something and eating up the economy. So you would prefer it’s less than 2%? Right. But 2% does not sound outrageously high to me. And if the ratio of wealth to GDP grows over time, which it tends to do when you have durable capital and no major wars. The financial sector will grow relative to GDP. But again, that’s not sinister. Think of it in terms of wealth. I see. So one way to think about it is like the management cost as a fraction of the assets under management or something. And that’s right. In that case, 2% is not that bad. Yeah. Okay, interesting. I want to go back to the risk aversion thing again, because I don’t know how to think about this. So his whole thing is these animal spirits, they guide us to make all these bets and engage in all this activity. In some sense, he’s saying, like, not only are we not risk-neutral, but we’re more risk-seeking than is rational. Whereas the way you’d conventionally think about it is that humans are risk-averse, right. They prefer to take less risk than is rational in some sense. How do we square this? Well, here, Milton Friedman, another goat contender, comes into the picture. So his famous piece with Savage makes the point that risk aversion is essentially context dependent. So he was a behavioral economist before we knew of such things. So the same people typically will buy insurance and gamble. Gambling you can interpret quite broadly, and that’s the right way to think about it. So just flat out risk aversion or risk-loving behavior, it doesn’t really exist. Almost everyone is context-dependent now. Why you choose the contexts you do, maybe it’s some kind of exercise in mood management. So you insure your house, so you can sleep well at night, you buy fire insurance, but then you get a little bored. And to stimulate yourself, you’re betting on these NBA games. And yes, that’s foolish, but it keeps you busy and it helps you follow analytics, and you read about the games online, and maybe that’s efficient mood management, and that’s the way to think about risk behavior. I don’t bet, by the way. I mean, you could say I bet with my career, but I don’t bet on things.…

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