What is an Education?

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Walking around an institution of higher learning, I’m sometimes shocked by how little learning seems to be emphasized. Such an observation isn’t a slight on my school by any means—I understand that there’s a finite amount of control professors wield over the motivations of the students, but there seems to be a certain aversion to learning the material beyond what is required to get the desired grade. For example, in many of my classes I’ve seen students grill the teacher about what vocabulary, formulas, and concepts they need to know for an upcoming test. More often than not, they’ll study these things alone and neglect to pick up on the subtleties that make the material remotely applicable and enriching. Dependence on study guides, flashcards, and problem sets creates a culture of narrow-mindedness, in which information is stockpiled, briefly retained, and dumped in time to re-load for the next exam. I understand that some degree of this is a necessary biproduct of standardized evaluations, but I would have anticipated something more of a burning desire to learn and truly understand the material (at least for in-major classes).

In many ways, college becomes a game. Who can do the research ahead of time to find the good (or easy) professors, memorize quickly the terms for the upcoming assessments, and race through courses to get their diploma the fastest? A friend of mine told me in conversation that she was shocked at how much interest I took in her paid research on a molecule that, when tagged in different places, could potentially permit thinning or thickening of blood. Most of the time, when she’d tell people that she planned to spend the next few hours “doing research,” the typical response would be one of commiseration. Why should people be sorry for someone who gets to study what they love? Someone who is able to foment their learning in a creative and challenging environment ought not be pitied, but envied!

Unfortunately, this simply isn’t the case. An education shouldn’t be confined by four brick walls, or the Chemical Engineering Lab on campus. It should be an iterative process, sharpened in conversations outside of class, curiosity constantly ignited and satiated by exposing oneself to different opinions, articles, journals, books, and the myriad of resources all colleges offer an inquisitive mind. What a blessing it is, when we step back objectively, to be in a place where we have no agenda beyond the strengthening of our mind and shaping of our worldview. 

Sean

300% return on stocks? The dangers of Leveraged Investing

Making 3x returns in Stocks (2/3/18)

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           Growing up, one of the things that most fascinated me was the stock market. Something about Keynes’ animal spirits, the irrational exuberance of investors, and erratic and unpredictable returns appealed to me. It seemed to me that with a surfeit of information I ought to be able to select securities that would perform better than everyone else’s—after all, my sixth-grade simulated portfolio had more than quadrupled in the four years since I reexamined it! Oh, youth.

Perhaps at the heart of my interest is the few lucky trades I made right off the bat—not unlike “beginner’s luck” in gambling, they convinced me that there was money to be made, and I became entranced with the idea that Eugene Fama was wrong (market efficiency theory? Irrelevant!) Perhaps, there exists enough asymmetric information such that a privileged and knowledgeable individual (a portfolio manager, for example) could wade through the noise and locate the signal of a deeper lying trend, uncovering mis-priced securities. Inside Traders, for example, consistently make a tidy profit. Unfortunately, such results could not be replicated by 99.9% of us. Millennial investors get a bad rap—we are more ethically conscious than our predecessors and certainly make a concerted effort to save for the future—but many of the views we hold are intrinsically contradictory (for example, a desire for a strong dollar, and a trade surplus). A few of the problems I see in young investors are unwilling assumption of excess risk, a lack of a clear exit strategy, and a belief that the markets can be timed accurately. I’ve been privy to these myself at times, but would like to spend time writing about the Leveraged ETF (which aims for 2-3 times index returns), and whether or not it's a good investment option.

Stocks are evaluated on a risk-return basis, which is typically measured in standard deviations from the expected return (E(x)) of the security. ETF’s, or exchange-traded funds, work similarly, but are managed for a nominal fee and provide exposure to a broad swath of asset classes, offering instant diversification. Such funds can be found in other funds, market indexes, foreign assets, commodities, and a wide variety of other assets, with fluctuating fees based on the frequency of the need for re-balancing. Vanguard’s S&P 500 index, for example, has expenses of only 0.14% annually, far less than the historical load of a managed mutual fund. In the long run, the S&P returns about 8% annually, or 5-6% adjusted for inflation (and including dividends). A leveraged ETF would then in theory provide an investor with a 16-24% return. Given the power of compounding, why would such an investment not appeal to all investors, let alone millennials? The return since the inception of Direxion’s Large Cap Bull ETF (3X leverage) is right around 90% per year, up some 700%!

Unfortunately, any data we have is necessarily backwards-looking. Even Value at Risk (VaR) models subscribe to this logical fallacy, meaning that systemic, or broader-market risk, is the same towards the end of the bull market (right now) as it would have been immediately after the crash (2008) in many models. Likewise, with a conception in 2012, the Direxion fund (SPXL, NYSE) has been fortunate enough to exist in a bull market with very few significant corrections. Although the S&P will march upwards in the long run, the difficulty of timing markets makes such investments unattractive. Should the S&P correct 5% from current levels, and then rally to its previous close, it would be a break-even investment. The mirroring leveraged fund would not—it would correct 15%, recover 15.8%, and end up 1.6% lower than before, despite no net change in the greater market. In short, as an investor you must be careful to evaluate potential risks and returns in such speculative securities, and know what you’re getting yourself into. The best tip I’ve heard is not to invest anything you’re not able and willing to lose—if you want to try to time the market, there are intelligent ways to do so, but the risk of a sideways market or unexpected correction can never be completely mitigated. Even the best investors struggle to predict market trends. For the casual investor, a long-term buy and hold index fund seems to consistently outperform active models. Hope this helps!

How we Decide

How we Decide by Jonah Lehrer (Book Review #1)

https://www.goodreads.com/book/show/3860977-how-we-decide

                 Should I buy the shirt, or the shoes? A ticket home for spring break, or a trip with the roommates? Going on the late-night restaurant excursion or catching up on sleep? If there’s one thing I’ve learned in college, it’s that decisions are an integral part of nearly everything we do. If you’ve ever wondered how the process works, how to make better decisions and why, this book is a good layman’s resource!

                 Any time we’re faced with two or more conflicting choices, our brain filters massive amounts of information and offers an emotional response, largely based on release of the chemical dopamine. Dopamine is released in response to stimuli, generating patterns (often cause-effect) based on data collected by the anterior cingulate cortex (ACC). Any time we face a situation which relates to past experiences, our brain projects a response derived from this information that yields the best possible result. The brain is constantly weighing excitation of the NAcc (nucleus accumens) against the insula, ultimately presenting a consensus response even if the cost-benefit analysis is very close. This is an incredibly useful process, honed through millions of years of evolution, and operates extremely efficiently. In a case study involving four decks of cards, with corresponding rewards (two of which had smaller rewards, but a much better average return), people’s “gut” reaction (their physical stimuli, such as perspiration or increased heart rate) indicated pattern recognition some four times faster than the rational brain could produce. While such studies seem to indicate the necessity of “following our inclinations,” they fail to capture a few key blind spots: truly random processes, simple decisions, and processes that are unprecedented in prior experience.

                To illustrate this, we look at patients whose dopamine activity is increased—patients with Parkinson’s disease, for example, who take drugs to increase the activity of their current dopamine chemicals to compensate for extensive loss in quantity. In such subjects, the propensity to gamble is wildly increased, because dopamine rewards unpredicted success. A slot machine, for example, becomes intoxicatingly fascinating for its anomalous payouts, which represent a mystery that refuses to be solved. Truly random events, consequently, are best left to the rational brain.

                Simple decisions testify to the utility of the pre-frontal cortex (PFC), found in the frontal lobe and far more developed in higher primates than any other animals in the world. The PFC permits that a wide variety of data can be processed, repackaged, and applied to novel situations. This is a relatively new (evolutionarily speaking) but exceptionally useful process, which permits development of forward looking counterfactuals (how will this affect me in the future?). An unfortunate limitation is the human working memory, which can only process between 5 and 9 pieces of disparate data at any given time. Thus, the PFC is more efficient than emotions at differentiating between a couple pieces of data (which type of oatmeal should I buy), and far less efficient in very complicated situations (should I ask the girl out? Do I want to take job A or job B?). It is also extremely useful in novel situations, where past experience is irrelevant (piloting a crashing airplane before flight simulators).

                So how should we make decisions? The best uniform advice is to trust your gut in very important decisions, like buying a car or choosing a wife. It’s important that you let your rational brain take in the convoluted information (read reviews, learn about features, go on a serious number of dates), but there should be a period of incubation or distraction of the rational brain while the emotional half churns through information. Consumers who were given too much data before making a car purchase selected the (objectively) best vehicle only 25% of the time, but when they were distracted by a memory game in-between, their success rate was well over 60%. In simple decisions, like buying groceries or having another cup of coffee, the rational brain is your tool of choice. When in doubt, metacognition (thinking about thinking) can save us from impulsive decisions, or allow us to give ourselves the space to let our emotional supercomputer take the lead.

Hope this helps! Questions, corrections, and comments are encouraged!

Sean

Where do we go from Here?

                What a time to be alive! Here I am in the basement of Wheaton College’s own Buswell Library, typing away happily under the beaming LED lights, unfettered by expectation and hopeful that after a few brisk keystrokes, my ideas will be viewable to anyone around the world who happens to stumble upon them. It really is marvelous how rapidly the internet has changed our perceptions of normality; we’re soon to see the first generation to grow up entirely in the smartphone era, surrounded by digital media, mobile apps, and an incomprehensible amount of data. What does life look like in this digital age? Should we be concerned for the future of our workforce, children, and the innovation of humanity? This blog is not intended to be political (although I won’t shy away from my own views), nor is it an amalgamation of editorial pieces designed to solve the most nuanced problems in sociocultural or environmental spheres. Rather, I see it as an opportunity to share a part of myself—through books I read, experiences I have, or ideas I think are worth sharing. Perhaps you’ll join me on this journey through college, and catch a glimpse of the educational system through the eyes of a student at a College often ranked in the top 2% of schools domestically.

               I certainly do not claim a monopoly on the truth, but I strongly believe that these experiences are a great touch-point for evaluating the rigor of our educational system, observing social trends from inside the system, and offering critique where confirmation bias triumphs and my pre-conceptions trip me up. This blog will likely offer the most value to a college-age crowd, or twenty-somethings searching for vocation and entering the workforce. They say to write what you know, and the scope of my experience is still limited to this. I encourage discussion and suggestions, correction and autonomy. These are, in my mind, a few of the things most lacking in the classroom today.

Yours,

Sean Dunlop