Friday, July 31, 2009

Children and Money (Part I)

I took a day of vacation on Monday to spend some time with a friend from college who happened to be in town. In the morning before everyone else woke up, I went for a walk over the Post Office to pay a bill. As I was walking across the elementary school parking lot, I spotted a couple of pennies. Of course I picked them up, and then I came up with an idea for a post, children and money. I don’t have any children but, as hard as it may be to believe, once upon a time I was a child. I have a little pamphlet on the subject from Charles Schwab that I saved, thinking that someday in might be of some value to someone. I thought I could use some of the material from that publication and I will. However, as I began to organize some ideas in my mind a great deal of emotional baggage floated to the surface. It seems that sex, money, and family relations are just about the only subjects that carry the kind of emotional clout that stays with us for a lifetime. They are also just about the only subjects we are hardly ever completely honest about, even to ourselves.

Even though I realize the statue of limitations for well intentioned parental errors has long since expired, I still harbor some resentment concerning the way I was taught to relate to money. My parents did not believe in giving me an allowance. When my father gave me money to do something it seemed pretty stupid, like paying me a dime to pick up a wheel barrow load of rocks. I did not have the option of declining this opportunity, even though I could and did earn more money picking up soda bottles on the side of the road. Fortunately, I had a Great Aunt who sent me money and nice gifts from time to time. I am still grateful for what she meant to my life and my relationship with money.

My parents did not want to spoil me and my father was intensely interested in building my character. I believe that children should be given an age appropriate allowance and that it should be used as a teaching tool. It is an opportunity to teach saving for a goal. Deferred gratification is an important life skill. Children should have a limited opportunity to discover the consequences of foolish spending in a safe and protected family environment and of course, children should be taught how to give to others.

Obviously, as children grow older, the freedom and the size of the goals will become larger, especially if the child finds a job. I think that if a teenager works, she should be accorded special privileges and support, such as gas money for the commute. I had a variety of jobs through college and high school and saved every nickel I could lay my hands on. It ultimately did not do me a whole lot of good. My parents would not let me buy a car. My father even made me contribute some of my money towards actual college expenses. Of course on things like books, entertainment, and the like, I was strictly on my own. I could have easily purchased my own car. It would have been less expensive than paying for my own car insurance. I did have to pay for my own insurance before I was allowed to drive the family car. For some reason my parents believed that if I owned a car, I would flunk out of school or kill myself. I believe that preventing me from obtaining the one thing I wanted with the fruits of my own labor was a mistake. I believed that then and I believe it now.

On the other end of the scale, my wife was very badly spoiled by her parents. They did not want her to suffer the kind of deprivations they did growing up in the Great Depression. She had no idea of the value of money as she was always given everything (within reason) she ever wanted. It made for some interesting interactions in the early days of our marriage.

It seems that somewhere between these two extremes there must be a child specific golden mean.
Ephesians 6
[1] Children, obey your parents in the Lord: for this is right.
[2] Honour thy father and mother; (which is the first commandment with promise;)
[3] That it may be well with thee, and thou mayest live long on the earth.
[4] And, ye fathers, provoke not your children to wrath: but bring them up in the nurture and admonition of the Lord.

Sunday, July 26, 2009

I will not let you go until you bless me.

Hard to believe but six months have come and gone since I presented the Silver Eagle challenge at Derwood. Today is officially the end of the second experiment, but I hope that it is just the beginning. The participant in the first experiment is still keeping her notebook for financial insights and answers to her prayers. It is now time to ask ourselves two questions:

1)Have you remained more or less faithful to commitment you made in January to pray and write?
2)Are you better off than you were six months ago?

On my end of the agreement, I have been fairly faithful to pray for the participants on a regular, though not always daily basis. I know I missed some days, but not too many. To paraphrase the song, you were often on my mind. I have studied the financial news and a selection of reputable blogs on a daily basis except during my beach vacation. During that time I tried to study the economic implications of what was going on around me. You have seen everything I have written in the Silver Eagle Experiment blog.

Am I better off than I was six months ago? Yes. The rising market has significantly lifted the value of my self directed fund, although not yet to its pre-collapse level. I am still about 8% below November 1, 2007. I have continued to add to my credit union savings. That number is significantly higher than it was in November 2007. Finally my TSP account (The Federal equivalent of a 401K) is just about back to where it was before the crash. Of course I have been adding 14% of my pretax income to this account on an ongoing basis and Uncle has been adding his 5% matching money. At my age, the loss of more than a year hurts but it serves as proof that consistent investment, plus time, plus compound interest can overcome many obstacles. I have been blessed. I realize that I am not all that smart. I thank God that He has seen fit to place his hand of protection upon me during this crisis. Do I know more about money than I did six months ago? Absolutely. Reading enough to come up with subjects for my blog entries greatly expanded the width of my knowledge. However, it did not increase the depth of my knowledge quite as much as I would have hoped. Maybe that will be something for me to work on during the next six months. Perhaps I should try and read the Intelligent Investor by Benjamin Graham. Warren Buffet, the great sage of Omaha, describes it as, “by far the best book on investing ever written."

In the last week, I have heard progress reports from 2 of the 13 Derwood participants. They have both been good reports. I would encourage all of you to share your stories with me. I am absolutely convinced that the Silver Eagle method works. God has promised to share his wisdom with you, whoever you may be. He is no respecter of persons. If you persistently pursue God’s wisdom over an extended period of time in any problem area of your life, I believe you will find deliverance. Writing a daily journal is important for several reasons.

1)It forces you to study enough to have something to write about.
2)It forces you to pray about what you have learned, teaching you how to hear from God.
3)Writing focuses the mind.
4)Writing creates a permanent written record of your interactions with the Lord. As with the first participant in the Silver Eagle Experiment, this journal can become a faith building record of answered prayers.

If saying to the Lord, “I will not let you go until you bless me,” works for a scoundrel like Jacob, it will work for you, with or without a Silver Eagle.

Genesis 32

[24] And Jacob was left alone; and there wrestled a man with him until the breaking of the day.
[25] And when he saw that he prevailed not against him, he touched the hollow of his thigh; and the hollow of Jacob's thigh was out of joint, as he wrestled with him.
[26] And he said, Let me go, for the day breaketh. And he said, I will not let thee go, except thou bless me.
[27] And he said unto him, What is thy name? And he said, Jacob.
[28] And he said, Thy name shall be called no more Jacob, but Israel: for as a prince hast thou power with God and with men, and hast prevailed.
[29] And Jacob asked him, and said, Tell me, I pray thee, thy name. And he said, Wherefore is it that thou dost ask after my name? And he blessed him there.

Saturday, July 25, 2009

Car Math

I could have called this blog entry, “Something Old, Something New, Something Borrowed, Something ….Red?” I traded in blue in November 1999 for my wife’s 2000 Nissan Altima. Cars are one of our biggest expenses. Except for a few people living in a vibrant downtown neighborhood in a large city automotive expense including initial capital outlay, maintenance, gasoline, tires, insurance, etc. etc. is essentially unavoidable. How to keep those expenses at a minimum and still enjoy adequate transportation, and maybe even get some pleasure out of driving down the Blue Ridge Parkway early on a fall morning, that is the question.

A few weeks ago, I made a decision. It will be at least a year before I know if it was a good decision or a bad decision. My beloved 1996 Honda Prelude passed 180,000 miles. Every 90,000 miles my car requires major maintenance including replacement of the timing belt, water pump, and a whole host of expensive replacement parts and fluids. My car was in unusually good condition for a vehicle of that age, but still if something, anything, breaks on a car that old, I really couldn’t complain.

Do I buy a new Acura TSX (my desire) or do I fix the old car, or do I trade in the Honda on a late model used BMW Z-4 (my other desire). I knew that the required maintenance and any discovery of additional problems would run me between $1,000 and $3,000. I knew that a new TSX would cost over $28,000 and I knew that I could get a decent used Z-4 for $25,000 or more. Given the state of the economy and my desire to retire as soon as possible, I decided to keep the cash. Repairing and maintaining the Honda ended up costing me $1,656 and two days of aggravation. I was blessed in the timing of this work. I had a cracked radiator that was still over ½ full of fluid. If I had run it dry—well---Aluminum blocks do not tolerate heat like their cast iron cousins. If I had run it dry, my car would probably have been sent to the scrap yard. They also discovered a nail in one of my tires. I believe God was watching out for me last Friday. Larry Burkett of Crown Financial Ministries repeatedly stated that it is almost always cheaper to repair an existing car than it is to buy a different car. If I have no more major maintenance headaches for a least a year, I clearly made the correct decision. If my Honda continues to provide me with a reliable commute until I retire, I would consider myself extremely blessed.

This is a hard word and I know that sometimes it is impossible, but try and pay cash for cars and other disposable items, like clothing. Save money into an account for that purpose. Then when the day comes, write a check. Making car payments to yourself rather than the finance company is always a better plan, although I know it is not always possible. Achieving this goal is easier with the purchase of a late model used car rather than a new vehicle. I have been told that Dave Ramsey of Financial Peace Ministry would always recommend the purchase of used car. An analysis of the facts supports this recommendation. The predicted life of a car is measured in some combination of years or miles. Such a decline in value is consumed on a linear basis. However, a new car can depreciate $1,000 or more the minute you drive it off the dealer’s lot. In the first few years of its life, an automobile depreciates in cost much faster than it depreciates in value. In fact, years ago, I remember learning how to use a linear regression and scientific graphing program by developing a formula to describe the declining value of a Toyota pickup truck as a function of its age in years. If I recall correctly it was some kind of second order equation. That means the cost declines proportionally to the square of the age. Sure enough, again this is from memory, the inflection point (maximum value) on this curve was out about 2 or 3 years, just where you would expect it to be.

How much car can you afford? There is a rule of thumb. You can afford a car that costs 30% of your gross salary. That means if you earn $30,000 a year, you can afford to spend $9,000 on a car. That pretty well limits you to a used car. If you earn $100,000 a year, a new car at $30,000 would be pushing it. As you can see, many Americans are choosing to live beyond their means. If you see a late model SUV and a late model minivan in a driveway with a combined family income of $120,000, you might be looking a marriage headed for financial problems. However, as with any such advice, we would do well to remember that the definition of a rule of thumb, is a rule that works thumb of the time.

Thinking about a new car? I was surprised to learn that the cost of new cars is trending upwards, even though supply currently exceeds demand. How can that be? It turns out that the automobile manufactures have or are in the process of retooling and manning for a nationwide demand of 8 to 10 million units per year rather than 15 to 17 million new cars per year. The bankruptcies of General Motors and Chrysler have caused a dramatic decline in the number of car dealers in the United States. This is also not good for the consumer. Finally, as a nation, we are buying automobiles, such as hybrids that are more expensive to produce. Also, right now, the people who are buying new cars either really need a car or are so rich that the price doesn’t really matter all that much.

Just to keep things honest, let me state that I bought my first new car for my wife in 1988 and my first new car for me, the aforementioned Honda, in 1996. I also bought the Altima new. All the other cars my wife and I have owned were used. Some of them were pretty decrepit and perhaps some of them might have even been considered dangerous. By the way, I paid cash for all of those new cars.

Philippians 4:

19) But my God shall supply all your need according to His riches in glory by Christ Jesus.

Saturday, July 18, 2009

Somethin's Happenin Here. What It Is Aint Exactly Clear

I haven’t given much advice on this blog, beyond “old school” exhortations like stay out of debt unless absolutely necessary. I don’t think I have made any prognostications. If I was all that smart, I would be retired and living in Hawaii. Today, however, I would like to take on an argument in which I believe both sides are correct and in doing so; I will have made a prediction.

Something is happening in the macroeconomic world that seems to confound the experts. The Treasury Department and the Federal Reserve Bank are creating money and dumping it into the economy at an absolutely frightening rate. If the United State Government is to remain solvent, it must at some point in the future repay all the debt being created in this desperate attempt to prevent the economy from completely capsizing. The attempt is so desperate, that recently our Vice President stated, “We have to go spend money, to keep from going bankrupt.” There are only two ways to repay this debt, taxes or inflation.

A fair number of knowledgeable people are raising the specter of hyperinflation, a situation, where overnight a currency can become worthless. It has happened before in places like Argentina, it is happening now in places like Zimbabwe, and it will happen again. Generally it is believed that inflation is a monetary event caused by too much currency chasing too few goods. The Government is creating money out of nothing and dumping it into the economy at a historically unprecedented rate, but the Consumer Price Index is actually at a negative 1%. The Core Inflation Rate is right about 2%, just where the Government wants it to be. Economists believe that a little inflation is good for the economy. In times of inflation, the costs of commodities rise. Last year Aluminum was over $3,250 per metric ton. This year the price has recovered a bit and stands at about $1,600 per metric ton. (Note: I read these numbers off graphs. The number is only as accurate as my eyeball.) The price of lumber, platinum, and even wheat reflect a similar pattern, hardly hyperinflation.

What is going on here? Some savants point out that the world’s supply of dollars has actually dropped, because so much of the world’s wealth was destroyed in the debacle of 2008. My house is worth roughly $150,000 less than it was worth in 2006. Some economists would consider that fact in their calculations of currency available to chase other goods. I have lost roughly 1/3 of the money I invested in Hong Kong and Shanghai Bank, more dollars gone. In fact, someone observed that the Government effort to restart the economy could be likened to a man trying to patch a hole in a dam with more water. No one knows how much of the trillion or more in subprime mortgage bonds and Alt-A investment vehicles (liar loans) might be worth. The Government has agreed to insure their value in a scheme so convoluted; I don’t begin to understand what it all really means. The Federal Reserve has relaxed accounting rules so the banks can keep these dubious assets on their books and claim full value. This has been compared to the Bureau of Labor Statistics lying about the unemployment rate so not to upset voters when the rate is unacceptably high. I remember a while back some of this toxic waste was selling at about 20 cents on the dollar. Last week a block of something like $800 million was sold for about 30 cents on the dollar. There is no way of knowing how representative of the overall quality of these bonds these two sales might have been. 30 cents on the dollar may have been a high price for some better stuff.

Everyone knows what the end game will entail. The value of all fiat money eventually drops to zero. From Wikipedia, “Fiat money is money declared by a government to be legal tender. The term derives from the Latin fiat, meaning "let it be done". Fiat money achieves value because a government accepts it in payment of taxes and says it can be used within the country as a "tender" (offering) to pay all debts.” Fiat money is backed by nothing but the coercive power of the government and your faith in that power. The United States cut the dollar loose from the gold standard in 1971. Given the amount of dollar denominated debt held by the Chinese, it is unlikely we will ever return to the gold standard.

I have concluded that at sometime in the future the value of the American dollar will drop to zero. The problem is I have no idea when this might happen, next week, next year, or a century from today. If inflation is waiting in the wings, I should be buying real things, like property, lumber, gold, safe foreign currency (like the Swiss Franc) and commodities. I do have some of that stuff in my investment portfolio, but I also have Government bonds denominated in good old U.S. Dollars. However, if you really believe we are facing a “Road Warrior” scenario, I would encourage you to invest in shotgun shells and gasoline, as well as cigarettes and bar soap for trading purposes.

Psalm 27

[1] The LORD is my light and my salvation; whom shall I fear? the LORD is the strength of my life; of whom shall I be afraid?
[2] When the wicked, even mine enemies and my foes, came upon me to eat up my flesh, they stumbled and fell.
[3] Though an host should encamp against me, my heart shall not fear: though war should rise against me, in this will I be confident.
[4] One thing have I desired of the LORD, that will I seek after; that I may dwell in the house of the LORD all the days of my life, to behold the beauty of the LORD, and to inquire in his temple.
[5] For in the time of trouble he shall hide me in his pavilion: in the secret of his tabernacle shall he hide me; he shall set me up upon a rock.
[6] And now shall mine head be lifted up above mine enemies round about me: therefore will I offer in his tabernacle sacrifices of joy; I will sing, yea, I will sing praises unto the LORD.
[7] Hear, O LORD, when I cry with my voice: have mercy also upon me, and answer me.
[8] When thou saidst, Seek ye my face; my heart said unto thee, Thy face, LORD, will I seek.
[9] Hide not thy face far from me; put not thy servant away in anger: thou hast been my help; leave me not, neither forsake me, O God of my salvation.
[10] When my father and my mother forsake me, then the LORD will take me up.
[11] Teach me thy way, O LORD, and lead me in a plain path, because of mine enemies.
[12] Deliver me not over unto the will of mine enemies: for false witnesses are risen up against me, and such as breathe out cruelty.
[13] I had fainted, unless I had believed to see the goodness of the LORD in the land of the living.
[14] Wait on the LORD: be of good courage, and he shall strengthen thine heart: wait, I say, on the LORD.

Saturday, July 11, 2009

Greetings from Sodom and Gomorrah

[10] And Lot lifted up his eyes, and beheld all the plain of Jordan, that it was well watered every where, before the LORD destroyed Sodom and Gomorrah, even as the garden of the LORD, like the land of Egypt, as thou comest unto Zoar.
[11] Then Lot chose him all the plain of Jordan; and Lot journeyed east: and they separated themselves the one from the other.
[12] Abram dwelled in the land of Canaan, and Lot dwelled in the cities of the plain, and pitched his tent toward Sodom.
[13] But the men of Sodom were wicked and sinners before the LORD exceedingly.

For almost six months now we have focused on the area where spirituality and financial realities overlap, both in our own life and in the larger world. There is nothing inherently wrong with money any more than there is anything inherently wrong with electricity. They are both nothing but forms of energy. However, we would do well to remember that potential energy in any form can be dangerous if mishandled. Most of us are not called to full time ministry, so as we pursue our ambitions and develop our talents we will be drawn into closer proximity with the world. There are dangers here. It is important that we have the right safety equipment, insulated gloves, boots, and tools, maybe even a face shield or a hard hat when we work around high voltage equipment.

Abraham and his nephew Lot reached a point where their corporations had grown so large they could no longer operate in the same region without over saturating the market. Abraham, trusting his God, offered Lot first pick of new territories. Lot looked towards Sodom and Gomorrah because that is where it was happening. Lot knew about Sodom’s technology corridor and heard that Gomorrah was planning a new industrial park. For a man with ambitions and a plenty of capital the opportunities were everywhere. Quite frankly, the spiritual climate in the metropolitan DC area is horrendous, but there aren’t any naval ship research and development centers in Travelers Rest, South Carolina. We all make compromises with our talents, ambitions, and the financial realities of the world. If a dancer or a musician wishes to “make it” in their profession, they travel to places like Los Angles, New York, or Las Vegas. If drawn to the financial professions, the investment banking house and exchanges are found in New York and Chicago. All of these places contain more than a little of the same spirit that led to the destruction of Sodom and Gomorrah.

There are dangers in fulfilling our passions and developing our talents in places like Sodom, or Los Angles, or Washington D.C. In Lot’s case, his family and his family relations paid the price. Not just in his lifetime but even unto this day. His sojourn in Sodom contained at least two of the threads of murder and retributions that have troubled the Mideast for three millennia. If anything, the dangers are greater for those who have been called to the ministry. Attempting to expand the Kingdom of God on the enemy’s home turf is extremely dangerous and will inevitably attract opposition. This warfare can lead to attacks on our physical health, our emotional stability, our marriages, or even attacks against our children. Our enemy abides by no code of a just war or rules of engagement based on the Geneva Convention.

We have been called to be “in the world but not of it.” Sometimes that is hard and we fail, but we are assured that our Lord knows how to rescue godly men from their trials.

And, “Hey, let’s be careful out there.”

Second Peter Chapter 2 (NIV)

6if He condemned the cities of Sodom and Gomorrah by burning them to ashes, and made them an example of what is going to happen to the ungodly;
7and if He rescued Lot, a righteous man, who was distressed by the filthy lives of lawless men
8(for that righteous man, living among them day after day, was tormented in his righteous soul by the lawless deeds he saw and heard)
9if this is so, then the Lord knows how to rescue godly men from trials and to hold the unrighteous for the Day of Judgment, while continuing their punishment.

Saturday, July 4, 2009

God and Game Theory (Part III)

An excerpt from The Godfather by Mario Puzo

Michael: They want to have a meeting with me, right? It will be me, McClusky and Sollozzo. Let's set the meeting. We get our informants to find out where it's going to be held. Now we insist that it be held in a public place, a bar or a restaurant where there'll be other people there so I'll feel safe. They're going to search me when I first meet them, right? So I can't have a weapon on me. But if Clemenza can figure a way to have a weapon planted for me, then I'll kill them both.
Sonny: [laughing] What are you gonna do? Nice college boy, didn't want to get mixed up in the family business. Now you want to gun down a police captain. Why? Because he slapped you in the face a little? What do you think this like the Army where you can shoot 'em from a mile away? No you gotta get up like this and, badda-bing, you blow their brains all over your nice Ivy League suit. C'mere.
[Kisses Michael on the head]
Sonny: You're taking this very personal. Tom, this is business and this man is taking it very, very personal.
Michael Corleone: Where does it say that you can't kill a cop?
Tom Hagen: Come on, Mikey...
Michael Corleone: Tom, wait a minute. I'm talking about a cop that's mixed up in drugs. I'm talking about a - a - a dishonest cop - a crooked cop who got mixed up in the rackets and got what was coming to him. That's a terrific story. And we have newspaper people on the payroll, don't we, Tom?
[Tom nods]
Michael Corleone: And they might like a story like that.
Tom Hagen: They might, they just might.
Michael Corleone: [to Sonny] It's not personal, Sonny. It's strictly business.

The Corleone family is in the middle of a crisis. Turk Sollozzo, a heroin dealer backed by the rival Tattaglia family, attempted to assassinate Don Vito Corleone. The Godfather, hit by five bullets, lies in a coma. If he dies the family looses his political and judicial contacts, effectively ending the stalemated gang war. Sollozzo must finish the botched murder attempt or he is a dead man. The Corleone family must kill Sollozzo before he completes his task, but he is guarded by a corrupt police captain and by the rules of the game he is untouchable. No member of the mafia has ever killed a police captain, but Michael has concluded, as an exercise in pure reason, it is time to break the rules.

It has been said that The Godfather is the best management text book ever written. Whenever one of the characters is about to unleash murder and mayhem on a foe, he is apt to observe, “It’s just business.” In a recent poll by the Barna group, 85% of un-churched members of the prime demographic described Christians as hypocrites. I don’t think this should surprise anyone, but in the same poll 47% of church attending members of the prime demographic described Christians as hypocrites. That surprised me. I expect a lot of this distain for the Church in America is the result of Christian business practices, both by ministries and for profit corporations, as well as a number of high profile sex scandals, the most recent involving the governor of South Carolina.

Tom Landry, the extraordinarily successful coach of the Dallas Cowboys, is still a rather controversial figure. As a result of his very public, very high visibility stand for Christianity he is called “God’s Coach” by both fans and detractors. A large number of former team members, admittedly, not the cream of the crop, question Landry’s Christianity. They believe he was a ruthless businessman, focused on the bottom line. They believed that Landry was far more interested in God than he was in people. It is reported he would tolerate and exploit players as long as it was profitable and then he would drop them without compassion or conscience. I remember reading an article, perhaps 25 years ago, where it was reported that whenever Landry was asked about a particularly cold blooded act, he would reply, “It’s just business.” When Jerry Jones bought the Cowboys, he fired Tom Landry. When interviewed about firing the beloved legend, it has been reported he replied, “It was just business.”

I don’t really know the condition of Tom Landry’s soul, that question is thankfully somewhat above my pay grade. I don’t know who is telling the truth in these reports, exposes, and biographies, but I do know that we Christians are guilty of compartmentalization. At different times and places we have all knowingly put aside what we knew was right and done that which was wrong. Some of us sin, but try and repent. Some of us harden our hearts, carefully walling off some part of our soul from the demands of God. Often, when money is involved, it is all too easy to sidestep the cries of the Holy Spirit and perform in the great game as “a rational player” or worse.

In the Gospel of Luke, Jesus tells a story about two men who attended a revival service at the Big Swamp Baptist Church in a town located somewhere south of Washington, D.C. One of these men sat in the front row, as the choir sang, he thought, “I thank you Lord that I am not as other men. I am a Senior Deacon, I have taught Sunday School for over 20 years, every time the Church door opens I am here, I tithe, and I pray and read the Bible every day.”

In the back row a man confessed to God, “In my store I sell pornography, beer, lottery tickets, and cigarettes. I have cheated my customers and stole their money. I have even traded gasoline for sex. Lord Jesus Christ, have mercy on me a sinner.”

Who do you suppose left the service justified in the eyes of God?

I really didn’t know where this series would lead me when I started writing it. That is pretty unusual. Normally, by the time I begin one of these things, I have a pretty good idea what I want to say. Now I have reached the end. My conclusion, God is not particularly impressed with my business ethics, whatever they may be. He is, however, extremely interested in my direction of travel. If I am moving towards Him, He is pleased. If I am standing still or worse, moving away from Him, He is not pleased. And Oh by the way, just for the record, I think God takes everything we do, "very, very personal." After all He did send his Son to die, in part, because we excused our acts by saying, “It’s just business.”

Luke 18

[10] Two men went up into the temple to pray; the one a Pharisee, and the other a publican.
[11] The Pharisee stood and prayed thus with himself, God, I thank thee, that I am not as other men are, extortioners, unjust, adulterers, or even as this publican.
[12] I fast twice in the week, I give tithes of all that I possess.
[13] And the publican, standing afar off, would not lift up so much as his eyes unto heaven, but smote upon his breast, saying, God be merciful to me a sinner.
[14] I tell you, this man went down to his house justified rather than the other: for every one that exalteth himself shall be abased; and he that humbleth himself shall be exalted.

Friday, July 3, 2009

God and Game Theory (Part II)

The Stanford Encyclopedia of Philosophy states, “Game theory is the study of the ways in which strategic interactions among rational players produce outcomes with respect to the preferences (or utilities) of those players, none of which might have been intended by any of them.” This branch of applied mathematics has been around for about 60 years. It has only recently been utilized in actual business problems. From what I have read, several organizations competing to gain control of cell phone band width in certain key locations developed and agreed to a mathematical solution that maximized the benefit of all at a minimum expenditure of their resources. Although the study of game theory is a relatively new and arcane academic discipline that is only finding its first applications in the real word, the language of game theory is showing up in financial websites, business publications, and even in the mainstream press.

Tic tac toe is not a very interesting game. Players take turns placing an X or an O in a matrix in an attempt to locate three of their symbols in a single line. There are not many ways to cheat at tic tac toe. Football is a little more interesting. The players do not take turns. When the ball is snapped 22 men and one ball start flying around in three space. Some of the players are doing what they have been told to do by their coaches. Some of the players are free lancing. At least some of the time the play ends when the referee blows his whistle. There are rules but players are taught how to cheat and escape detection. On almost any given play, particularly among offensive linemen and defensive backs, someone is cheating. Cheating is part of the game. Of course, if detected, the foul will draw a penalty. The coaches and the players need to make a rational decision on how and when to cheat in order to maximize the possibility of winning the game.

Economic behavior is even more complex. There are almost 6,000,000,000 players and no time clock. However there are similarities. Many companies routinely steal patented technology. They make a rational decision. The probability of a law suit and the expected penalty is weighed against the cost of obtaining a legal license. If the cost of cheating is deemed to be smaller than following the legal course of action, the company will cheat. Sometimes these calculations don’t work out as expected. Back in the late 1980s Kodak lost $494 million in an attempt to steal Polaroid’s instant camera technology.

Human behavior is not always rational. In the aforementioned article “The End of Rational Economics,” an interesting experiment is described. Two players sit at a table. The researcher offers one of the players a ten dollar bill. The player is told he can keep the ten dollar bill end the game and walk out of the room or he can give the ten dollar bill to the second player. He is told if he gives the ten dollar bill to the second player, the researcher will give an additional forty dollars to the second player. If the game progresses and the second player gains fifty dollars, he can choose to share it with his partner and end the game or he can choose to keep the entire amount. If the second player chooses to keep the entire amount, he must agree to one more move. If the second player chooses to keep the fifty, then the first player is given twenty five dollars. The first player can choose to keep the twenty five dollars, leaving the second player with fifty dollars or he can choose to give any amount of money back to the researcher. For each dollar given to the researcher the second player looses two dollars. If the first player spends the entire twenty five dollars he can take all the money away from the second player, leaving both of them with nothing. Strictly rational behavior would leave the players with seventy five dollars. In this case one of the players would feel cheated. The Golden Rule would leave the players with fifty dollars. In this case both players would be happy and the basis for a future business relationship would have been established. However, all too often, researchers have discovered the players leave the game with nothing. Further research based on brain scans of players taken during these games indicate that taking personal vengeance against a perceived enemy lights up the pleasure centers of the brain, our fallen nature at work.

I would contend that the unwritten rules are even more important than the written rules. People are very sensitive to what is expected in a culture. If they are attracted to the culture, they join. If they turn out to be a bad fit, they leave. A famous story is told about General Robert E. Lee. After the war, he became the president of Washington University. Once a freshman approached the great man and asked where he could obtain a copy of the college rule book. General Lee looked shocked and replied, “Why we have no rule book. We are all gentlemen here.”

Engineers and other rational beings tend to believe that corporate culture is squishy talk from liberal arts majors. I tell them, no, corporate culture is not soft. It is hard. During a project, I once had occasion to visit a pump factory in Pennsylvania. The lobby was a two story glass atrium. The back wall of the atrium was completely covered with hundreds of professional engineering licenses from every state in the union. It is completely overwhelming. New hires will never need to hear a single word about the importance of obtaining a P.E. license. Corporate culture is hard.

Our culture is breaking loose from its Juedo-Christian roots. It seems to be bypassing behavior that can best be described as strategic interactions among rational players and moving towards a world similar to the one created by Mario Puzo in the Godfather. A world where the players need not give one another assurances as though they were lawyers because a move that is not perceived as the act of a friend will demand certain and bloody retribution and blood, it has been observed, is a big expense.

Matthew 5:

[1] And seeing the multitudes, he went up into a mountain: and when he was set, his disciples came unto him:
[2] And he opened his mouth, and taught them, saying,
[3] Blessed are the poor in spirit: for theirs is the kingdom of heaven.
[4] Blessed are they that mourn: for they shall be comforted.
[5] Blessed are the meek: for they shall inherit the earth.
[6] Blessed are they which do hunger and thirst after righteousness: for they shall be filled.
[7] Blessed are the merciful: for they shall obtain mercy.
[8] Blessed are the pure in heart: for they shall see God.
[9] Blessed are the peacemakers: for they shall be called the children of God.
[10] Blessed are they which are persecuted for righteousness' sake: for theirs is the kingdom of heaven.
[11] Blessed are ye, when men shall revile you, and persecute you, and shall say all manner of evil against you falsely, for my sake.

Thursday, July 2, 2009

God and Game Theory (Part I)

Every few hundred years in Western history there occurs a sharp transformation.... Within a few short decades, society rearranges itself -- it's worldview; its basic values: its social and political structures; its arts; its key institutions. Fifty years later, there is a new world. And the people born then cannot even imagine the world in which their grandparents lived.... We are currently living through just such a transformation.
Peter Drucker

As with many such trends, it started in California. People who bought a $500,000 house they couldn’t possibly afford, suddenly found their property worth $250,000. They couldn’t sell the house and cover their mortgage. They couldn’t refinance. Even if they could continue to pay the mortgage, it made no sense to throw good money after bad, so they just walked away. They put their house keys in an envelope with a letter informing the bank, the house was no longer their problem. These envelopes containing the keys to abandoned houses were called jingle letters. An article in Forbes observed, “In California and Arizona, the law restricts deficiency judgments--a court's ability to collect on the remaining value of a foreclosed home once it has been sold. In these states, homeowners with negative equity can walk away from the property.” The banks were shocked. Nothing like this had ever happened. Customers (victims?) were no longer playing by the bank’s rules. In the most recent issue of the Harvard Business Review an article entitled “The End of Rational Economics” expresses shock and dismay at these changes in customer and employee behavior and proposes a new field of study, behavioral economic, to better understand why people might act in their own rational self interest, rather than adhering to a strict moral code that would benefit a bank. A series of psychological experiments undertaken by these researchers conclude that, “Most individuals, operating on their own and given the opportunity, will cheat – but just a little.” Over the past 30 + years American corporations systematically destroyed social covenant after social covenant with their customers, shareholders, and employees. Now they are shocked as the public acts in their own rational self interest rather than obeying the Golden Rule.

Like the unjust steward discussed in an earlier post, the credit card companies are attempting to get ahead of the curve on this problem. They are actively soliciting cardholders and offering to settle their account for as little as 50 cents on the dollar. These rational businessmen would rather get something today than nothing after the law changes in February. It isn’t just the new law. Unemployment is rapidly approaching the magic 10% threshold. Customers with no property can not have a lien placed on their home. The unemployed can not have their wages garnished. Of course the customers the banks and credit card companies want to shed are the customers least able to take advantage of these generous offers. If they could pay off half their credit card balance in cash, they probably would have already done so. Experts predict that in the near future, the credit card companies might expect to recover 5% from an average past due account. The banks will cheerfully accept as little as 35% cash on the barrel, today. Not surprisingly, the IRS is interested in these transactions. They view such forgiven debt as earned income and will be demanding their share of the loot.

Various organizations, both for profit and not for profit, are making money doing for the debtor what the debtor could do for him or herself. Just listen to the advertisements on Christian radio stations; this is happening in the church. It is happening today. A line has been crossed. There is no going back.

Luke 6 (NIV)

31Do to others as you would have them do to you.