Commentary: Twitter, Death, Risk, Finance

Posted on May 20, 2011

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I know that The Atlantic ran these stories in part for the absurdity of their headlines. It’s in vogue with populist rage to run stories demonstrating the excess and absurdity of those on Wall Street, to show the unrepentant and illogical nature of the concentrated wealth of America. But these stories, though they seemed intensely bizarre (and I did walk into them thinking, “What the hell, Wall Street?), actually demonstrate some interesting developments in the world of finance—there’s a sign here that individuals are looking for more stability and less risk, and there’s a teachable moment as to what we can expect when we leave massive gaps in our society for the private market to pick up with its own demented, but genius, creativity.

Story one: In the most zeitgeisty move imaginable, some suites have started a hedge fund whose strategy is centered around Twitter. The thing is that the plan isn’t so insane as it sounds—the market being driven by human sentiment about current events and concepts, and Twitter not being able to predict sudden shifts, but being able to measure unbridled human interests well enough, with the proper algorithm you can gauge market behavior three days later using Twitter with almost eighty percent accuracy, barring sudden changes in the national environment.

This is actually rather brilliant. The goal here is to game the system for investors, yes, but it intends to do so in the least risky way possible: through a relatively robust metric of market behavior. It’s not a 1:1 ration so it’s not as if there’s a fix on the market or insider information. But as opposed to using hedge funds to play massive gambling games, the use of Twitter as a guide is an attempt by some on Wall Street to maintain high gains without entering into high risk scenarios. It’s a marriage of technology and finance, of risk aversion and wealth accumulation that isn’t careless, nor is it dishonest and unfair to other investors.

Twitter’s a good call, too, as the self-identification of individuals means that one can both select for opinions most relevant to the market of interest and find information that is actually circulating and serious, rather than testing the truly random anonymous information in comments on sites or the somewhat ambiguous and limited information of Google searches (although there’s a learning opportunity here—compare different online user information sources [comments, Twitter, Facebook, Google] and find which best predicts the market, identify the difference between the sources in what aspects of human thought and reaction they speak to, and better understand the way humans operate as actors in the marketplace and as financial-emotional decision makers). Facebook would be a good target for other hedge funds attempting the same tactic, of course.

The main risk here is the self-awareness factor: what happens when this tactic reaches a critical mass of usage and of awareness such that those most apt at manipulating the Twit-o-sphere can effectively fix the market or commit insider trading? What happens when the metric, which is inextricably tied up now as a cause of market behaviors (given the influence on emotion and knowledge of Twitter and its ilk), becomes autonomous of and begins to attempt to manipulate the measurer? It’s the doomsday scenario, but there are telltale signs of such things happening, so it’s worth consideration.

Story two: Less novel and much sketchier, the financial industry has recently developed something called “death derivatives.” The idea is that investors will sink their money into pension plans alongside the investments of individuals and businesses in the same pension plans. When individuals die before collecting their full pension, the excess payoffs are returned to the investor, whereas when individuals live longer than they paid into their pension to cover, the angel money of the investor will cover the remainder of their life under pension. In the middle scenario, the individual pays as much into their pension as they take out of it and thus the investor breaks even on the risk, having sunk no extra investment into that individual or reaped anything out of their investments.

The icky factor in these investments is that, for an investor to make money, they essentially have to bank on the premature death of individuals in the derivative. It feels a little weird, but in the end is it really so bad?

The population’s getting older, but there’s a significant pushback to moving the retirement age up as compensation, and jobs haven’t magically started to match age with income, so it’s getting harder and harder to pay for our aging and infirm populations. Borrowing against the future is also our first step in reacting to financial duress, meaning in the current environment, with pensions decimated by the financial collapse and being chipped away by the current financial constellation of the U.S., it’s even harder to fund a full pension for an aging population.

Betting on death is unsavory, but someone please provide a better explanation. Outside of the Soylent Green and the Logan’s Run solutions, so long as we continue to age the population through better life extension science, but fail to increase the capability of those elders to work, we will face financial distress. Sure the population creates a boom in industries centered around their care, but without proper pension plans, those industries can’t be financially supported, making this a three-way disaster. If one doesn’t want pushback against longevity itself, and one refuses to alter the way we think about aged workers or government involvement in pensions, then betting on death may be the only option that we have.

Like with the Twitter hedge fund, though, there’s a catch—there’s always a catch. There’s some incentive here for inside trading by medical providers and pharmaceuticals, who might have some gauge on the age of the population and changes therein. That’s not to say we can’t regulate against that sort of thing, but it is to say that where there’s a bet, people will try to cheat. And betting on death opens the doors for some really nasty cheating: lobbying against health care, defunding for medical investments, and (most likely) the recognition of industries most likely to produce premature death and significant investment in the pension plans of those industries.

The first two are doomsday scenarios and any iteration of them we see realized will probably be low-level and ineffective (the sentiment behind it will still be disturbing, though). But the third option is by far the most frightening. It will make financial sense as an investor to bundle together low-level pensions of high-risk jobs. Usually these pensions, often in dying industries, will be highly unstable and that unstable pension will disincentivize the job. But shoring up the security of the pension, in fact making it more robust, through such investments runs the risk of making high-risk, low-life jobs much more desirable by increasing the payoff to the worker taking a necessary gamble on his own life. There’s a chance that the supply-demand logic here will select against workplace reforms and select for dying or impractical industries by making them attractive for workers and more viable for businessmen. It’s an underdeveloped critique, but a valid one. But until we get a handle on national-level ideas about age, aging, employment, social security, and pensions, what else can we fall back on?

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