by Don Friedman on February 3, 2017

The Casino, Atlantic City:

A long read here: Bob Henderson interviews Robert Frank, a professor of economics at Cornell. An important disclaimer (that I’ll revisit three paragraphs below): Bob H has been a friend since we met the week before freshman year at Rensselaer began, 35 years ago.

A very short summary of the interview and Professor Frank’s work might be that luck plays a larger role in events than we want to think it does. In formal terms, luck is at the core of engineering design, since any aspect of empirical reality that we address – for example, structural loading and the load-carrying capabilities of beams – is defined as a probabilistic bell curve. Our design codes do not promise safety. Rather, they promise a small probability of failure based on the shape of those bell curves. Back to my example, if the median of the strength curve for a steel beam* is, say, 150% of the expected loading, we accept that the probability of failure as defined by the overall of the tails of the two curves is small enough to be okay.

That example, while absolutely true, stinks. It’s mechanistic and, by virtue of being buried inside design codes, invisible. The interesting examples are the ones that Frank talks about in the interview, the ones where our perceptions of causation meet the results of our actions.

Let me start with a personal example: it’s pure luck that I met Bob when I did. Had we been assigned different dorms instead of both being housed on the first floor of Nason Hall, we might never have talked, or might have met later on after we both had established circles of friends. If that had happened, our lives would probably be much as they are, but I certainly would have missed out on a number of important moments in my life. Maybe there would have been equivalent moments with other friends, maybe not. It’s all contingent.

Moving on to real estate development, which is closer to work than a chance meeting of two students in 1982, no one is certain which lots, which streets, or which neighborhoods will become valuable. The old loft buildings of the Lower West Side were as close to worthless as Manhattan real estate can be in 1970. A few decades pass, the definitions of “cool” and “hot” change, and SoHo and TriBeCa are among the most expensive parts of the city. A few owners held their old buildings long enough to become very rich on that wave; some sold in 1980 for twice what the buildings had been worth, thought they were doing great, and missed most of the increase in value. The ones who got rich were not necessarily smarter than those who did not, but they were almost certainly luckier.

Finally, my favorite example: what determines which buildings become designated historic landmarks? They have to physically survive over time, which is partly the result of luck. They have to maintain enough physical integrity that their age is readable, which is partly the result of luck. They have to represent an architectural style or an era that is valued today, which is partly the result of luck. And they have to be noticed by a landmarks agency such as the LPC, which is partly the result of luck. Buildings equally worthy as those that are designated were demolished before historic preservation existed, were altered to an extent that their architecture and history is no longer relevant, were built in currently-unpopular styles, or are in neighborhoods not associated with quality architecture. I’m saying this as if the luck in question were the buildings’ but that’s not true: buildings have no feelings or luck. The luck is partly that of the owners and partly that of all of us. The buildings that have been saved make our lives better through their presence and which buildings those are has been a matter of luck. So in this light, our work is about improving the probability of a building surviving longer, which fits well with the code-based engineering probability I mentioned above.

* Of a known quality of steel. I could keep putting qualifiers on these statements all day, but I think the basic idea is clear.

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