What is Money?

We all spend it.  We all save it.  We all want more of it.  What is it?  This may sound like a silly question but the answer is not entirely obvious.  Let's briefly explore this phenomenon.

The concept of money has changed over the years but for our purposes, we can discuss the present-day functions of money.  In fact, by definition, money is anything that fulfills certain primary functions in the market.

1. MEDIUM OF EXCHANGE: Money can be used for the payments of goods and services.  This circumvents a lot of the problems that arise from a pure barter system.

2. UNIT OF ACCOUNT: In this context, money provides a way of measuring the value of goods and services in the marketplace.  This also means that every unit of money is worth the same.  My dollar bill is equal to anyone else's dollar bill, assuming none of them is counterfeit; this property of sameness is called fungibility.

3. STORE OF VALUE: Whatever money you make and have left after your expenditures can be reliably saved without losing value.  Some people argue about this point because inflation depreciates the purchasing power of money.

4. STANDARD OF DEFERRED PAYMENT: Money is the accepted means of repaying debt from a loan.

Many forms of currency existed before paper money, or banknotes, first emerged (Tang Dynasty China, 7th century).  People have used metals such as gold and silver but also shells, rocks, beads, and salt ("salary" comes from the Roman word for salt).  The problem was that these other forms of exchange had problems with portability, one of the four primary monetary functions, or some combination.

Originally, paper money were banknotes which were IOUs from a bank.  These were checks that could be traded in for metal coins at the bank.  As nations became more advanced and unified, federal banks set the standard notes for a given country.  Still, the paper notes derived their value from the promise of gold or silver.

What we use in the United States is called fiat money.  When you hold that green, miniature portrait of Benjamin in your hand, you are holding a piece of paper that has been legally approved (legal tender) by the U.S. Federal Government as U.S. money.  There are some nuances with this non-intuitive derivation of value but it boils down to trusting the federal government (its credit) since the bills themselves have no intrinsic value; in some sense, they're just paper.  The important takeaway is that U.S. dollar bills are not convertible by law to anything else (like gold and silver) and their value isn't fixed.  This can easily be witnessed by observing the fluctuating currency exchange rates between the dollar and the euro.

There are two things that significantly affect the value of the dollar, the supply of and demand for U.S. dollars.  The Federal Reserve constantly prints out money to inject the economy with more cash which leads to inflation.  Inflation is a purely monetary phenomenon where the prices of goods and services increase together.  This is why the value of one dollar today is worth more than the value one dollar next year.  Another way the dollar can lose value is if people (including foreigners) become less trustful of the American federal government.  In this sense, there is a certain vulnerability to fiat money since it is entirely reliant on U.S. credit.

Now that we have some understanding of our monetary system, it should be obvious that a lot is at stake if the U.S. economy remains in deep debt to other countries and falls into a deeper recession.  Simply printing out more money and selling bonds to other countries may provide short-term solutions but we need to come up with better solutions now for the long-run.  Both parties disagree on tax raises and spending cuts which puts us in an uncomfortable situation.  The only policy that both agree on is improving public education because that really is the best option for long-run economic growth, investing in human capital for a more productive workforce.

You Can't Rely on Social Security

Do you know how much the average U.S. senior citizen receives per month from Social Security?  It's around $1,200 per month.  The disturbing truth is that for most retired people, their Social Security checks make up most of their monthly benefits.  That's not a lot of money to live on so millions of older Americans are just barely getting by.  Up to my parents' generation, this is approximately how much they should expect from Uncle Sam.

An even more disturbing truth is what my generation is expected to receive from Social Security.  (Note: My generation is Generation Y, people born in the mid-80s to the late 90s.)  Our predicted benefits will be around $600 per month!  This is the result of our present debt being delayed to burden the future generations.  Obviously, pretty much no one can live off of $600 a month so there needs to be a solution.

In order for people to retire comfortably, they need to purchase annuities.  What exactly is an annuity?  An annuity is a series of future payments from an investor who is asking you for a certain amount of money today.  For example, you give him $100,000 today and for the next 10 years he will pay you $14,237.75 at the end of each year.  Nice deal, right?  This is assuming an interest rate of 7%.

You can also invest in bonds with coupons attached to them.  For example, you give a company $135,117.91 today and you will receive $12,000 at the end of each year for 10 years and $100,000 at the end of the tenth year (in addition to the $12,000 for that year).  This is also assuming an interest yield rate of 7%.

The problem is, many Americans don't have enough savings to invest in.  There are some psychological factors and perhaps one solution may to be to significantly raise taxes so that our Social Security benefits would increase.  Unfortunately, this would probably be political suicide so no politician would actually put that on his or her platform.

My proposal is that we need to radically change our public education curricula at the high school and even middle school level.  We need to teach young Americans basic economics and finance.  They need to know about the different financial instruments out there, including derivatives.  They need to understand how insurance works and why people take these unfair gambles.  (Answer: People are risk averse.)  They need to learn how to save money so that they can make more money on their own to invest in their retirement funds.  They need to be more informed citizens about how the economy functions as a whole, that we're all in this together in this increasingly more global network.

I understand that there's beauty to analyzing Shakespeare and knowing the periodic table of elements can broaden our understanding of how materials work, but I think given the current state of affairs in our country, informing our youth about financial topics is a bigger priority.

Why Do I Need to Know Probability and Statistics?

One of the most revealing results from psychology is that we are intuitively horrible statisticians.  In this article, let's explore how poorly we calculate likelihoods of events and why we could derive some benefit from knowing how probability works.

1) You go to see a doctor and she runs a test to see if you have cancer.  If you have cancer, there is a 95% chance that your result will be positive.  If you don't, there is only a 2% chance that your result will be positive.  You are shocked to learn that the result was positive.  How worried should you be?

If you're like most people, you would be terrified because you'd think that the odds of you having cancer is about 95%.  This is a classic example of ignoring the base rate which in this case is the percentage of people in the U.S. who get cancer each year.  It turns out that percentage is roughly 0.5%.  Given this information, you can calculate how likely it is for you to get a positive test result whether you do or don't have cancer.  Despite getting the positive result, you have a probability less than 19.3% of actually having cancer (after applying Bayes' Theorem from elementary probability theory).

2) Here's a simpler one that is deceptively tricky.  There's a couple who has two children and you are told that one of them is a girl.  What are the odds that the couple has two daughters?  Again, most people think 50% since the other child has a 50/50 chance of being male or female.

Let's go through this problem step by step.  Note that there are four possibilities:

OLDER CHILD   YOUNGER CHILD

Girl                        Girl

Girl                        Boy

Boy                        Girl

Boy                        Boy

You know that they have at least one girl so you must get rid of the last possibility; all the others are fair game and they all have equal likelihoods.  Thus, the probability of having two daughters is actually only one-third, not one-half.

3) Ashley majored in English literature at a small liberal arts school where she was active in theater, music, and political activism concerning women's and minorities' rights in America.  It has been over a year since she graduated from college.  Given five possible post-graduation outcomes, place a probability next to each possibility:

A) She is pursuing her dream to become an actress.

B) She is working as a banker.

C) She is working as a banker and auditioning for acting roles at night.

D) She is attending law school.

E) She is unemployed.

Given what you know about Ashley, take the time to actually place a probability for each outcome.  

Okay, done?  Great!  First, make sure that your numbers don't add up to over 100% since that wouldn't make any sense.  Second, what probability did you assign to B?  How does that compare to the probability you assigned to C?  Many people would assign C with a higher probability than to B since Ashley seems like she's very artistically inclined.  However, this is actually impossible.  The probability of her working as a banker AND auditioning for acting roles must be lower than the probability of her working as a banker.  One way to think about it is that the probability of her working as a banker is equal to the probability of her working as a banker and auditioning for roles PLUS the probability of her working as a banker and NOT auditioning for roles.  Thus, the probability of C cannot be greater than the probability of B.

These types of puzzles unveil some of the imperfections of our "rational" minds.  If you are interested in exploring the faulty statistics that go on in our heads, I highly recommend Daniel Kahneman's Thinking: Fast and Slow and Leonard Mladinow's The Drunkard's Walk: How Randomness Rules Our Lives.  I may also post more about these issues in the future.

10 Tips for a Healthier and Fitter Body

After a year and a half of getting out of shape since college graduation, I’ve decided to try to improve my physique and overall health.  During my fitness research, I have encountered several tips that immediately gave me some good results.  I thought that I would share them with you in case you are interested in improving your diet and lifestyle.

1. Avoid fruit juices.  They have a high sugar to fiber ratio that’ll stress out your pancreas from the spike in blood sugar levels.  Also, this will lead to unnecessary levels of fat storage.  Eat fruit instead!

2. Drink less alcohol.  You are probably already aware of this fact but it is true.  Alcoholic beverages are not only calorically dense (hence the beer belly) but are completely void of nutritional value.  If you must, go with light beer or red wine.

3. Consume complex carbohydrates and avoid simple ones.  White bread and white rice are broken down in your body very quickly and lack all the nutrients whole wheat bread and brown rice have.

4. Eat breakfast.  In fact, get into the habit of eating something within the first hour of getting out of bed.  It will kick-start your day’s metabolism and provide you with the energy to engage in your daily activities.  According to Men’s Health magazine, most overweight people skip breakfast.

5. Drink lots of water.   Two-thirds of your body is made up of water so you need a good amount to make sure your body is functioning properly.  A good benefit of being well hydrated is that your appetite will be stable, preventing you from eating unnecessarily.

6. Eat more meals throughout the day.  This one may be counterintuitive so let me explain.  If you only eat one or two meals a day, your metabolism will slow down because you’re body will want to store energy (thus fat) to last you through those long intervals without any food.  If you eat five or six meals a day (eating every 3 hours or so), then your metabolism will keep going throughout the day, burning more calories.  This is a good way to increase your protein intake if you want to add more muscle.

7. Make sure to eat healthy fats.  Your body needs fat to function properly but it is important to keep track of the fat sources.  A general rule of thumb: get your fats from plants (e.g. canola, olives, beans) and fish.  Avoid the fats from dairy and red meat.

8. Stay away from soda.  The diet alternatives are still bad because of the high sugar content.  Sodas have high levels of phosphorous which results in calcium loss, increasing the risk of osteoporosis (i.e. bone density loss).

9. Stop drinking coffee.  Your body should not need caffeine to get you energized in the morning or at any point during the day.  If you feel tired, then that’s your body’s way of telling you to rest.  Dumping coffee into your system is not a healthy way to solve the problem.  If you are addicted, you may experience withdrawal; try to slowly wean yourself off of it.

10. Eat plenty of plants (fruit and vegetables).  If you look at our dental structure, it is more herbivorous than carnivorous; most of our teeth are for cutting and grinding plants.  Evolutionarily speaking, our bodies are adapted to sub-Saharan African jungles and the available food sources there.  A major problem with our diet these days is that we now eat foods that did not exist or were rare in our prehistoric environment.  This is why obesity and diabetes have become so rampant.  Sugar was scarce but provided a lot of energy; thus we developed sweetness to detect sugar, which then inclined us to consume more of it.  Now, sugar is ubiquitous and many devour it carelessly to their demise.

So there you have it.  I have tried to avoid mentioning the obviously unhealthy habits (e.g. smoking tobacco, snorting cocaine, eating fried food, shooting up heroin); if you do any of this already on a regular basis, I highly encourage you to stop.

Do Wealth and Power Corrupt Everyone?

According to my dad, there's no such thing as a good rich person.  Now, I understand that was probably a hyperbole.  However, there might be a certain amount of truth in that statement but I also contend that people in the upper echelons of the socio-economic hierarchy are not inherently more evil than others.  Rather, it is more likely that wealth and power corrupt whoever possesses them.

This came to my attention even more lucidly while reading Howard Zinn's A People's History of the United States.  The first chapter begins with Columbus' arrival to the West Indies and his successful genocide of ALL the Arawak natives on the island.  This chapter is followed by the horrible conditions that African slaves had to endure as well as those of the white indentured servants.

Were the Spanish, the Dutch, the French, the Portuguese, and the English worse people than those from other countries?  I doubt it.  A much more plausible explanation is that they encountered civilizations that had many desirable resources and the former had the ability to take what they wanted by will.  (If you're interested in the exact details of how and why the Europeans dominated the globe, read Guns, Germs, and Steel by Jared Diamond.)  If the Chinese were the first ones to actively explore the New World, then perhaps they would be the ones who would have conquered the Americas and wiped out virtually all of the Native Americans off the two continents.

One of the more interesting ideas from the book had to do with class struggle during America's colonial period under the British.  The basic idea is that well-educated middle and upper-middle class Americans like Sam Adams, James Otis, Jr. (the man who famously coined the phrase "Taxation Without Representation is Tyranny"), and many other famous Bostonians (credited for planting the seeds of the American Revolution) would rally support against the powerful British and Tories in Boston by summoning the American lower class, riding on their angst, grievances, and frustrations caused by the unfair taxes and laws imposed by the British Parliament.  Of course, the leaders of the American Revolution succeeded but the poor remained poor, the slaves remained enslaved, and the oppressed remain oppressed.  Note that the American government continued its territorial expansion by killing off more Indians and witheld women's suffrage, just as the Europeans did.

This social phenomenon of the bourgeoisie using the proletariat by promising the latter a better life under new social rule (followed by the former never following through on their promises after they acquire their power) is usually mentioned in world history classes when discussing the French, Bolshevik, and Cultural Revolutions.  But one should not underestimate the ubiquity of this important pattern for America is not immune.

How might this be relevant to you?  If you're one of my friends reading this, you're probably a Democrat and will vote for Obama this coming election.  You're well-educated and you think that big businesses are the bane of our society and their CEO's are nothing but greedy fat-cats who don't care about Americans.

BUT, would you still be voting for Obama if you were among the super-wealthy in America?  Probably (and statistically), you wouldn't.  It's more likely that you'd vote for Romney who promises not to increase your income tax.  If that's the case, then who are you to morally condemn the millionnaires and billionaires who are simply voting in their interests?  After all, that's what you'd do.

By the way, I am NOT saying that any of the atrocities committed by the rich and powerful are justified.  Wrong is wrong.  Rather, this is merely a reflection on human nature and that maybe we should think twelve times before we judge those who abuse their social advantages.  In a way, they're victims too.

People Are From Africa

I'm surprised by how many very intelligent people don't know that humans are originally from Sub-Saharan Africa.  It's true!  Most of human evolution took place there, even before Australopithecus.  In fact, the two Great Apes that are our closest evolutionary cousins (chimpanzees and gorillas) are still mostly in Africa.

Also, most fossil evidence of early Homo genus members are concentrated in the eastern parts of Africa.  I say "most" because many of them wandered out to parts of Eurasia (i.e. Neanderthals in Europe, Denisovans in Siberia, and Homo erectus in China and India).  There are some competing theories about the precise details of the most recent parts of human evolution, but there is an overwhelming scientific consensus that at least the main bulk of human genetic material came from Africa.  There is some evidence that other human-like species evolved in Eurasia and then interbred with the African Homo sapiens.  Comparing Neanderthal DNA to humans' shows that an estimated 1 to 4 percent of French and Chinese have Neanderthal ancestry.

Just to clear up any confusion: Neanderthals looked almost exactly like modern humans.  In fact, they were probably more intelligent since their craniums were larger than ours, implying that their brains were bigger too.  They were also much stronger than us, especially in terms of upper body strength.  It is unclear why Neanderthals became extinct.  One hypothesis is that humans were more aggressive and vastly outnumbered them.  When the two came into contact, humans would usually kill them or sometimes absorb them into the human gene pool.

One question: why aren't we all black?  Once people started moving out of Africa, they needed to absorb more sunlight since the sun's rays are less intense further from the Equator.  If you had too much pigment in your skin (from melanin), you wouldn't absorb enough sunlight to produce vitamin D in your body.  If this happens at an early age, you develop rickets where your legs become cross-legged.  Thus, natural selection produced people who eventually had fairer skin.

Why does any of this matter?  For starters, it's fascinating!  We now have a better understanding of where we came from and how we developed as a species.  In evolutionary psychology, it is helpful to have a better understanding of prehistoric human conditions and behavior to know how they might have influenced ours.

Secondly, I think this is an important tool in eliminating racism and perhaps nationalism.  The fact that we are all of African descent should liberate us from thinking that one ethnic group is better than another.  At least, that is the hope.

Importance of Core and Lower Body Strength

Walk into a gym and observe the difference between the average man's workout routine from the average woman's.  It seems as though all the benches are always used up by men doing all sorts of bench presses and flyes.  If they are at the squat rack, they are often doing barbell curls to pump up their guns.  Men are the ones doing all the tricep extensions on the cables.  The only core exercises men seem to care even remotely about are all sorts of crunches, sit-ups, and leg raises (if that).  Then you observe the women and you notice that they are far more concerned with cardio and leg strengthening movements (especially the adductor/abductor and leg curling machines).

Men can learn a thing or two from the women at the gym.  Men are so obsessed with how their upper bodies will look at the beach, that they often neglect their lower bodies.  Ironically, their upper bodies would be even more impressive if they incorporated exercises like squats and deadlifts to their regimens.  This is because heavy exercises involving compound movements using the legs and the core produce an anabolic effect that stimulates the whole body to grow.

Let me be honest; my legs are not that impressive.  My upper body strength is decent for my weight, but my core and lower body strength could use improvement.  In fact, the imbalance is so big that my bench has always been higher than my squat.  That is not normal and would explain why I had so much difficulty shooting in effectively in wrestling for single and double leg takedowns (the bread and butter of wrestling).

I looked around for different strength training methods and encountered one that my friend Ryaan started using, Starting Strength (created by Mark Rippetoe).  This remarkably simple program has increased my deadlift AND MY BENCH in a WEEK!!!  It has a strong emphasis on squatting three times a week for three sets of five repetitions each time.  I highly recommend beginners, novices, and intermediate lifters to consider Starting Strength.  (If you're advanced, then you're probably already familiar with this.)  There is a nice wiki for his methods: http://startingstrength.wikia.com/wiki/Starting_Strength_Wiki

WARNING: The only drawback is that the program requires you to do power cleans which most gyms don't allow.  If that is the case, you can substitute rows or hang cleans.