Great post. I’m not sure most of it relates to Bayesian thinking, but just bad logic. I especially appreciate your point about low-probability events—but then the entire hedge-fund industry is based on the fact that people think 2% is a very small number, so we’re not alone.
I think there is a lot of value in discounting estimates’ influence on actions based on uncertainty.
So hedge-fund managers can become absurdly rich despite adding very little value to society. IMHO if a fund manager had to set these out as numbers rather than percentages, clients would be more likely to complain that (for large investors) the management fees are ridiculous. (“How can you justify earning $30 m in one year for managing my money?”). But when they see “2%” maybe it feels cheap to objest to such a “small” number.
Yes this was clear—imho you underestimate how sophisticated investors in hedge funds (what you call “clients”) are. The best hedge funds charge way more than 2% and it can still be a rational investment. “Value to society” is not a criterion that matters. “Value to investors” is.
There are many mutual funds that charge over 1%, add little value and target unsophisticated investors. That’s the case where I buy your point.
Great post. I’m not sure most of it relates to Bayesian thinking, but just bad logic. I especially appreciate your point about low-probability events—but then the entire hedge-fund industry is based on the fact that people think 2% is a very small number, so we’re not alone.
I think there is a lot of value in discounting estimates’ influence on actions based on uncertainty.
Yeah, I agree. I think I should have framed it as like ways in which Bayesian thinking fails rather than as an attack on Bayesian reasoning.
The hedge fund industry is not based on this. Most hedge fund investors are sophisticated and they often pay more than 2%.
Sorry, I wasn’t clear. I was referring to the fee structure, where many funds charge 2% of the investment as annual management fees. Two and Twenty: Explanation of the Hedge Fund Fee Structure.
So hedge-fund managers can become absurdly rich despite adding very little value to society. IMHO if a fund manager had to set these out as numbers rather than percentages, clients would be more likely to complain that (for large investors) the management fees are ridiculous. (“How can you justify earning $30 m in one year for managing my money?”). But when they see “2%” maybe it feels cheap to objest to such a “small” number.
Yes this was clear—imho you underestimate how sophisticated investors in hedge funds (what you call “clients”) are. The best hedge funds charge way more than 2% and it can still be a rational investment. “Value to society” is not a criterion that matters. “Value to investors” is.
There are many mutual funds that charge over 1%, add little value and target unsophisticated investors. That’s the case where I buy your point.
Fair, It seems you know more about this than I do! Thanks!