Tuesday, July 09, 2019

The Model Thinker #26 - Learning Models

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Learning models can find a lot of useful applications in investing and gaming.

Reinforcement learning models how individuals choose an action to take. The probability of choosing a course of an action relative to other actions is based on how rapidly the person adjusts to new reality, the original probability of choosing this action, as well the reward beyond a level of aspiration.

So, as rewards increase, learning becomes faster. Also a positive surprise where outcomes exceeds expectations, learning can also be accelerated.

Adding a level of complication to this is that sometimes, aspirations are often endogenous. Aspirations tend to keep going upwards until it reaches the a level equal to the mean reward.

Learning can also be social. People learn by watching others. Models of social learning depend on now just how rewarding a behavior is, but also how popular this behavior is. So, if someone is doing something rewarding, then I die die must follow ! That is the Singaporean way.

Learning models may explain the recent REITs melt-up and why banks are starting to declare dividends on an quarterly basis.

At the individual level, folks are impressed with REIT yields. This is because the financial planning industry has been educating innocents to accept returns sub-3%  for endowments and various annuities. When a well-managed REIT pays about 1.5% four times a year, it does not take a genius to figure out that hordes of older investors will flock to this product like bees to honey. Making things more interesting, REITs can have escalating rents over time.

This generates a positive surprise for investors.

At the social level, the growing popularity of REITs as well as it's rewards creates its own momentum as folks see other folks make some money from the recent melt up and plow their money into REITs further.

Banks are now getting into the quarterly dividends game because frequent rewards with a surprising upside is what will generate loyal equity holders over the long term. This is an inevitable trend moving forward and explains why stocks like even mid-caps like UMS remain robust in the face of a decrease in Purchasers Manager's Index.

This is the reason why I say that Dividends are the Opiate of the Capitalist masses. In fact, if you know about learning models and leveraged investing, escalating dividends through leveraged REITs can potentially be the Fentanyl of the Capitalist masses.

Recently, my FA friend told me that his idiotic agency manager actually believes that annuities can be sold to an investor like me because annuities have a predictable pay-out and complements my passive income portfolio.

I never laughed so hard in my life !

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