The Path Least Traveled
As The Crow Flies
Getting to and from work can be a job all in itself. Most of my experience in commuting is in the greater Los Angeles area, a region renowned for turning freeways into parking lots. There are no shortage of statistics about the traffic in L.A., but this site is not about tossing out numbers just to hammer home the obvious. If you’re really all that curious, pull up Google Maps during any morning, lunch, or evening commute, and you’ll see a smattering of red all across nearly every major throughway indicating that the cars just aren’t moving all that fast.
Economics is all about efficiency, getting the most benefit at the least possible cost. And cost is not merely a dollar amount, your time spent staring at the bumper ahead of you is an opportunity cost. You could be spending that time with your family, unwinding from a hard day’s work, or working on that home improvement project you never seem to have enough time for. This article is about trying to return that time for you.
Contrarianism, A Guide
To be a contrarian in the language of investments is to do the complete opposite. My professor at The Max M. Fisher College of Business at The Ohio State University gave one of the most impressive lectures I have ever had the pleasure of attending. His point was about the concept of hedging, but the two points are similar, as I’ll try to illustrate here.
“Remember the Seinfeld episode where George just ‘does the opposite’ of what he would normally do, and his life ends up being amazing?” Persons began. He then spent the better half of five minutes expounding on this...
“When you’re hedging, you just do the opposite!” my professor exclaimed. Hedging is a way you can limit your exposure to a particular transaction by buying/selling options or purchasing forwards or futures in a foreign currency. In short, if you have a burgeoning widget operation in Columbus, Ohio, and a major supplier is in Hong Kong, you can eliminate the risk involved in the change in the US Dollar against the Hong Kong Dollar by locking in the exchange rate at the time the deal is struck. This way, the scope of your company’s business is limited to the risks of making widgets, not the significantly more risky side business of currency speculation.
In the same vein, contrarian investing gets its name from the counterintuitive way investors work. The well-worn advice to ‘buy low and sell high’ is flipped on it’s head. Why would someone buy a stock when it was at it’s all-time high? One theory is that the market will sell on instinct to capture profits, and that activity will be noticed by investors who weren’t as informed or insightful to have traded on it’s way up. The efficient market hypothesis suggests that markets (more or less) prices adjust to relative news events almost immediately. Now, that might be true for a sophisticated institutional investor like a mutual fund, but some people still decide whether to buy a stock on the information printed in the Wall Street Journal, the closing price for the previous day, which is virtually guaranteed to have changed the moment it was printed. The contrarian investor may not care exactly how information flows to the different investors trading in a particular security, but he knows that almost all of them are thinking, ‘buy low, sell high,’ and his investment strategy centers around the idea that no one knows whether a stock is going up or down. They may think they know, but if the market is efficient, then whatever ‘news’ is already reflected into the current stock price, first by speculators trading on rumors, then by the floodgate of investors that think they’re somehow getting that information first AND that they’re able to execute their order first. Both of these are delusions.
Let’s take that scenario and run it around a few more iterations. Now the price of the stock is inflated, because demand for the stock is driven up artificially by speculation that the stock’s price was supposed to rise. Then some other people saw the price rising, and they wanted to catch that wave. The contrarian who took a short position by selling that stock, assuming he’s not over-leveraged and looking at a margin call, is now in a position to profit from the subsequent fall of the stock. The contrarian investor makes a bet that the market overreacts to information, and takes advantage of the information asymmetries to make a profit.
'Pretty Sneaky, Sis'
What does that have to do with traffic? The same decision making goes on every day, not just in the stock market, but also on the roads. With decision making on the road, you are literally at the wheel. There are ways to use a contrarian investor’s strategy in order to hedge for your time in morning commute. For an example, we’ll try driving from Universal Studios in Universal City to the famous intersection of Hollywood & Vine.
If you go to Google maps , the trip-planning algorithm will suggest taking the well trafficked 101 Ventura Freeway from the Universal City in Burbank to the Vine exit in Hollywood, about eight minutes with the road empty. That time could easily quadruple in rush hour. Alternatively, you can take the Cahuenga Pass, a route that runs mostly parallel to the 101 and will likely get you to Hollywood and Vine in nine minutes, but in a time that’s more or less indifferent to rush hour traffic on the freeway. In Angeleno parlance, this is call taking ‘surface streets’. Every once in a while, you hit a stop light, but by and large you miss the congestion caused by folks traversing the longer distance between the San Fernando Valley and Downtown Los Angeles. Taking the Cahuenga Pass is the equivalent of hedging. On average, you get there faster since the freeway isn’t moving much faster than bumper-to-bumper by clockwork during heavy commuter hours.
The most visible factor that goes into the cost of a trip is gasoline. Gasoline on the freeway when it’s wide open and when you’re bumper-to-bumper in four hours time can both be cost prohibitive. It costs a lot to drive faster, and it costs a bunch to just sit in idle for hours on end. However, gasoline is not the only factor at play. Wear and tear on an automobile in stop-and-go traffic is especially taxing, even though it may not be particularly visible during the time you’re driving. That cost is realized when you need new brake pads, you have to change your oil, or when you find yourself on the side of the road overheated. But there is an even more prevalent cost that you hardly recognize. The cost of parking in dollar terms is probably matched in the time in takes to find a parking spot. Too often we drive to a destination, then look for a spot to park. A more astute driver learns to drive to where they can park. Either way, parking in Hollywood is no fun. The Ambidextrous Economist has had pretty good luck (a perfect record, in fact) by parking in restricted parking zones, even without a permit. The logic behind this is, there are much sketchier things going on in Hollywood to keep the police and traffic officers busy, and an illegal permit-only parking solution should be the least of their concerns. The unrealized risk of the price of a ticket has more than made up for the time looking for legal parking and the cost of parking in a paid lot. Some people might be put off by the notion that parking illegally is, by definition, breaking the law. But the same people probably don’t have a problem driving ten miles over the speed limit.
Let’s say you’re dead set against parking illegally, taking surface streets, and sitting for hours on end in a traffic jam. There is an even better solution. The Red Line subway goes underneath all the traffic, and there’s free parking at Universal City. You can pay $1.50, skip all the costs associated with wear and tear, gasoline, and parking, and save a great deal of time. If you catch your train, you go Point A to Point B in less than five minutes, and you don’t have to spend one minute parking. The difference when you’re driving to Downtown L.A. from Burbank is even more pronounced, probably 20 minutes by subway compared to at least an hour in a car, and downtown easily costs upward of $100 a month just to park. Commuting by subway costs significantly less in pecuniary terms AND it takes less time. That’s called a win-win. You don't have to rationalize that you're doing something better for the environment - You're doing something better for yourself.
People everywhere are creatures of habit. In Los Angeles in particular, people love their cars. A herd mentality also tends to breed complacency, as if sitting in traffic for hours on end is the order of the day, therefore it’s best to just get on with it. There are ways around town that avoid freeways altogether. It’s counterintuitive to think that the speed limit on surface streets is lower, therefore it takes more time. But not if everyone else is thinking the speed limit on the freeway is higher, so it should take less time.
George Costanza was onto something. Used judiciously, ‘doing the opposite’ is exactly the course of action that can get the most successful return on your investment.
AE - 07.27.2011
The Ambidextrous Economist will race you any time, any place.
He can be reached at AmbidextrousEconomist@gmail.com.