Karel Volckaert is a wealth strategist. He lives with his family in Gent, Belgium.

His interests include value & risk, public finance, and earth system science.

He rides a Cannon- dale Synapse 105, swears by Finnegans Wake and thirsts for a taste of Heitz Wine Cellars' 1974 Martha's Vineyard.

Brexit – Europe’s politicians don’t know their game

The tragedy of Brexit is that neither the United Kingdom nor, especially, the European Union saw fit to convincingly spell out to the public what the future would look like after the referendum. A credible precommitment, not excluding credible threats, ought to have promoted a cooperative outcome in the game. Instead, the uncertainty drove each of the British peoples to what they believed to be the safest option.

Brexit is sometimes argued to represent a situation where mutual cooperation is in everyone’s best interests but still the individual players “defect” and go solo. To model such situations, a game called “prisoner’s dilemma” has been conceived. In such a game, two partners-in-crime are interrogated separately. If both cooperate – with each other that is, not with the authorities – they can only be convicted on a lesser charge; if both defect, they face heavy charges; but in case one partner remains silent and the other betrays his partner, the partner ends up in jail for an even longer time whereas the other is released. Cooperation in the prisoner’s dilemma simply is not a strong equilibrium, i.e. a player can do better by unilaterally changing strategy. Defection is the dominant strategy. That is not the game you want to play.

It is implied that the prisoners have no recourse to rewarding or punishing their partner-in-crime after the game has played out. By advertising beforehand an expected penalty for players that defect against cooperators, the prisoner’s dilemma morphs into another game that has been known since Jean-Jacques Rousseau and David Hume as the stag hunt. Two hunters must decide whether to combine their skills to try and hunt down a stag or go it alone and settle for an easier hare. (For those that dislike hunting: Hume gave the example of two rowing a boat; if one does not cooperate, the other rows in vain.)

Crucially, the stag hunt game has two (pure-strategy)equilibria: the more rewarding stag hunt in the event both cooperate, and the alternative of the hare that is less risky as it does not depend on coordination. The crux is not whether to cooperate is an equilibrium but rather which equilibrium to choose: potential solidarity or perceived safety. Precommitting to a penalty mechanism – ranging from the European Union precluding any cherry-picking to full-out retaliatory measures – allows at least a cooperative equilibrium to arise by transforming the prisoner’s dilemma into a stag hunt. But uncertainty surrounding the willingness to cooperate and the payoff from doing so pushes the hunters to individually settle for the hare. Resolving such uncertainty may in addition nudge them towards the higher-potential stag. We leave it to the reader to identify which is which in brexit country.

Or maybe brexit is best captured by a game called “battle of the sexes”? Suppose, for argument’s sake, that Britain preferred to leave the Union whereas the continentals would have liked the islanders to remain, but that in any case all of Europe’s politicians wanted to be ‘in the same place’: either the United Kingdom leaves and the European Union reluctantly accomodates the departure, or the United Kingdom remains and puts on a happy face. In either coordination equilibrium only one player is pleased, but both equilibria are preferred to the situation in which a mismatch occurs. How then to avoid the parties choosing different strategies?

One possible way out is to “refine” the equilibrium concept by means of a randomising device that correlates the parties’ strategies. If both parties decide to flip a coin (say the United Kingdom organises a referendum) and agree beforehand that “heads” means “remain” and “tails” implies “leave,” neither would rationally want to alter his strategy after the referendum for fear of getting stuck in a coordination failure. Which brings us back to the tragedy we started from.

The Artist — Life or Work?

Do you need to know the details of an artist’s life, or even like the person, to be able to appreciate the work? At the beginning of Ioon, Plato has Socrates say this: 

I must say I have often envied you rhapsodes, Ion, for your art: for besides that it is fitting to your art that your person should be adorned and that you should look as handsome as possible, the necessity of being conversant with a number of good poets, and especially with Homer, the best and divinest poet of all, and of apprehending [530c] his thought and not merely learning off his words, is a matter for envy; since a man can never be a good rhapsode without understanding what the poet says. For the rhapsode ought to make himself an interpreter of the poet’s thought to his audience; and to do this properly without knowing what the poet means is impossible. So one cannot but envy all this.

[translated by W.R.M. Lamb, 1925]

Note how Plato/Socrates invert the commonly proffered argument that to understand a work of art, it may (or may not) be good to learn something about the author’s life in general, or at least the circumstances in which the particular work of art was created. The rhapsode, the expert performer of the epics of Homer, must rather understand (συνίημι, litt. bring together) what the poet means to be able to act as an interpreter (ἑρμηνεύς) of the artist’s thinking (διάνοια) for the audience. So the work of art serves to understand the artist’s inner world.

Europa’s punt op oneindig

Vijf presidenten smeden vier unies om de éne Economische en Monetaire Unie te vervolledigen. De queeste moet Europa leiden naar een “echte” Economische Unie, een Financiële Unie (met inbegrip van een Banken- en een Kapitaalmarktenunie), een Fiscale Unie en uiteindelijk een Politieke Unie. Morgen [vrijdag] brengt het bonte genootschap Jean-Claude Juncker, Donald Tusk, Jeroen Dijsselbloem, Mario Draghi en Martin Schulz verslag uit van hun vorderingen. Codewoord is “convergentie,” één van de meest voorkomende woorden in eurospeak waarin steeds minder Europeanen dezelfde betekenis zouden herkennen – of erkennen. → Read More

Ein klarer Duft blaute alle Schatten

Palermo, April 2 1787

Johann Wolfgang Goethe’s Italienische Reise is not a travel guide. He gives us an autobiographical account of a turning point in his life. Unhappy with his work in the Weimar administration and in his relationship with Charlotte von Stein, he steals away to the South. Following in his father’s footsteps who toured Italy in 1740, he sets out for Rome and Roman antiquity from Karlsbad on September 3 1786 at three in the morning to recharge and accumulate a lifetime of experiences to draw from. → Read More

Tyndareos’ wager, the Trojan war — and Rawls’ veil

How do you marry off the most beautiful woman in the world? King Tyndáreos, stepfather to Helen — of Trojan fame — was at a loss. How could he not offend the many suitors of Helen? There was Ajax and Odysseús, Menestheús and Menélaos and many more, each bearing gifts and seeking her hand in matrimony. There was talk of murder in the air among those inevitably to be rejected. But Odysseus made a deal: if Tyndareos was to help him woo and win Penelópe, he would provide the king with a solution to the suitors’ game…

So before giving away Helen, Tyndareos made all of the suitors swear solemnly to defend whoever was chosen against anyone who would challenge the husband. Menelaos came out on top. Until Paris came to Sparta — the oath was called and the Greeks set sail for Troy.

Doesn’t Tyndareos’ stratagem remind of John Rawls’ idea of justice as fairness? Rawls argued that his principles of justice — our equal rights to basic liberties, equal opportunity to obtain “offices and positions”, or the requirement that any inequality ought to benefit the worst-off in society — would have been the natural outcome of a Gedankenexperiment in which we all had to decide on which type of society we want while each of us was unaware of our different personal characteristics and where we would ourselves end up — a slave or a plantation owner — after we had designed society.

The social contract is a commitment device – or vice versa.

Pax fiscalis

Een consistent beleid is niet altijd het beste beleid. De economen die deze cruciale kronkel opmerkten, gaven het volgende voorbeeld. Als de overheid mensen kon overtuigen dat er géén maatregelen zullen worden getroffen om huizen te beschermen die in overstromingsgebieden worden gebouwd, dan zou niemand er wonen. Maar als iemand daar toch zou bouwen, erop vertrouwend dat de overheid alsnog in de bres springt eenmaal er huizen staan, is de toekomstige beleidsmaker waarschijnlijk verplicht om inconsistent te handelen.

Je kan dreigen met een uitstap uit de eurozone om de ander tot toegevingen te dwingen; wanneer de ander uiteindelijk toch niet toegeeft, kan het misschien niet langer optimaal zijn om je dreigement uit te voeren. Het optimale plan voor de toekomst hoeft niet noodzakelijk de beste keuze te zijn eens die toekomst eraan komt. → Read More

Taxshift: quick fixes versus fundamentele hervorming

Wij Belgen betalen véél belastingen

De fiscus roomt in België bijna 5 procentpunten meer af van wat onze economie ieder jaar genereert dan het gemiddelde van de eurozone. Als de belastingdruk in België even zwaar zou zijn als in onze buurlanden, zou het beschikbare inkomen van de Belgen en hun ondernemingen zowat 18 miljard euro hoger liggen.

‘Rechts’ vindt daarom dat Vadertje Staat (Grote Broer?) nu echt te veel in de immer te kleine zakken zit. ‘Links’ laat anderzijds niet na te wijzen op wat de staat allemaal levert in ruil voor ons belastinggeld – en dat er nog heel wat van het inkomen of vermogen niet wordt belast

Deze bijdrage wil dat onzalige geschil overstijgen. We willen verduidelijken hoe het belastingstelsel werkt, en waarom er verschillende belastingen naast elkaar kunnen (of moeten) bestaan. Een beter begrip van de manier waarop belastingen ons welzijn en ons gedrag beïnvloeden, moet ons helpen op een pragmatischer manier over hervormingen na te denken in plaats van het debat te verengen tot wie wat betaalt. → Read More

Trading trade-offs

This is about the other side of luck. In spite of heroic track records and ingenious investment processes, it is gruesomely difficult to distinguish between a skillful investment manager and a lucky one. But let’s pretend for the duration of this entry.

So you think you can pick stocks. Or you have the ability to forecast returns in general. Before executing the best possible trade to exploit your forecast, you will have to balance the trade-off among at least three other considerations next to skill: aggressiveness, breadth, and correlation. → Read More

The art and science of mispricing

In his 2004 preface to the 1972 classicMartin Leibowitz recounts how Inside the yield book grew out of a series of “Memoranda to Portfolio Managers” Sidney Homer and Leibowitz prepared for the bond traders at Salomon Brothers & Hutzler. The memoranda shocked the veteran bond traders by deconstructing — well, demolishing — the latters’ “rock-certain” principles that had governed the fixed income universe for decades. → Read More

In twee fasen naar een echte belastinghervorming

De kakofonie rond de tax shift waar de economie zo naar snakt, bereikte de voorbije weken een nieuw hoogtepunt. Het blijkt nogmaals veel eenvoudiger om een debat kapot te manipuleren dan om het algemene belang centraal te stellen. De uitkomst is dat het cynisme wortel heeft geschoten. Zeldzaam zijn zij die nog geloven dat een belastinghervorming meer kan zijn dan het bevoordelen van een bepaalde achterban ten koste van anderen.

Wat iedereen wil van het belastingstelsel ligt nochtans voor de hand. Het moet de noodzakelijke inkomsten genereren op een manier die eenvoudig, rechtvaardig en rechtzeker is en zo weinig mogelijk duurzame economische groei in de weg staat. Als er al een consensus bestaat, dan is het wel dat het huidige stelsel tekortschiet om deze combinatie van doelstellingen te verzoenen en te verwezenlijken.

Het is cruciaal dat een voldoende hoge drempel opgeworpen wordt tegen argumenten die ons wegleiden van eenvoud als kernwaarde en er in de praktijk al te vaak voor zorgen dat we eindigen met niets dan complexiteit. De opportuniteit die een echte belastinghervorming biedt, is om bij elke uitzondering die je toestaat na te gaan of het voordeel ervan opweegt tegen het complexer maken van het systeem. Duurzame economische groei bijvoorbeeld vereist dat de keuze van de belastingbetaler om vandaag dan wel later te consumeren niet nodeloos verstoord mag worden. Het is zeer de vraag of het bestaande fiscale stelsel – met alle vrijstellingen, aftrekken en verminderingen van dien – daaraan tegemoet komt.

We missen economisch gefundeerde argumenten in het debat van vandaag: argumenten die voorbij het bean counting gaan en effectief belastingbetaler én overheid aanzetten tot een rechtvaardiger en efficiënter omgaan met ons belastinggeld. → Read More